Academics and practitioners recently spent two days in Vienna at the 11th Drucker Forum discussing the latest ideas on ecosystems theory and practice. Viewing the conference as a barometer for the state of this rapidly expanding field, here is a personal synthesis of some of the main messages.

Drucker Forum 2019

This article is one in the “shape the debate” series relating to the 11th Global Peter Drucker Forum, under the theme “The Power of Ecosystems” taking place on November 21 & 22, 2019 in Vienna, Austria.
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1. As with any new and popular managerial concept, a fair measure of confusion and over-application abounds. Ecosystems are a convenient universal metaphor for any sort of multilateral collaborative effort and we heard the term applied to families, nations, the planet and everything in between. As a result some sounded a note of skepticism towards the emerging field.

2. Nevertheless, it is clear that the term also points to a new and substantive phenomenon: 70% of the worlds largest businesses are now built on digital platforms and involve the coordinated delivery of complex offerings by large numbers of enterprises.

3. Setting aside ecosystems as a collaborative metaphor, the term points to a specific governance form, in which a dynamic group of companies delivers a coordinated offering to customers. This governance choice combines some of the flexibility of the market place with some of the coordination of the vertically integrated enterprise or the stable, linear supply chain.

4. Ecosystems are not a panacea but rather a strategic choice, contingent on business characteristics and aspirations. Ecosystems require a modular offering, so that multiple firms can contribute to its delivery and are only valuable when a measure of coordination is required, whether through common standards, interfaces or otherwise.

5. While there are a number of pre-digital precedents, like Tupperware or MasterCard, digital technology has undoubtedly driven the recent rapid rise of ecosystems, by permitting the coordination of high complexity at low cost and with broad reach.

6. Business ecosystems require dynamic and flexible internal structures, rather than static classical hierarchies. There is much experimentation to find the right form of internal ecosystem, from Haier’s micro-business units to the agile structures of Ten Cent and others.

7. Successful ecosystem implementation requires a different way of thinking compared to a classical product-centric organization. The relevant unit of analysis becomes the multilateral ecosystem rather than the individual company. Value extraction is complemented by an equal emphasis on mutual value creation: the ecosystem fail is if does not attract and retain partners. Stability gives way to dynamism, and planning to experimentation and emergence. We might label this differentiated approach, biological thinking as opposed to mechanical thinking. It is one of the major barriers for product-centric companies in embracing ecosystems, as manifest by familiar and apparently reasonable but actually somewhat inappropriate questions, like “how do you manage an ecosystem” or “how do you design an ecosystem”.

8. The rapid rise of digital ecosystems raises questions about the required skills of people. Ecosystems require on the one hand agile, granular organizations but also integration on larger scales – emphasizing the skills of strategic empathy, collaborative leadership and communication. Ecosystems leadership requires long-range communication with low control, to convince partners of the mutual value proposition.

9. Ecosystems create new social challenges alongside their obvious economic benefits, but regulation has lagged behind the rapid pace of business innovation. It’s hard to apply antitrust frameworks based on consumer harm to situations where consumers may be getting more choice, with greater convenience at lower cost. Ecosystems can also be the solution to social challenges like urban revival and urban mobility, and are gradually being embraced by local governments, leveraging their spending power.

10. The next waves of ecosystems development are likely to include new models for the internet of things, and in the industrial internet of things. Purpose-driven ecosystems aimed at solving major social challenges like elderly care are also set to grow rapidly in importance, driving also a greater involvement of the public and not-for-profit sectors.

11. Finally, practice is racing ahead of theory, and the spread of relevant managerial knowledge needs to start with the codification and analysis of the Cambrian explosion of new practices of leading practitioners. After a period of stagnation in the discipline of strategy, in which academic and practitioner interests diverged, ecosystems may offer an opportunity for a renaissance in the substance and relevance of strategy.

For all of the hype and over extension, ecosystems are here to stay and represent an exciting new area of strategy and management for the foreseeable future.

About the Author:

Martin Reeves is senior partner and managing director of BCG New York office and chairman of the BCG Henderson Institute

This article is one in the Drucker Forum “shape the debate” series relating to the 11th Global Peter Drucker Forum, under the theme “The Power of Ecosystems”, which took place on November 21-22, 2019 in Vienna, Austria #GPDF19 #ecosystems

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The challenge to corporations comprises not merely a moral imperative for successful corporations to give back, or to manage reputational risk prudently. The very growth which demonstrably generates the majority of corporations’ returns in the long run is under threat. If this claim sounds dramatic, consider the following facts: growth rates are trending downward globally, corporate investment levels are falling, start-up activity is declining and there is a political tide rising against one of the major drivers of growth, global economic integration. Furthermore, this could even be compounded by an emerging backlash against technology, another major potential growth driver, motivated by fear of its impact on employment and inequality dynamics.

Addressing these threats will require not just setting different goals, but also adopting a different mindset. Business thinking has been dominated in recent years by the idea of maximizing Total Shareholder Returns (TSR). Such a philosophy is arguably appropriate to a situation where two conditions hold: 1) there are minimal externalities from business impacting the broader system beyond the company; and 2) the game is well established enough that emphasis on exploiting it fully makes sense, but not so mature that the exploration of new possibilities becomes critical. Clearly, these conditions do not hold today. Maximizing a rate of return which also incorporates expectations, creates an unsustainable ratchet effect. As the graph shows, after a period of high TSR performance, there is rapid regression to the mean. And the strength of the effect is increasing over time.

This should not come as a surprise. Aristotle already distinguished between two species of economics. First, there is Chrematistike, or wealth maximization as an end itself, without constraints. Aristotle posited that Chrematistike is flawed as a model and likely to undermine society. He presumed that a better of model is Oikonomia, the art of managing a household, where financial considerations are subordinate to the higher purpose of family welfare. For Oikonomia the acquisition of wealth is merely an instrument to ensure well-being. We would argue that the latter approach is more appropriate to the current circumstances. In a straw poll at a recent World Economic Forum meeting of business and public sector leaders, all participants agreed that that a polarized society was the most likely, if least desirable, default outcome of expected developments in technology and work. This can be avoided only changing the current approach.

So how should companies change their thinking and rewrite their strategy agenda to reflect the new circumstances?

We suggest eight imperatives for such an agenda.

1. Define clearly the purpose of each corporation, the higher social goal which it serves. This should be at the intersection between a need in the world, and a distinctive aspiration and ability to deliver it. This will address the self-limitations of pursuing TSR maximization as an end in itself.
2. Diversify beyond the narrow metrics of TSR and GDP and adopt metrics which more broadly define wellbeing. We have suggested SEDA (Sustainable Economic Development Assessment) for societies and have recently released a report proposing TSI (Total Societal Impact) for companies.
3. More emphasis on the future. The present value of growth options (PVGO) and investment levels for corporations have both fallen in recent years. This implies an insufficient exploration of future opportunities, particularly by large companies,  which makes them vulnerable to the success trap
4. Invest in technology “front to back”. That is, stress growth and the fulfillment of unmet human needs, rather than the easier prize of cutting costs (and often jobs) in the back office. Some basic needs like education, healthcare and housing have increased in cost and the burden has fallen disproportionately on the less fortunate. Addressing such needs would make a good target for technological and business model innovation, leading to more broad based prosperity gains.
5. Reeducate employees and citizens to make them better equipped to deal with changes wrought by technology. This would both reduce unemployment and alleviate talent shortages in emerging areas such as data engineering and artificial intelligence.
6. Rethink and reshape the future of work. In particular, understand and redefine the role of employees in organizations powered by artificial intelligence.
7. Support entrepreneurial business ecosystems. Corporations should rethink their global supply chains and business models in ways which create demand for services of the new and small companies which might not only be collectively major sources of employment but can also be a potent source of new ideas. It would also address the rising scale, concentration and complexity of incumbent enterprises.
8. Communicate a new compelling narrative for globalization, technology and for business overall, which inspires confidence in a shared future. As narratives shape perceptions and political reality, which in turn shape economic reality, business leaders have the opportunity to take an active stance and influence the direction of our societies.

Creating the conditions for sustainable growth is a challenging task.  Some leaders especially in younger companies appear to be already active in trying to build this new narrative and reality. Now, the challenge and opportunity for established companies is to extend their own longevity and growth prospects by doing the same.

About the author:

Martin Reeves is a BCG senior partner in New York and director of the BCG Henderson Institute. Bob Eccles is a visiting professor at Said Business School at Oxford University and Claudio Chittaro is a consultant in the BCG Henderson Institute.