Strategic Management of Ecosystems

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Over the last 30 years, the economy has been shifting from strictly defined industries formed around large, vertically integrated, “independent” organizations driven by technological innovations and an increasing connectivity. As a result, “the business environment has become a jungle rather than a gladiator arena” (James et al., 2012). This has been marked by the transformation of business operations from the old industry silos to more advanced ecosystems with the application of platform-based concepts and business techniques. Ecosystems are extensive, diverse and more fluid compared to the traditional network of bilateral partnerships (Beamish & Lupton, 2009).

The emergence of ecosystems has transformed competition between incumbents and new entrants. For example, the 7-year-old start-up Airbnb is valued at $7 billion more than the 97-year-old Hilton Worldwide (Sako, 2018).

“Ecosystem” should not be overlooked, the idea is becoming widespread. Businesses poorly understand ecosystems; therefore, many continue to adopt the traditional business mindset. However, the ‘old economy’ is not comparable to the ‘new economy’ and the old-fashioned mindset, based on the application of Porter’s Five Forces Model, is no longer leading to competitive advantage (Gaubinger, 2015).

The Relevance of Porters Framework

Porter’s traditional framework is an important tool for understanding the forces that shape competition within an industry (Figure 1).

Figure 1: Porter’s Five Force Analysis Model

The application of Porter’s framework enables to reorganize and apply effective business strategies to enhance their competitive power. However, this model outlines a picture of a comprehensive industry based on past operations and it cannot be used to assess the current business ecosystems (Kumar et al, 2015).

1. Organizations are ecosystems, not value chains

In the ‘old economy’, it was wise to adopt the traditional linear model of distributors and suppliers by focusing on core competencies and keeping everything in-house, however, this is unlikely to make you competitive in the future. The traditional product mindset limits strategic thinking.

2. Markets and competitors are more dynamic

Ecosystems do not use industries as a basic unit of analysis. Instead, industry boundaries blur; rivals challenge virtually and physically from anywhere in the world, and other sectors. This enables adjustments to a firm’s product over a given period of time, as well as recognizing organizations that cross industry boundaries. Today, competitiveness is achieved through the ability to think more than business rivals.

3. It is not about being the biggest

The framework has an implicit assumption that companies succeed through scale; the bigger the company, the higher the revenue and market power. Many companies focus on being big in order to generate revenue that would cover the capital cost of big factories. They approach homogenous markets with undifferentiated services and products; this thinking is outdated. Today, organizations succeed through better ideas and visions, executing them better than rivals.

In addition, the dynamic working conditions within organizations include: the emergence of cultural diversity, cultural distances and technological changes. These problems affect organizations operating at both local and international level. In order to respond to dynamic business environment, strategic mangers are directed to adopt working policies and regulations that make certain that numerous cultures are recognized within the organization. This problem affects organizations which are located in nations with a high population of people from different regions and societies such as the United States. It implies that through ecosystems, a business might be exposed to problems of fluctuating cultural diversities and distance (Yan, 2015). When strategic managers run firms using, they encounter technological, innovative, cultural diversity and distance in an attempt to attain a competitive advantage (Kale and Singh, 2009). In the current business climate, continuous usage of the Five Forces Model will become marginalized while members of their ecosystems defect to those offering better value (Reeves et al., 2016).

Solutions

The future of ecosystems has a profound impact on the way managers need to strategically think in order to obtain competitive advantage. They must move from a traditional business mindset towards an ecosystem mindset. Solutions are provided to overcome this.

1. Ecosystem based on nodal advantage

In the current interconnected world, a web of entities rather than a particular company coordinates with a set of activities which offers utility to the mutually associated consumers which develops ecosystems. Ecosystem based production along with consumption environment considers it vital to develop new set of factors which facilitates in determining the business success or nodal advantages for organizations (Laszlo & Zhexembayeva, 2017).

It is vital to make transition from the notion of organization based competitive advantages to ecosystem based nodal advantages through which products, services or processes attained by a particular company that affects one or more ecosystems are exploited to enhance operations (Sölvell, 2015). For example, initially, Samsung limited the compatibility of its Smartwatch, to its smartphone, the Galaxy S3, in order to develop the Samsung mobile ecosystem (Shankar et al,. 2018)

A nodal advantage can be achieved by inventing and coordinating a set of activities that provide relevant products to customers, therefore, establishing ecosystems (Shaughnessy, 2016). Based on the current business environment, business can shift from the traditional way of performance by participating in innovating entities. In most instances, the appropriateness of these initiatives is usually fostered by the presence of technological businesses.

To increase nodal competitive advantages, companies’ employs a new set of competitive forces likely to impact it financial profitability within the ecosystem (Leonidou et al., 2015). Such networks are important for maintaining the competitive ecosystem whereby consumers and producers are located all through the world.

2. Allying

Strategic alliances have become a central part of multinationals and small businesses when attaining competitive edge and expansion through knowledge and information access (Kale & Singh, 2009). Strategic alliances allow companies to strengthen the positioning of their brands by enhancing efficiencies, market power, accessibility to new resources, and markets (Rothaermel & Boeker, 2008). Large companies in the world today have tied up at least 20% of their capitals and more than 30% of their yearly expenses strategic alliance relationships (Dimitrieska, 2016).

The increasing growth of alliances between corporations has become an outstanding platform to improve competitive advantage (Altman, 2016). Alliances and partnerships have become formal associations in which one or more different firms agree to collaborate to exchange, share, and develop capabilities and resources to mutually achieve certain benefits. Approaches to the formation of successful alliances under ecosystems are outlined.

i) Building a bridge to “Our Way”

Strategic managers must understand the reason why they form alliances and expectations of other firms by scanning the potential business ecosystem between the firms in the new relationship. Given that every employee in an alliance team has to develop new expertise and work in a different way than they do when concentrating within their firms, executives should not be rigid to change (Hsieh et al., 2010). Rather than “my way” or “your way” alliances must strive to build a bridge to “our way.” Building a strategic relationship found on such a concept permits managers and employees to focus their energies and synergies towards its success and creating an ecosystem that encourages achievement of objectives. Additionally, it enables them to conveniently focus on a platform as a new way of organizing their wealth creation activities. Evidence suggests that companies establishing an alliance must strategically share their resources, ideas and capabilities in the market (Gawer & Henderson, 2007; Shaughnessy, 2016; Zhu, F, and Furr, 2016) to enhance their successful operation to help build on the notion of “Our Way.” The concept of building an open culture that individual partners adhere to help to build linking, multi-product ecosystems to foster aggressive competition by inducing customers to migrate from competitor's ecosystem to theirs (Kumar, Dass & Kumar, 2015).

Example:

Safaricom is the leading mobile operator in Kenya and is partially owned by Vodafone. Safaricom has successfully provided the services of M-PESA (mobile money). The strategic managers from both Companies proposed an initiative of allying that will revolutionize mobile money. The alliance led to the introduction of MPESA mobile money system. This service has been recognized as the global leading mobile money service. The

system of MPESA operates under the principle of understanding the sub-cultures of Kenyan people. The alliance between Safaricom and Vodafone provided a strategic solution to the problem of having unreliable mobile banking system in Kenya.

The limitation with the suggested solution is that it makes partners place more value on the informal culture than formal. For instance, if a firm has established a formal philosophy that empowers employees in decision-making while the informal culture seeks the approval of multiple levels of management, staff facing challenges to get things done right.

ii) Developing a shared vision

In an atmosphere of growing connectivity, aggressive encounters are common multi-dimensional and wide based but rewarding opportunities rather than amid organizations that compete for a market share. For instance, Walmart ecosystem competes with Amazon. Alliance cohorts have equal power and responsibilities in operations unlike in subcontracting engagements. Each of the members is a separate entity having its guidelines, goals, and missions. In order to be effective, partners must put into consideration some of the questions such as “What is it for them?” and “What is in for me?” Providing answers to such questions depend on the understanding of their respective mission, vision, and strategies of both firms combined.

Executives from partnering firms must acknowledge that each firm is governable by their priorities, which are liable to modification and change. Preventing future problems from becoming an obstacle to the execution of the strategic alliance, executives should ensure speedy alignment of high-level goals and governance of the relationship. The aspects may include the role of a company, sharing intellectual capital, expectations from alliance cohorts, and success measure determinants. Having a joint approach often reflects on a similar process as developing one’s company policy. A shared vision in alliances focuses on changing the mindsets of alignment of the industry to an ecosystem orientation (Bickerstaff & Walker, 2005; Julkunen, 2016). In the process, shifting the emphasis from compactly bracketed sectors and accounting for the multifaceted network of conjointly interrelated nodes among para-industrial bodies, consumers, and businesses (Kumar, Dass & Kumar, 2015; Dass & Kumar, 2014). The approach is beneficial to companies because it supports the building of trust which is practised at suitable levels of the partnership. Although attributes such as commitment, complimentary, and compatibility are crucial to the success of an alliance, Strategic managers tend to apply these characteristics based on their effectiveness. Partner complementarity has a strong role in a strategic relationship especially when one cohort is comparatively younger than the other (Rothaermel & Boeker, 2008).

However, commitment remains crucial where partners have recognized particular benefits they anticipate to gain by establishing an association. The commitment of a cohort is essential because firms allying must be ready to dedicate their material and intellectual resources as well as pledging when they experience cultural differences. As a result, strategic leaders must consider such eventualities when choosing partners that will be compatible, committed, and complementary when building an all-inclusive shared vision without giving priority to their organizational interest. An alliance that has executives from both firms involved and aligned on the issues influencing its existence enjoy the commitment of each partner attributed to proper physical and human resources on a consistent basis.

Example:

Apple Pay and MasterCard shared a vision of engaging in a strategic alliance. MasterCard is recognized as the second largest credit card Company in the world. This is a market positioning strategy adopted by Apple pay in order to advance the processing of arena among other commercial provisions. As a global strategy, MasterCard will obtain the benefit of emerging as the first means of payment accepted by Apple pay. This alliance relationship will not be exclusive because MasterCard is more powerful than Apple Pay. Both companies have a shared vision of increasing their competencies and a comparative advantage.

The alliance between MasterCard and Apple pay is consistent with AA strategies (Figure 2). The principle of aggregation and adaptation has been adopted to give these Companies economies of scale.

Figure 2: AAA Framework

(Ghemawat, 2007)

Recommendations/ Next Steps

An ecosystem is a challenging place to navigate, especially for organizations operating under an interconnected strategy. In Porters approach a firm’s capabilities to tap into the location advantages of other nations are viewed as limited (REF). Therefore, firms should utilize The Global Advantage Diamond (figure 2) to gain competitive advantage through platforms and alliances to overcome the issues with the traditional business performance framework.

Figure 3: The Global Advantage Diamond

To enhance the competitive advantage of an organization, the global advantage diamond encourages leadership to focus on market access, resource access, network coordination and local adaptation. In addition, the business should consider using the modern technological innovations and tools to enhance competency.

To overcome the dynamic environment of ecosystems, the business is should harness and utilize the concept of global competitive advantage (Adner, 2017). Outline your global objectives in relation to the environment of the organization and after understanding this segment, you should establish a set of initiatives to expand the market and offset the incidence of the dynamic environment especially if your business has an alliance through:

- Enhancing the go-to-market approach. This system can be achieved by improving status of the current marketing and sales forces.

- Improving the manufacturing facilities. This can be achieved by establishing competitively complex system of manufacturing facilities to stand-out and produce quality products in the market.

References

Adner, R. (2017). Ecosystem as Structure: An Actionable Construct for Strategy. Journal of Management, 43(1), 39-58

Kale, P., & Singh, H. (2009). Managing Strategic Alliances: What Do We Know Now, and Where Do We Go From Here? Academy of Management Perspectives, 23(3), 45–62

James Williamson, P., & De Meyer, A. (2012). Ecosystem Advantage: HOW TO SUCCESSFULLY HARNESS THE POWER OF PARTNERS. California Management Review, 55(1), 24–46.

Kumar, P., Dass, M. and Kumar, S. (2015). From competitive advantage to nodal advantage: ecosystem structure and the new five forces that affect prosperity. Business Horizons, 58: 469–481 Shaughnessy, H. (2016). Harnessing platform-based business models to power disruptive innovation. Strategy & Leadership, 44(5): 6 – 14

Shaughnessy, H. (2016). Harnessing platform-based business models to power disruptive innovation. Strategy & Leadership, 44(5): 6 – 14

Yan, S. (2015). A THEORETICAL FRAMEWORK OF COMPETITVE ADVANTAGE FOR SMES IN CHINA UNDER NEW NORMAL ECONOMY. European Scientific Journal, ESJ, 11(34).

Gaubinger, K., Rabl, M., Swan, S., & Werani, T. (2015). Innovation Strategy. In Innovation and Product Management(pp. 61-80). Springer, Berlin, Heidelberg.

Kumar, P., Dass, M. and Kumar, S. (2015). From competitive advantage to nodal advantage: ecosystem structure and the new five forces that affect prosperity. Business Horizons, 58: 469–481 Shaughnessy, H. (2016). Harnessing platform-based business models to power disruptive innovation. Strategy & Leadership, 44(5): 6 – 14

Beamish, P. W., & Lupton, N. C. (2009). Managing joint ventures. The Academy of Management Perspectives, 75-94.

Sako, M. (2018). Business ecosystems: how do they matter for innovation?. Communications of the ACM, 61(4), 20-22.

Laszlo, C., & Zhexembayeva, N. (2017). Business reality reshaped: the BIG three trends. In Embedded Sustainability(pp. 24-47). Routledge.

Reeves, Ransbotham, Sam, David Kiron, Philipp Gerbert, and Martin. "Reshaping Business With Artificial Intelligence: Closing the Gap Between Ambition and Action." MIT Sloan Management Review 59, no. 1 (2017).

Shankar, V., Kleijnen, M., Ramanathan, S., Rizley, R., Holland, S., & Morrissey, S. (2016). Mobile shopper marketing: Key issues, current insights, and future research avenues. Journal of Interactive Marketing, 34, 37-48.

Rothaermel, F. T., & Boeker, W. (2008). Old technology meets new technology: Complementarities, similarities, and alliance formation. Strategic Management Journal, 29(1), 47-77.

Dimitrieska, S. (2016). How to gain competitive advantage in the marketplace. Entrepreneurship, 4(1), 116-126.

Hsieh, P. F., & Pai, J. T. (2010). What is the difference of innovation between industrial and service cluster? A case study. International Journal of Sustainable Society, 2(4), 355-375.

Gawer, A., & Henderson, R. (2007). Platform owner entry and innovation in complementary markets: Evidence from Intel. Journal of Economics & Management Strategy, 16(1), 1-34.

Zhu, F., & Furr, N. (2016). Products to platforms: Making the leap. Harvard business review, 94(4), 72-78.

Bickerstaff, K., & Walker, G. (2005). Shared visions, unholy alliances: Power, governance and deliberative processes in local transport planning. Urban Studies, 42(12), 2123-2144.

Julkunen, S. (2016). Meanings of Shared Resources in Interorganizational Relationships: A Narrative Study in Retailing. Journal of Relationship Marketing, 15(1-2), 17-34.

Ghemawat, P. (2007). Managing differences: The central challenge of global strategy. Harvard Business Review, 85(3), 58-68.

January 19, 2024
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