Win-Win - The Impact of Business Ecosystems on Corporate Strategy, Innovation, and Sustainability

Author: Marco Iansiti, Roy Levien / Country: Mainland China
Publisher:
Publish Date: 2006-06-01
Features: The collective collapse occurred in December 2000 when Yahoo stumbled. It happened almost overnight. In the previous quarter, the company was still growing and profitable; in the next quarter, it incurred massive losses and shrank. Just a month later, Cisco also fell into trouble, with nearly $2 billion in inventory having to be written off. What was the reason? And even more intriguing is why it happened so suddenly? The setbacks of Yahoo and Cisco were actually due to the fact that the vast commercial ecosystem they belonged to was gradually becoming unhealthy and ultimately collapsed. Although their decline was sudden, it was not caused by a single event. Instead, their dramatic collapse was a reflection of the often puzzling collective behavior that frequently occurs in decentralized organizational networks. Like species in a biological ecosystem, the performance of firms in a networked industry is highly interdependent. The value and financial performance of Envision Corp. are highly correlated with the value and performance of its Taiwanese manufacturing platform, TSMC. And Envision Corp. is linked to Microsoft's fate through Xbox. Additionally, due to Xbox, Envision Corp. is connected to other companies such as Flextronics, which assembles Xbox circuit boards, and Electronic Arts, which develops Xbox games. The numerous interdependencies among these companies likely create subtle but strong connections in the results they achieve, even if these companies appear unrelated at first glance. In fact, the performance of a video game producer and a circuit board assembler should be interrelated, but since they operate in different industries, this correlation may not be immediately apparent. However, because both the video game production group and the circuit board assembly group are part of the larger commercial ecosystem, the performance link between these two types of businesses is inevitable. Typically, the relevant boundaries drawn to understand the behavior of a commercial ecosystem extend beyond the scope defined by industry boundaries. The key members of the Yahoo ecosystem are not limited to other internet companies, nor even confined to related software companies or internet retail companies. Instead, it extends to a range of businesses in other commercial sectors, including venture capital firms, investment banks, and pension funds in the financial sector. As we will see later in this chapter, many of Yahoo's internet partners had long-term issues, which may have been exacerbated by Yahoo's actions. However, the various participants in the financial industry, with their substantial resources, provided a period of respite for Yahoo's internet partners. Funds flowing from a pension fund in Michigan to a venture capital firm in Silicon Valley would then move to a B2C e-commerce company south of Market Street in San Francisco, and then to Yahoo, and ultimately to large internet equipment manufacturers like Cisco. When this funding chain could no longer mask the inherent problems in the business models of Yahoo's numerous partners, the shock spread throughout the network. If Yahoo and Cisco had received enough cash, both companies would have done well. Although the internet business network deep-rooted operational issues, Yahoo and Cisco could still charge a good price for complex telecom equipment, advertising, and "traffic-sharing agreements." However, like many companies, Yahoo and Cisco leveraged their positions to extract as much financial benefit as possible. While this maximized their short-term profits, it made them dependent on an unhealthy commercial ecosystem, thereby damaging their long-term prospects. Gradually, the funding chain they relied on began to shift southward, particularly after being restructured south of Market Street, and the shift became more apparent as the overall expectations in the financial sector became more realistic. With the exhaustion of financial support, the inherent problems in the B2C e-commerce ecosystem came to the surface. As a result, the entire system collapsed. Because in a mutually dependent industry segment, the performance of several organizations within the same field is interrelated, the entire business ecosystem centered around Xbox and the fates of Cisco and Yahoo became closely intertwined, sharing a common or "collective" attribute. This attribute can be understood as a set of consistent characteristics that describe the overall behavior of the field. We can extend this idea to establish specific metrics to measure the "collective" attribute of the entire ecosystem. Like a biological ecosystem, the state of such a system may appear thriving or threatened by pollution. We believe that the "health" of a commercial ecosystem (and the various networks that constitute it) is a key collective attribute that we need to define, understand, and analyze. In the cases of Yahoo and Cisco, despite their continued profitability, the poor health state of their commercial ecosystem should have long served as countless warning bells. This chapter focuses on the collective health of a business ecosystem. To this end, we will use the discussion on biological ecosystems as a metaphor and draw heavily on the broader literature on the evolution of complex systems. The results of these discussions will propose metrics for ecosystem health and explain their implications for corporate strategy. P57-P60