“THE MYSTERIES OF THE TRADE BECOME NO MYSTERIES, BUT ARE AS IT WERE IN THE AIR”
The concept of ecosystem is derived from biology. In this report we discuss about how an ecosystem emerge and evolve over time in the industrial transformation. Focusing on in depth understanding of emergence of ecosystem with the elements responsible for it and the impact it has on other core strategies. I have discussed how an ecosystem can have impact on innovation, value creation and division of labour. And finally concluding by what the overall result it brings.
The scientists in 1970s working around biology studied about behaviors of complex systems. The biological world is comprised of vast hierarchy of networks, comprising from a molecule to an organism which formed an ecosystem (Origin of Wealth, Beinhocker p.141). The concept of networks gave an insight to how an ecosystem would function and this made the economic world depend on it. In the recent years, the concept of ‘ecosystem’ has raised interest in the way of depicting competitive environment. Many biological studies have helped to understand the ecosystem and how it would emerge and evolve along a period of time. The report states how the concept of ecosystem emerged and evolved over the years in relationship to the transformation of the industry.
What is an ecosystem?
Ecosystem refers to a group of interacting firms that are dependent on each other’s activities (Jacobides et al, 2018). The definition is borrowed from biological world when the concept of ecosystem was first studied. Jain and Krishna simulated evolving ecosystems to understand how each species are connected to one another in the ecosystem (Origin of Wealth, Beinhocker p.173). Ecosystem needs certain conditions necessary to emerge i.e., modularity and complementarities that allows every specimen to co-exist. Formation of an ecosystem can influence transformation in industry through concepts such as innovation, division of labour and value creation.
Emergence of Ecosystem
To understand in depth about ecosystem, we first have to understand the theory behind how an ecosystem emerge. Ecosystem is a result of combined experimentation and engineering from different firms. Modularity and coordination are the two most important characteristics of an ecosystem.
Modularity creates the conditions for an ecosystem to emerge CITATION Jac18 l 1033 (al, 2018) . Like ecosystem, modularity is derived from the biological world. It is defined as
“Modularity-Ability of a system to organize individual units and selective forces to increase the efficiency of the overall network”
Presence of modularity is the condition which allows the least degree of explicit coordination. Modularization has been associated with ecosystems in many industries throughout the world. By being modular, ecosystem results as the solution to the inter-firm coordination and interactions between markets, alliances and supply chains.
For ecosystem to be practical, an important coordination must exist and should not require an arbitrary order from the central actor in the ecosystem. This arises the need for different types of complementarities.
“Complementarity- It is the relationship between two or more elements in a way that one element transforms the value of the other element”
Complementarity in an ecosystem offers the end customers to choose from set of complementors or producers. This helps to represent a standardized or informal alliances between the complementors and focal firm in the ecosystem.
Fig: Ecosystem based value system
(Lecture 4, Magnus Holmen, Slide 66)To give a basic example for a complementarity in an ecosystem, we can look into the production of aircraft by airbus
Type of complementarities:
To describe in simple term “A doesn’t function without B” CITATION Jac18 l 1033 (al, 2018). In this type of complementarity A may require a single element of B or where A and B both require each other to function. This is termed by the idea of co-specialization. For example, in the case of a Nespresso coffee machine by Nestle, it requires the coffee capsules produced separately by a complementor to function and be useful. Without the unique capsules, the machine is of no use.
Complementarities can also be generic, which maybe a good or service required for producing a value or innovation in the ecosystem. Generic nature of the complement requires no coordination or arbitrary rules from the governing firm in the ecosystem. This type of complementarity can still cause an impact. The most common example is the requirement of electricity for everything which has its own value and impact, but it does not cause concern among the whole actors in the ecosystem.
“More of A makes B more valuable” CITATION Jac18 l 1033 (al, 2018). In this type of complementarity, A and B are two different elements which maybe a product or an activity. The value of A and B simultaneously increases when one element benefits. For example, again when we consider Nesperesso, the availability of different variations of coffee capsules can create greater demand among consumers and this in turn creates demand for the machine. Therefore, the both the elements creates value from each other.
Actors in an ecosystem:
In an ecosystem, specific actors tend to be important and are focused as the lead firm. They are called “keystone”. They help in the emergence of an ecosystem. It defines the standards and rules along with the participation criteria for the other actors in the ecosystem and their interaction norms but does not decide on their contribution to the ecosystem. For example, Google with its Play store is the keystone in its ecosystem. Keystone actors do not exploit the profits created by the other actors in the ecosystem. They enhance the overall performance of the ecosystem by incorporation of new innovations.
This type of actor integrate horizontally or vertically to occupy all the positions in the ecosystem. Dominator creates most of the value for the whole ecosystem and exploits the other actors in the ecosystem without contributing any value. Most of the revenue gained is exploited by the dominator. We can consider IBM has an example, where it dominated the personal computer ecosystem before the arrival of Microsoft and Apple. It provided most of the products and services for the customers and extracted the value for over a long time.
Niche actors are small and specialized section in the ecosystem. They provide various services, products and interests for the keystones or dominators in the ecosystem. Niches forms the bulk of the ecosystem and responsible for the major value creation. They are controlled by the keystone who offers them resources or dominators who exploits them. Niche are dependent on one another for their survival in the ecosystem. An example is Pixel phones by Google which are manufactured by the help of two keystone companies- HTC and LG. Both the companies offer there production resources to build the phones for Google while sharing the fate through their ecosystem.
TYPES OF ECOSYSTEMS
Ecosystem can be categorized into three broad groups:
In this type of ecosystem, a single firm remains as the main focus in the whole ecosystem. It can explained as an economic community of interacting actors that affect each other through their activity and causes impact on the main firm in the ecosystem. Each actor performance is tied to the performance of the whole ecosystem. The governing firm acts as the stabilizer for the whole ecosystem. The governing firm in the ecosystem is called as ‘keystone’.
Considering aircraft manufacturer Airbus as an example for business ecosystem, Airbus is the focus firm in the ecosystem. Many other manufactures in the airline industry ecosystem supply parts and services for Airbus. The better Airbus performs, all the other manufactures in the ecosystem benefits from that.
As the name suggests, the ecosystem focusses on Innovation and the elements which support it. To define, it is a set of arrangements made between firms where they individually offer logical solutions. The actors interact in the ecosystem to create and commercialize the innovation which in turn benefits the end customer. In this type of ecosystem, customers benefit from the end product rather from the firms.
For example, in the world of e-commerce, cashless economy is becoming more popular where the physical currency is turning into digital transactions. With innovation in electronic transfers, digital wallet was offered to the customers as a solution.
This type of ecosystem is characterized by the interdependence between a platform and their complementors. The complementors make the platform more valuable to their customers. The platform ecosystem is designed from a “hub and spoke” form where array of firms are connected to the platform via shared or open source technologies. Complementors can create complementary innovation and gain access to the platforms customers directly or indirectly through connecting to the platform. Amazon can be considered as an example for platform ecosystem, where amazon is the hub and other firms such as suppliers, logistics forms
Innovation in an Ecosystem:
Ecosystem simulation conducted by Jain and Krishna CITATION Bei l 1033 (Beinhocker) noted three phases in the pattern. Innovation played an important role in the evolving of an ecosystem. These three phases as noted are:
The network starts to spread through an area or a group of people without a structure and random changes occurs in the system without causing much impact. This is the balanced phase where a physical balance is observed in the pattern.
Innovations in the network causes the network into a growth phase. A loop is created in the system where one innovation leads to another innovation. New actors arise and obtain their place in the ecosystem in this phase and forms a niche market.
In this phase, the changes are more effective and network in the ecosystem forms a strong structure. Keystones starts to appear in the ecosystem. The network again enters a balance phase (equilibrium) until a further innovation. When the keystone species come up with an innovation, the changes spread into the whole ecosystem and the loop is again created which leads to the growth phase again.
The actors in the ecosystems coevolve over time including the preferences of consumers. What fit today may or may not be fit for the future, in this case strategy in the ecosystem changes. It evokes the requirement for new innovation and it forms a never ending race for innovations in the ecosystem. An actor operating in the network can use resources outside its organization, this integration is a critical form of innovation in the ecosystem.
Innovation ecosystem is a type of ecosystem focused on a particular innovation. Coordination in an ecosystem is important for an innovation to be successful or else it may fail. Innovation is also the core aspect of value creation in the ecosystem. Innovation across an ecosystem can change the nature of evolution in another ecosystem, it brings competition between ecosystems.
Complementarity can also lead to innovation in an ecosystem. Complex existence of actors offers complementary innovations. Ecosystem also becomes a location for innovation spillovers. Upstream innovation and downstream innovation differs when it comes to the ecosystem. Unique complementarity are dominant in production (upstream) and super-modular complementarity are dominant in consumption (downstream). Innovation requires complementary assets which help the overall ecosystem to commercially be successful.
Value creation/capture through ecosystem:
In an ecosystem, one of the important aspect is to create value for all the actors and consumers. In the case of innovation ecosystem, it provides a link between a product and its service which creates a values for the customers. In the case of keystones in an ecosystem, they leave the value creation to others in the ecosystem which is crucial for their survival and co-existence. Dominator becomes the sole actor when it comes to value capture and creation which limits the spread of structure in the ecosystem. Niche actors occupy most of the value creation credits as they form the bulk of an ecosystem.
Complementarity in an ecosystem focuses on creating a value between actors within an ecosystem. All the types of complementarities are inter dependent on one another where they create a structure or relationship to create value. This structure in the ecosystem creates no need for vertical integration thereby extracting more value. A firm may choose not to modularize a process and offer fungible design options to set up an own ecosystem which can create or extract more value.
Value creation helps design an ecosystem. Studying the types on complementarities, we can understand the concept of value creation in and across the ecosystem. Lack of value in an ecosystem can cause an actor to move into another ecosystem when they are not favored anymore. Super-modular complementarity based ecosystems are more established and obtain more value from the network. Unique complementarity creates greater value but is never established well overall in the ecosystem. Competition from super-modular complementarity can cause loss of value. A classic example being Nokia, which had 70% of market share and unique complementarity through their OS in mobile industry lost to super-modular Android OS. Value creation after all depends on the efficiency, governance and co-specialization of the ecosystem.
Division of labour in an ecosystem
In order for an ecosystem to evolve and succeed, division of labour is important. Division of labour is defined as the separation of tasks in a system so that the participants specialize. The secret to greater productivity was division of labour and specialization it produces. Keystone in an ecosystem could tap the economies of scale in which benefits from division of labour and co-existence. To reap the benefits division of labour and economies of scale, an ecosystem has to divide tasks among the actors, coordinate and allocate the roles. Hierarchy helps in the division of labour in an ecosystem.
Division of labour determines how value is created by each actors in the ecosystem. Division of knowledge leads to successful division of labour. From a consumer to the keystone, many actors are involved in the process. It is a key to development and innovation in an ecosystem. With increase in market size, an ecosystem will look for a more productivity and to meet the demand by vertical division of labor. It is controlled optimally by the firms. Therefore increase in market lead to increase in division of labour which increases the overall productivity of the ecosystem.
From this report, we understood how the concept of ecosystem emerge from the biological world and contributed the work into the industrial world. Elements of ecosystems- role of modularity and impact created by complementarity among the different actors in the network was studied. In relationship to the core concept of management, ecosystem plays a major role in innovation, value creation and division of labor. Ecosystem adds value to overall value in the business constellations and mainstream strategy for growth.