The rapid rise of a few powerful digital ecosystems disguises a harsh reality about this business model: Less than 15% of business ecosystems are sustainable in the long run.M. Reeves, H. Lotan, J. Legrand, et al., “How Business Ecosystems Rise (and Often Fall),” MIT Sloan Management Review, July 30, 2019, https://sloanreview.mit.edu. When we examined 110 failed ecosystems in a variety of industries, we found that more than a third of the failures stemmed from their governance models — that is, the explicit and/or implicit structures, rules, and practices that frame and direct the behavior and interplay of ecosystem participants.U. Pidun, M. Reeves, and M. Schüssler, “Why Do Most Business Ecosystems Fail?” Boston Consulting Group, June 22, 2020, www.bcg.com.
Business ecosystems are prone to different types of governance failures. One reason why the BlackBerry OS lost its competition with Apple’s iOS and Google’s Android was because Research In Motion failed to open its app ecosystem widely to developers until it was too late.A. Moazed and N. Johnson, “Modern Monopolies: What It Takes to Dominate the 21st Century Economy” (New York: St. Martin’s Press, 2016). Conversely, the video game industry fell into recession during the so-called Atari Shock in the 1980s in part because of overly open access to its ecosystem, which resulted in a flood of inferior games. Badly behaved platform participants, conflicts among ecosystem partners, and backlash from consumers or regulators are other indicators of governance flaws that can bring down an ecosystem.U. Pidun, M. Reeves, and N. Knust, “How Do You Manage a Business Ecosystem?” Boston Consulting Group, Jan. 20, 2021, www.bcg.com.
Many orchestrators struggle to find an effective governance model because managing an ecosystem is very different from managing an integrated company or a linear supply chain. Ecosystems rely on voluntary collaboration among independent partners rather than clearly defined customer-supplier relationships and transactional contracts. The orchestrator cannot exert hierarchical control but must convince partners to join and collaborate in the ecosystem. These challenges are exacerbated by the dynamic nature of many ecosystems, which develop and evolve quickly and continually add new products, services, and members.
Ecosystem leaders who understand the components of a comprehensive governance model and glean insights from ecosystem successes and failures can make more informed and explicit governance decisions. In doing so, they can improve the odds that their ecosystems will be among the lucky few that survive and prosper over the long term.