Martin: Ecosystems. We’ve heard a lot about the word. What actually is a business ecosystem?

Michael: Well, the problem is that there are too many definitions for it, and I think that there’s more confusion than clarity. Ecosystems have been used to refer to absolutely everything, but I think that it’s useful when you start looking at collaborating sets of firms that need to come together to create a joint product or service offering.

Is that a new thing? Clearly, there’s a great popularity around using the concept of ecosystems but, if you strip away all of the hype and confusion, is there anything new going on there?

There is something that is new. The thing that is new is the extent to which ecosystems are more important than traditional firms are today, and the reason is that you can do new combinations that were not feasible before.

Have we seen things that operate like ecosystems? Yes, we have. Many of the firms that right now have created their own ecosystems rely on principles that existed in the past. But the increase in modularization and the fact that you now have discrete parts that can be recombined in different ways — but also the needs to have some interoperability — means that you have groupings that need to coordinate while they’re also independent, in order to add value. So — is this new? Yes, because it’s never been so important — and also, yes — because the digital aspect of how firms combine, is something that has been brought upon by technology.

What is the trigger for this new type of industrial structure? This thing, which is as large as an industry in some cases and much more fluid and operates in different ways. Why is this happening now?

I think that you see a confluence of changes that have been happening for a long time. You have seen the dissolution of the ways that we had structured our economy. We had them in fairly clustered sectors and firms that were insular — and now what you see is the result of both changes and regulation — but also changes in technology. We have these small little bits. Think about toys that shift from being traditional toys made for a purpose to Lego bricks that can be recombined. And these Lego bricks need to intertwine with each other, so behind the growth of ecosystem is a change in the way that we organize in our society. As we saw industrial firms grow and become the dominant way of organizing a couple of centuries ago up until a few years ago, you now see a new way in which the economic activities are organizing. You see that if you look at what are the most profitable firms in the planet. If you look at the recent research that we’ve done and BCG has done, that looks at the incidence of the word, ecosystems, and that the fact that the firms that use it, tend to be growing much more quickly. There is something there.

Presumably, we don’t do ecosystems just because we can — there must be some advantage, something that ecosystems do better. If you look at some of the most sophisticated or successful ecosystem players, what is the job that’s being done better than a traditional — let’s say an isolated firm — or a firm in its value chain?

It’s great that you compare to it with a traditional firm, and a firm in its value chain because essentially ecosystems are new ways of organizing; and like with any new form of organizing, there’s pluses and there’s minuses. You don’t need it when you have a very predictable environment because you can organize and orchestrate things neatly. You can ensure that you focus on simply reducing the cost and having a very tightly run ship. Ecosystems are useful when there is a variety or there isn’t a predictability of what you want. Think about ecosystems that are used day to day, think about the fact that if you use your phone, you want to get an app, but I as the owner of this ecosystem — this platform — if I’m Android or if I’m Apple, I don’t know, which part of this variety is going to work for you. Neither am I good in producing all this variety.

Because I’ll tell you what is the other catch that we have, when we see these ecosystems grow and span more and more areas. You can not have one phone that is able to cover all of these different areas that need to come together to give you this sort of offering.

You are saying that ecosystems are very good at giving you the flexibility to deal with uncertainty and creating combinations of things that you couldn’t anticipate that you need other people’s capabilities to execute against, so those are some of the things that ecosystems are good at?

Absolutely, and also that they don’t need the assets, not just the capabilities that you develop. Essentially, the ecosystem play is one that allows you to partner with other companies that share both in the provision of the effort and the creation of these adventures and the splitting of their revenues.

Is that connected with the idea of super companies? So some people have pointed out that there’s a minority of companies that are doing terrifically well compared to other companies, especially on the metric of return on tangible assets. They appear to have good growth and profits on very light asset bases. Do you think that’s at all connected with the ecosystem phenomenon?

Absolutely, because essentially when you see many of these companies, what they do is that they manage to take some positions that occupy the bottlenecks, and they are the connectors between a number of other firms.

Now, when you occupy the bottleneck, when you are able to orchestrate all firms to be the one that is matching supply and demand, it’s like having the right of using the tools — and even the small tools in a very busy road is going to make you very rich indeed. That is the strategy for instance of Alibaba, finding what kind of thoroughfares can we get — and Amazon does a similar thing that is going to allow you to get small parts of massive volumes, which mind you, are going to challenge the people that were doing it the old fashioned way.

Amazon is going to challenge the traditional retailers. Alibaba is going to mediate some of the players that used to be there and by doing so and by orchestrating these ecosystems, they become very profitable.

I’m glad you brought up orchestrators because when a company looks at the possibility of building an ecosystem, they naturally tend to believe or want to believe, that they can be the orchestrator but arithmetically this can’t always be so, right? If there are a 100 companies in the average ecosystem, then one percent get to be the orchestrator. Now you just spoke about some companies who were successfully the orchestrators of their ecosystems, what does it take to be the orchestrator?

Delusions of grandeur are probably the biggest risk that you have in strategy and one of the biggest problems is that companies see strategies of firms that are particularly strong because of strong IP because of strong network position, because of the fact that they have an unparalleled set of pre-existing assets — and then say, “Let me emulate that.” Now saying that you’re going to try to emulate the tactics of one of the best basketball players is not going to make you the best basketball player.

No. But what would?

Understanding how basketball is played, so I think the problem is that we are changing, and the world is a world, which is increasingly mediated by ecosystems. Being able to understand what the best possible role that you have in this world is much better than deluding yourself into believing that you will be the Google or the Facebook or the Uber.

I see countless entrepreneurs, people who come from medium size companies, small size companies and sometimes companies that are older, somewhat cash rich, but absolutely nowhere close to the technological leadership in their sector, that think that all they need to do is announce to the world that they will always be.

So on average do you think we should be thinking more about how to be a profitable complementor in somebody else’s ecosystem than automatically assuming that we can be the orchestrator of an ecosystem?

Reality hurts but I absolutely do. And I think that you need to be strategic in understanding where you are going and then enchanting the way that you will develop the skills that you need as you are upgrading the positions along the chain.

That’s one myth of ecosystems — that not everybody can be the orchestrator. Are there any other common pitfalls if we apply our experience, and our common sense from traditional businesses to thinking about ecosystems?

Yes. There’s the belief that you can tell the ecosystem what to do, which is a little ironic because at the very point of having an ecosystem is that you are able to find a new trade-off between flexibility and control and ecosystems are not part of command chains.

You need to learn to live with a fair amount of both ambiguity and the fact that these are not your employees, these are not your subordinates, and that you need to get the ecosystem participants to agree to you. So, you can’t quite control them, and you also need to understand that they’re not going to be the same things that you’re used to. Ecosystems are not supply chains — neither are they the total opposite — they are not entirely open so that anyone can come in. They are a strategically managed group of complementors.

Quite often people who are excited with the myth of openness think that the benefit of ecosystems is that anyone can come in or out, that is not the case. Looking at ecosystems, we see that they are very carefully designed strategies of the orchestrators in terms of the governance and in terms of the entry and exit requirements.

We’ve been speaking about the physics of ecosystems, how they work and what they do. We seem to be saying that to be a successful ecosystem player, you may also need to think differently about strategy. So if we go inside the heads of strategists of major corporations, contemplating ecosystem plays, what are some of the ways in which such companies would need to think differently in order to act differently and be successful in an ecosystem context?

The first thing is that an ecosystem needs to be adaptive to its own environment. You can’t say, “I’ve got my ecosystem strategy. I have a wonderful set of PowerPoints. Anyone who wants to look at them, go to the shared documents, download it and read it.” It needs to adjust because you are responding to the needs of the environment but so is everyone else.

 It’s more like an adaptive approach than a plan-driven approach then?

Absolutely, and this is one of the reasons for which you need to make sure that you create the skills and that you also have the response times that are appropriate. So, if you were a part of the traditional industry with long cycles, take automobiles, if you are used to development cycles that are about three years in order to build a new car, and you now move into mobility services.

Services have extremely fast cycles where you have much smaller bets, where you have much more rapid developments, where you need to be making decisions and changing your decisions a few weeks at a time. So you need to understand that as you are shifting from your traditional role, to a role that combines the flexibility and the responsiveness to others, and quite usually much shorter response time, you need to create the organizational processes of authorizing decisions of committing the capital, of giving the go ahead, or pulling off when you need to — that are going to adapt to the changing speed….usually in the quickest way that you see in the environment.

So, final question Michael. Do you see ecosystems and a preoccupation with ecosystems as being a sort of a transitional phase as we transition to digital economy, here today, gone tomorrow. In other words, will we migrate to a new industry structure — a new paradigm of stability — or do you think there become a more permanent feature of the industrial landscape?

It’s a bit of both, why? Well, they are going to become a permanent part of the landscape, but you see a new type of power that is starting to be exerted. And that’s a problem not only for companies but also for regulators and for politicians.

One of the ways that we used to think about market power is about the extent to which, for instance, a merger would increase or reduce the prices in the focal market, this is the wealth criteria that people in antitrust have, and if you look at Amazon, Amazon has not gone afoul of any of these rules because it has not raised prices. On the other hand, it is exerting a remarkable amount of power over the rest of the participants in its ecosystem.