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excerpt from “Business ecosystems and the view from the firm” Antitrust Bulletin, Fall 2005

The Antitrust Bulletin/Fall 2005

Business ecosystems and the view from the firm


I. Introduction

For more than sixty years, markets and hierarchies have dominated our thinking about economic organization. The classic statement of markets and hierarchies as the two primary forms of economic organization is by Ronald H. Coase, The Nature of the Firm (1937) reprinted in OLIVER E. WILLIAMSON & SIDNEY G. WINTER (eds.), THE NATURE OF THE FIRM: ORIGINS, EVOLUTION, AND DEVELOPMENT (1991; subsequent economic policy study based on this dichotomy is surveyed in WILLIAMSON & WINTER (ibid.) and its systematic implications for antitrust in OLIVER E. WILLIAMSON, MARKETS AND HIERARCHIES: ANALYSIS AND ANTITRUST IMPLICATIONS (1975).

This paper suggests that a third form, the ecosystem organizational form, has now become so important in practice that it should be accorded equal recognition in theory and in policy-making. Markets, hierarchies and ecosystems are the three pillars of modern business thinking, and should provide the foundation for competition policy, regulation, and antitrust actions. I am pleased to contribute to this issue of the Antitrust Bulletin as a member of the American Antitrust Institute Invitational Roundtable on Complexity, Networks and the Modernization of Antitrust, American Antitrust Institute, April 26, 2005.

The ecosystem form of economic coordination has become pervasive on the business landscape. For comprehensive treatment of the business ecosystem organizational form and its applications, see JAMES F. MOORE, THE DEATH OF COMPETITION: LEADERSHIP AND STRATEGY IN THE AGE OF BUSINESS ECOSYSTEMS (1996); and MARCO IANSITI & ROY LEVIEN, THE KEYSTONE

ADVANTAGE: WHAT THE NEW DYNAMICS OF BUSINESS ECOSYSTEMS MEAN FOR STRATEGY, INNOVATION AND SUSTAINABILITY (2004) Business ecosystems surround, permeate, and reshape markets and hierarchies. Managers establish business ecosystems to coordinate innovation across complementary contributions arising within multiple markets and hierarchies.

The activities of business ecosystems set the agenda for “co-evolution” of markets and hierarchies and their outputs. Co-evolution is a core concept in studies of complex adaptive systems and the economy, focusing attention on reciprocal cycles of adaptation among one or more elements of an economic system. Uses of the term in business and economics range from the highly abstract and mathematical, to the empirical. For a mathematical treatment see PHILIP W. ANDERSON, KENNETH J. ARROW, DAVID PINES (ed), THE ECONOMY AS A COMPLEX ADAPTIVE SYSTEM (1988). Strategists such as MOORE (1996) op. cit., and IANSITI & LEVIEN (2004) op. cit. provide detailed empirical descriptions of co-evolution in action, demonstrating reciprocal interactions among technologies, business processes, products and services, market mechanisms, firm and ecosystem structures, and policy and regulation. CARLISS Y. BALDWIN & KIM B. CLARK, DESIGN RULES: THE POWER OF MODULARITY (2000) present highly detailed and fascinating studies of co-evolution between technical modularity in products, and the networks of firms that arise to produce them.

The focus of companies in most sectors has progressed from competing on efficiency and effectiveness to competing on the basis of continuous innovation. As companies have accelerated innovation in their own businesses, they have discovered that they can’t change the world alone. For every advance there are complementary innovations that must be joined in order that customers can benefit. These complementary advances often must co-evolve across company lines because no single firm has all of the required specialized knowledge and managerial resources necessary for the whole system. Indeed, a substantial solution to a customer need may require the participation of dozens or even hundreds of diverse contributors, each of which is a master of fast-moving, complex and subtle developments in its own domain. For a discussion of how innovation is coordinated by the business ecosystem organizational form, see James F. Moore, Predators and Prey: A New Ecology of Competition, HARVARD BUSINESS REVIEW, (1883)

A senior executive might say “we need to promote a business ecosystem around our new product” or “the iTunes ecosystem is becoming important for our company” or “our business ecosystem is becoming more standards-based and open.” The term “business ecosystem” and its plural, “business ecosystems,” refer to intentional communities of economic actors whose individual business activities share in some large measure the fate of the whole community. Companies making accessories for the Apple iPod can be said to be members of the iPod business community or, more evocatively, the iPod business ecosystem. The same can be said of the entertainment companies that license music through iTunes, the iPod-connected music downloading site, as well as the consumers who purchase and enjoy the music.

A business ecosystem, as we will see, can also be conceived as a network of interdependent niches that in turn are occupied by organizations. These niches can be said to be more or less open, to the degree to which they embrace alternative contributors.

One of the most exciting ideas in business today is that business ecosystems can be “opened up” to the entire world of potential contributions and creative participants.

In order for companies to co-evolve their goods and services, they must find ways to align their visions, so that research and development investments are mutually supportive, and capital investments and operating processes are synergistic. Companies must establish interfaces and protocols for putting together their contributions. Most important they must dialogue closely with customers so that what is created is what the customer wants and is willing to pay for. Mastering these challenges, of what might be called “distributed creativity,” is the aim of the ecosystem organizational form. The conventional hierarchical firm does not effectively address the breadth and importance of inter-firm relationships. The unaided market is not able to achieve inter-firm coordination sufficient to justify players aligning their dreams, plans, and product road maps. A seminal study of the failure of firms and/or markets to achieve such coordination and the rise of ecosystem-style “flexible specialization” is MICHAEL J. PIORE & CHARLES F. SABEL: THE SECOND INDUSTRIAL DIVIDE: POSSIBILITIES FOR PROSPERITY (1984)

Courts and regulators need to recognize the ecosystem form, appreciate its nature, structure and operation, and seek to support its contributions to pro-competitive and pro-innovative social outcomes. Antitrust cases that do not recognize this level of organization run the risk of ignoring and possibly damaging important collaborative, innovation-furthering public goods. Cases also run the risk of being used by opponents of a particular business ecosystem to undermine the effectiveness of an innovating community, thus making the courts unwitting tools of narrow competitive interests and inadvertently impairing collective advances that might benefit the whole society. In instances when leaders of business ecosystems seek to use their power in predatory or narrowly collusive ways, it is vital that regulators and courts be able to “connect the dots” and understand why particular actions are being undertaken, and anticipate their likely anticompetitive consequences.

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