Why Ecosystem Firms Are The Future Of Management

Figure 1

At the Global Peter Drucker Forum in 2019, Haier Group chairman, Zhang Ruimin, declared that “unless firms transform into ecosystems, they won’t survive.” Yet most big firms don’t even know what an organizational ecosystem is. And even those that do, often lack the agility to implement one.

A new book by strategy consultant, Erich Joachimsthaler, The Interaction Field: The Revolutionary New Way to Create Shared Value for Businesses, Customers, and Society, (Public Affairs, 2020)  offers key insights into the ecosystem model of management.

Three Types Of Firmshe Interaction Field usefully suggests that firms today fall into three main categories:    

  • The traditional value-chain firm is “the classic, asset-heavy organization. It is structured as a hierarchy and has organized its key activities along the value chain from sourcing to design, manufacturing, and marketing.” General Motors and General Electric were prime examples in the 20th century, where the firm was run as a machine, as shown in Figure 1, with a goal of maximizing shareholder value.
  • Platform firms “orchestrate and facilitate an exchange. They match riders with drivers, buyers with sellers, travelers with hosts who have an available room… they develop experiences, provide ancillary and related services, and more.” They include Amazon, Apple, Facebook, Google, Netflix, and Uber.
  • Interaction field or ecosystem firms don’t thrive on competition and disruption. Instead, they aim at collaboration, engagement, and cooperation. It might be a kind of “walled garden” where only approved players can participate. Or it might be more like “a rain forest” where any party can participate, as shown in Figure 1.

The Strength Of Platforms

The strength of a platform is that it scales more quickly than value-chain companies and at lower costs. If a traditional hotel wants to expand, it needs to build a new hotel or add a wing to an existing hotel. By contrast, “if Airbnb wants to expand, it merely needs to get more listings, which cost almost nothing. And as it adds more listings, Airbnb gets the network effects. That is, the service becomes more valuable to travelers as selection expands.”

The weakness of platforms is that “they are easy to copy. Casper is a relatively young, billion- dollar online mattress company. Competitors proliferated, such that there are now 175 mattress companies, offering virtually the same service as Casper, and consumers can scarcely tell them apart.” Similarly, “Blue Apron, the meal kit company, went public in 2017 at a $10 price and with great expectations. Its share price promptly dropped to under $1. There are now over 150 meal kit companies in the United States.”

Another weakness of platforms is that some like Uber, for example, “do not get the velocity boost from network effects that Airbnb does. That’s because its demand is local and additional riders don’t add value for other riders.”

The Advantage of An Ecosystem

By contrast, an ecosystem can “solve a broader set of customer needs than, say, transportation. An ecosystem is a way of providing adjacent products or services by collaborating with other companies or business units and sharing data generated on the platform.” For instance, Uber is heading in this direction with Uber Eats, Uber Health, Uber Freight, and Jump bike and scooter sharing. And Warby Parker is going beyond the sale of eyeglasses and trying to become “the go-to brand for eye health.”

The interaction field company is “intentionally organized to generate, facilitate, and benefit from interactions rather than transactions. It is designed to facilitate communication, engagement, and information exchange among multiple people and groups—from partners, suppliers, developers, and analysts, to regulators, researchers, and even competitors—not just the company and its customers. Unlike interactions that, say, match a buyer to a seller or offer a product in exchange for money, these interactions don’t always focus on just one outcome.”

In the interaction field, individuals and groups are called participants because they “engage, share, contribute, comment, benefit, and learn. They are not targets or partners for maximizing profits; instead, they actively contribute to value creation and can interact with each other through the interaction field.”

In an interaction field, the company “does not have to target customers and attempt to lure them in. Participants join voluntarily because they see the value for themselves and understand that the value creation strengthens as more participants come into the field. Velocity creates a gravitational pull,” as shown in Figure 2.

Figure 2

Ecosystems gain value from network effects, virality, and learning. Thus, a ride- sharing company might “build velocity in an interaction field that allows it to dramatically reduce vehicle- involved injuries and fatalities.” Or a health- care provider might gain velocity by “eradicating a specific disease or condition,” not merely “donating a small portion of their profits to social initiatives.” If it can pull this off, an interaction field company “can create a self- perpetuating virtuous cycle.”

Traditional Firms Embracing Ecosystems

Interaction field companies include not only start-ups but also traditional value-chain companies and platform companies, although this doesn’t happen “through the kind of half- hearted digital transformations or cynical user communities.” It cites successful examples such as heavy industries like “agricultural equipment (John Deere) and industrial metals (Klöckner & Co.), and in consumer businesses such as automobiles (Tesla, Waymo), cancer treatment (Roche’s Flatiron Health), action cameras (GoPro), and appliances (Haier).”

The book cites three key elements necessary to create an interaction field:

·       A nucleus of participants such as customers who contribute to the core interactions on a regular basis.

·       An ecosystem of contributors composed of partners in the company’s business activity often in relationships that may have been established over years.

·       Market makers that “exert influence and enable the velocity in the interaction field.” Market makers attract new consumers to the field and “can significantly determine the success or failure of the company in creating value.”

Three Key Elements Of The Ecosystem Model

The Interaction Field also cites three key enablers of the ecosystem model:

·       The mindset is focused on “problem-solving, value creation, and shared wealth”. Instead of trying to bring partners all under one roof, and leveraging, controlling and optimizing them, the ecosystem seeks to “create interactions with ecosystem participants and market makers..”

·       The operating model is “not about attacking competitors, defending assets, preserving brands, setting up barriers to entry, or seeking protection for practices and markets. It runs on collaboration and collective engagement. Winning comes from sharing. Rather than pushing products and images out from the company onto the market, the company seeks to attract people and partners into its field through gravitational pull.”

·       The company structure is that of a “network that brings in participants from well beyond the company’s traditional organizational boundaries and to enable and orchestrate interactions among participants. The structure is flexible, so that it can accommodate new participants of different types with different needs.”

A vertical hierarchy of authority is incompatible with an ecosystem—one of the key hurdles facing traditional firms that aim to become an ecosystem. This is the reason why most traditional firms lack the agility to implement a business ecosystem: they have yet to shift from a hierarchy of authority to a network of collaboration within the firm, let alone with outside the firm.

The Example of John Deere

The Interaction Field gives a detailed and persuasive example of the $30 billion agricultural equipment firm, John Deere. Founded in 1837, John Deere manufactures and assembles big machines in factories, many of which are located in the United States. Its primary customers are farmers, but John Deere also services the government and military markets, construction, and home and lawn care. It sells through a huge network of dealers and parts suppliers worldwide. But farm equipment also includes modems, Wi-Fi, and Bluetooth to facilitate two-way communication. The tractor collects data from the farm and sends it to the cloud. It also sends instructions from Deere, dealers, and software providers to the tractor.

For John Deere, most participants in the nucleus are farmers. But there are others in the ecosystem such as independent seed producers with whom Deere shares data to help improve its products. And there are also market makers who have influence on the interaction velocity of the field. In the case of Deere, one market maker is the US Department of Agriculture.

In the ecosystem, farmers can “configure their Deere equipment with a variety of add-on sensing devices that monitor and collect real-time readings about the various functions of each machine well as environmental factors, such as air temperature and soil conditions.”  The result is “precision tillage, so that “every single seed would be planted in exactly the right place, with the right nutrients… Using telematics (vehicle telecommunications software) offered by Deere, the information collected by the sensors in the field is transmitted to a centralized farm- management system.”

A Fundamental Change In Mindset

The Interaction Field points out that the shift to an ecosystem model requires a fundamental shift in outlook, not just “a half-hearted attempt to create some kind of online presence, establish a loyalty program, or set up a membership group, flexible lease program, or subscription service.”

Such efforts aimed at “locking the consumer into the brand and its products and to make it inconvenient for the consumer to shift,” are self-interested measures that the customer quickly detects. These are no more than “corporate Band-Aids. They don’t put the interactions—the creation of value through data—at the center of the enterprise. They are marginal at best.” Ultimately, it is “the quality of interactions that create value.”

The Goals Of Platform and Ecosystem Firms

The Interaction Field is on less-sure footing when it comes to the goals of the firms, both in terms of denigrating the goals of all platform companies, while romanticizing the goals and prospects of ecosystem firms.

For instance, the book asserts that all platform firms are just in it to make money: “both kinds of companies, value chain and platforms, seek to maximize their own value. Creating value for a customer is really just a way to make money for themselves.” Firms like Apple, Amazon and Netflix beg to differ. They have all the embraced the explicit primary goal of adding value to customers, not merely making money for themselves, and have demonstrated that repeatedly over many years.

The second issue concerns the assertion that interaction-field firms, like John Deere, not only aim to create value for the whole ecosystem but also have a primary goal of solving great social problems. This would appear to be an expression of hope, rather than a description of achieved reality. The fact is that firms like John Deere do what they can for larger social issues, but do not aim at “doing good” as their central reason for being. If they were to do so, the prospects of their long-term survival would not be high.

The Interaction Field also tends to stretch credibility when it comes to the supposed benefits of ecosystems. “Unlike a value-chain company that is vulnerable to market conditions and competitors’ actions,” the book says, “an interaction field company is self- sustaining and gains velocity as its participants contribute to, improve upon, and expand its offerings and as the company attracts new participants to the field. This also means it can often avoid the kind of up- and-down cycle characteristic of value-chain companies.” Time will tell whether such unprecedented hopes will materialize in real life.

Nevertheless, despite these shortcomings, The Interaction Field is a valuable contribution to the literature on the future of management.

And read also:

How Management Is Being Transformed: Haier’s Ecosystems

Why Most Firms Lack The Agility To Implement A Business Ecosystem

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