We discussed how and why businesses build partner ecosystems with Julian Birkinshaw, Professor of Strategy and Entrepreneurship and Deputy Dean at London Business School. Following his article on business ecosystems in Harvard Business Review.
Julian, in your recent Harvard Business Review article on ecosystems, you mentioned ecosystem as a new competitive advantage, new competitive moat. Does this mean that companies become more open these days and if so, how do they speed up this transition?
So the heart of the argument is that today, even more than ever before, success in the business world is about working in collaboration with others. Of course companies have always collaborated with others, but nowadays, because of the speed of change, because of the range of different technologies and competencies you need, to deliver value to customers, you have to be prepared to work much more collaboratively than you did in the past. And that particularly means not, shall we say, hoarding everything for yourself. Because if you want to collaborate with others you've got to be prepared to give as well as receive. So that means that the companies that succeed in creating these ecosystems have to be quite generous and letting others succeed in order to succeed themselves.
I remember your course on Strategic Agility, which is great. How do you think companies can move from being in entrenched mentality into more open mentality?
So there's a couple of bits to that. One is to be very clear on what you are good at doing yourselves. And when we talk about ecosystems we automatically gravitate towards companies like Google and Amazon and Alibaba and WeChat in China. Companies that have certain competencies, often around data analysis, often around collecting information, often around certain narrow pieces of technology. And explicitly building partnerships with others in order that their platform, their core piece is something that people will flock to. So the logic is "I need to create value and to get more and more users, using my platform, using my ecosystem. And I have to worry a little bit less about how exactly I monetise that. Creation always comes before capture. and often all these successful companies, they had no idea how they were ever going to make money, until after they've actually built a huge user base of organisations. So in this article I use this logic that the old way of thinking about competitive advantage it was a moat, was that you take an advantage and you protect yourself. And of course that is an old-school thinking, because it's very difficult to protect an existing asset these days. And I want to shift our thinking towards what I call a “turnstile logic”. The more companies and more people coming through the turnstile, joining our system, in the long term the more successful you'll be. You still want to think ultimately about how you make money out of the people coming through your gates, through your turnstiles, but the starting point is we need a bigger flow of people, that is the lasting underlying logic.
When people think about ecosystem collaborations, they usually understand very well vertical relationships like supplier and distributor, and then horizontal relationships, such as BMW partnering with Mercedes on autonomous cars. Beyond app stores, which are Google and Apple, how do you think about ecosystems and new ways companies collaborate?
So absolutely what you say is true. In other words, the classical business system logic, if you like Michael Porter, you know the definitive thinking about strategy in the old days was: components, manufacturing, distributors, retailers and so forth. That logic has not gone away, but that logic is far less relevant than this notion that, you know, there is an entity somewhere in the middle of a system. Yes, they might have suppliers, they might have customers, but there's also a whole range of complementors - organizations with whom we are currently adding value. And you've got to take all of these entities together. I'll just give you a very specific example – you take WeWork, what is WeWork? WeWork on one level is essentially a real estate company, it's an organisation, which creates value by renting space to people. But of course WeWork is saying "that's not what we do, because what we're trying to do, is to build a community, and we're trying to attract all sorts of different entities to that community, we're trying to find new ways of creating reasons for organizations to stay with us. And if we can do that, then we make the entire kind of system work more effectively. And almost as a sort of a side-effect what we're getting is more rental income from the system. They haven't succeeded yet, don't get me wrong, WeWork is still not a profitable business, but this aspiration to move away from this classical notion of "who are my customers, who are my suppliers" and to think about creating a pie that's much bigger - that is the heart of ecosystem thinking. And just to give you one more example, Alibaba is now world-famous as an ecosystem company. They're deliberately no longer thinking about making products, because they know that if they ever make their own products, they will be competing with the companies that they want to put onto their system. So they are deliberately rising above the actual activities of making them selling things to say "we want to create a system, where everybody feels more attracted, because they've chosen to join our system." So it is genuinely a different paradigm than the one that we had before, because the old one was based in the old vertically integrated supply chain.
In a recent survey by Accenture, almost 50% of executives said they want to build ecosystems. Do you think it is for everyone?
No. I mean let's be very clear, right? We talked about an ecosystem, which of course is a set of organisations, which are collaborating in some sense to create value. With typically one organisation in the middle, that is actually kind of "calling the shots". Everybody likes the idea that they would be the one in the middle who is in charge. But of course that's actually nonsense, because it's literally impossible for everyone to be in the middle of an ecosystem. So if, for example, you are a provider of a very clever piece of software or a very clever piece of hardware, the idea that you would actually provide that piece of technology to a company that controls the ecosystem, whether that's even Apple or Google or Microsoft, actually can be very attractive. You just go back a few years ago, Intel provided of course, the microchip that went inside every personal computer. It was very much the Microsoft ecosystem that Intel was contributing to, but Intel was hugely profitable because of course they had this little piece of technology that nobody else could do as well as they could. So they were almost a monopolist, providing a component to somebody else's ecosystem. And if I just give you another example, you look at the world of movie streaming, we've all got Netflix now, we've all got Amazon, soon we'll all have Disney and we'll have Warner and Apple. In that battle to provide movies to customers, ultimately we as customers are going to get fed up of having to choose between these things. I don't want to have five different movie streaming service. Which of these services am I going to choose? I am going to choose the one with the best content. And so in that situation the distribution becomes almost the commodity and the value becomes the guys who create the unique content. So the guys who have got the really the coolest shows are the ones who are going to make the money in that system, right? And of course that's one of the reasons why Netflix is making its own shows. But if I'm an independent movie producer and I'm making really good content, I can then have the power to choose which ecosystem I join. I'm not at the center of that ecosystem, I'm not the guy who is orchestrating the system, but I'm obviously in a very strong bargaining position to sell my wares to the right one. So the bottom line is you've got to understand the dynamics of the ecosystem, then you've got to figure out, do I want to be the guy who's trying to orchestrate that system, because there's challenges in doing that. Or do I want to actually be a contributor to somebody else's system, because I've got something that actually other people value. And once you understood which role you're going to play, that helps you in terms of making the right choices about how you then subsequently engage with these different players.
Imagine that I'm an MBA student or a business executive who thinks about ecosystems and wants to learn more. How would you try to educate myself?
There's obviously an awful lot written about this. It's probably the hottest topic of the moment. One useful indicator is every year there's a conference called The Drucker Forum in honour of Peter Drucker, and this year (2019) their theme is the power of ecosystems. My point is it's the topic of the moment, you go to Harvard Business Review, you go to the London Business School Review, there are articles on that ecosystems all the time. And then the other option of course is, if you're trying to actually to run a business, you can throw your own investigations and conversations with some of these companies. You can talk about how they are actively building out their own systems. I would be very wary of anybody who said they're going to create a new ecosystem, because as I said earlier, the world doesn't actually have space for that many ecosystems. A much smarter move is to say "in an ecosystem world, what is the best place for me, as a player?" And if I'm just looking for a job, are there certain types of companies that I can actually join to get involved in that? Because the skills you need to work in managing an ecosystem are rather different than the skills you need to just to be building a product or building a technology. I talked to people at Alibaba and they say "Look it's actually pretty chaotic. Trying to build an ecosystem where the rules are changing all the time, we're trying to stay one step ahead of everybody else. We don't really control anything, but we do have this hugely powerful ground, where lots of people want to flock to. This is not business as usual, this is a world where every month we are changing the rules. That is a very different mindset that you need. So as an MBA student, if this is the world you're moving into, you've got to get used to this idea that moving quickly and staying ahead is actually far more of a competitive advantage than being able to going to lock down one technology or one product and milk that for many years.
Do you think then that this is not a fad, this is a long term trend?
Look, as always you've got to separate out the term from the trend, right? The word “ecosystem” is just a fad of the day, absolutely, and there's a very good chance that a year from now we'll have using a slightly different language. But this notion that businesses are moving faster, businesses are working more collaboratively than they used to - that is a long cycle trend. And there's absolutely every reason to think that that will continue to be in a part of the story. So words come and go, but underlying principles of collaboration, of being more open, working more with others - these things are enduring.
Brilliant, thank you so much Julian. It was my sincere privilege and pleasure.
Thank you very much.
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