Interview

What is a business ecosystem?

Mari Sako breaks down the basics of business ecosystems

In a hyperconnected world, innovation doesn’t happen in a vacuum. It happens when companies connect and collaborate with other partners in a broader ecosystem. Just look at Amazon or Google, for example, which orchestrate networks across multiple industries to develop innovative products and services. 

Ecosystems drive innovation because they enable companies to link capital, partners, suppliers and customers to create and capture new value. Ecosystems also facilitate healthy competition and collaboration between startups and incumbent firms.

However, because many entrepreneurs and business leaders lack an in-depth understanding of ecosystems – and how to manage them effectively – these networks are falling short of their potential to drive innovation. To address this knowledge gap, Mari Sako, Professor of Management Studies at Oxford University’s Saïd Business School, breaks down the basics of ecosystems in this interview.

Q. What makes ecosystems different from networks or clusters?

Ecosystems have three defining characteristics: sustainability, self-governance and evolution. In order to be called an ecosystem, a network must fulfill each of those criteria.  

An ecosystem is sustainable because it thrives without outside influence. Within an ecosystem, people and products balance their use and reuse of resources to perpetuate the ecosystem. For example, in ride-sharing apps, riders and drivers are in a symbiotic relationship, and all participants are working towards reducing congestion and pollution. 

An ecosystem is self-governed because it does not have top-down control. In other words, there’s no major company or governmental body that regulates the ecosystem. Instead, the ecosystem governs itself through shared sets of formal rules and informal norms, which themselves are subject to change due to competition and innovation.  

An ecosystem evolves because it has the flexibility to change over time through competition and experimentation. 

Q. What does a self-governed ecosystem look like?

Startup communities, for example, have no prevailing governor. They are moderated and propelled forward by all their participants, and so they meet the criterion for being self-governed. By contrast, Apple and Google development networks are tightly regulated by the platform to which they’re contributing. With such overarching control, we wouldn’t call these networks “ecosystems”. 

Q. What helps support good governance in business ecosystems?

There are three mechanisms that can help in the regulation of business ecosystems. 

One, buyer-supplier ratings. Businesses can regulate each other through transparent buyer-supplier ratings. This helps to maintain good service while keeping corporate conduct in line. 

Two, public-private cooperation. Governments can learn from and work closely with private-sector actors who might be more familiar with the emerging technologies and markets to be regulated. However, governments should be wary of big corporations lobbying their interests. 

And three, third-party regulators. Governments can consider appointing non-government organizations – both for-profit and nonprofit – as de facto regulators. These private, third-party regulators can then set their own standards and rules as long as they meet certain outcomes, such as data security or privacy. The governments then become “super-regulators”. 

Lights in the darkness

Q. How can companies better leverage ecosystems for innovation?

I like to say that success comes with collaboration – and competition. Business suppliers are both partners and potential competitors in an ecosystem. In the mobility ecosystem, for example, automakers must work with app developers, software providers and public regulators to create new, innovative solutions for transportation. They also must be able to access assets they don’t own, which requires relationship building and cooperation. 

Also, good governance is essential to ensure sustainability and evolution. It’s no surprise that the regulation of ecosystems poses a challenge because many of the businesses involved are introducing new technologies or business models for which rules don’t yet exist. Just think about cryptocurrency. Without good governance, ecosystems can crash and burn. 

I like to say that success comes with collaboration – and competition.

Q. How can a company thrive in a business ecosystem – even if they’re not the first business on the block?

The hard fact remains: Being part of a business ecosystem means that some participants will create value and others won’t. Sure, being the first actor with a novel idea always helps, but other businesses can succeed by ensuring that they collaborate effectively with the other shareholders in the ecosystem. 

In this interview, we asked Prof. Sako to discuss her article, Sako, M. (2018) ‘Business ecosystems: how do they matter for innovation?’, Communications of the ACM, 61(4) pp.20-22.