Davenport, Leibold, Voelpel: Understanding the ecosystem and the role of your business in it

Wal-Mart’s and Microsoft’s dominance in modern business has been attributed to any number of factors, ranging from the vision and drive of their founders to the companies’ aggressive competitive practices. But the performance of these two very different firms derives from something that is much larger than the companies themselves: the success of their respective business ecosystems. These loose networks of suppliers, distributors, outsourcing firms, makers of related products or services, technology providers, and a host of other organizations affect, and are affected by, the creation and delivery of a company’s own offerings.

Like an individual species in a biological ecosystem, each member of a business ecosystem ultimately shares the fate of the network as a whole, regardless of that member’s apparent strength. From their earliest days, Wal-Mart and Microsoft – unlike companies that focus primarily on their internal capabilities – have realized this and pursued strategies that not only aggressively further their own interests but also promote their ecosystems’ overall health.

They have done this by creating “platforms” – services, tools, or technologies that other members of the ecosystem can use to enhance their own performance. Wal-Mart’s procurement system offers its suppliers invaluable real-time information on customer demand and preferences, while providing the retailer with a significant cost advantage over its competitors. Microsoft’s tools and technologies allow software companies to easily create programs for the widespread Windows operating system-programs that, in turn, provide Microsoft with a steady stream of new Windows applications. In both cases, these symbiotic relationships ultimately have benefited consumers – Wal-Mart’s got quality goods at lower prices, and Microsoft’s got a wide array of new computing features – and gave the firms’ ecosystems a collective advantage over competing networks.

Over time, the companies in the ecosystems made investments to leverage their relationships and began to depend on Wal-Mart and Microsoft for their own success. For example, Procter & Gamble integrated its ERP system with Wal-Mart’s, and AutoCad integrated Microsoft’s programming components into its applications. Although Wal- Mart and Microsoft have been criticized for being tough on their business partners, the complex interdependencies among companies that these industry giants encouraged have made their business networks unusually productive and innovative – and allowed the two companies to enjoy sustained superior performance. Each of these ecosystems today numbers thousands of firms and millions of people, giving them a scale many orders of magnitude larger than the companies themselves and an advantage over smaller, competing ecosystems.

Although Wal-Mart and Microsoft have been astonishingly successful in organizing and orchestrating their vast business networks, their two ecosystems aren’t anomalies.

Most companies today inhabit ecosystems that extend beyond the boundaries of their own industries. The moves that a company makes will, to varying degrees, affect its business network’s health, which in turn will ultimately affect the company’s performance – for ill as well as for good. But despite being increasingly central to modern business, ecosystems are still poorly understood and even more poorly managed. We offer a framework here for assessing the health of your company’s ecosystem, determining your place in it, and developing a strategy to match your role.

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