Strategy-as-ecology

68HARVARDBUSINESSREVIEWlO;.;;i^Stand-alonestrategiesdon'tworkwhenyourcompany'ssuccessdependsonthecollectivehealthoftheorganizationsthatinfluencethecreationanddeliveryofyourproduct.'.nowingwhattodorequiresunderstandingleecosystemandyourorganization'sroleinit.WAL-MART'SANDMICROSOFT'Sdominanceinmodernbusinesshasbeenattributedtoanynumberoffactors,rangingfromthevisionanddriveoftheirfounderstothecompanies'aggressivecom-petitivepractices.Buttheperformanceofthesetwoverydifferentfirmsderivesfromsomethingthatismuchlargerthanthecompaniesthemselves:thesuccessoftheirrespectivebusinessecosystems.Theseloosenetworks-ofsuppliers,distributors,outsourcingfirms,makersofrelatedproductsorservices,technologyproviders,andahostofotherorganizations-affect,andareaffectedby,thecreationanddeliveryofacompany'sownofferings.Likeanindividualspeciesinabiologicalecosystem,eachmemberofabusinessecosystemultimatelysharesthefateofthenetworkasawhole,regardlessofthatmember'sapparentstrength.Fromtheirearliestdays,Wal-MartandMicrosoft-unlikecompaniesthatfocusprimarilyontheirinternalcapabilities-baverealizedthisandpursuedstrategiesthatnotonlyaggressivelyfurthertheirowninterestsbutalsopromotetheirecosystems'overallhealth.Theyhavedonethisbycreatingplatforms-services,tools,ortechnoiogies-thatothermembersoftbeecosys-temcanusetoenhancetheirownperformance.Wal-Mart'sprocurementsystemoffersitssuppliersinvaluablereal-timeinformationoncustomerdemandandprefer-ences,whileprovidingtberetailerwitbasignificantcostadvantageoveritscompetitors.(ForabreakdownofhowWal-Mart'snetworkstrategycontributestotbisadvan-tage,seetheexhibitTheEcosystemFdge.)Microsoft'stoolsandtechnologiesallowsoftwarecompaniestoeas-ilycreateprogramsforthewidespreadWindowsoperat-ingsystem-programsthat,inturn,provideMicrosoftwithasteadystreamofnewWindowsapplications.Inbothcases,tbesesymbioticrelationshipsultimatelyhavebenefitedconsumers-Wal-Mart'sgotqualitygoodsatMARCH200469StrategyasEcologylowerprices,andMicrosoft'sgotawidearrayofnewcom-putingfeatures-andgavethefirms'ecosystemsacollec-tiveadvantageovercompetingnetworks.Overtime,thecompaniesintheecosystemsmadein-vestmentstoleveragetheirrelationshipsandbegantodependonWal-MartandMicrosoftfortheirownsuccess.Forexample,Procter&GambleintegrateditsERPsystemwithWal-Mart's,andAutoCadintegratedMicrosoft'spro-grammingcomponentsintoitsapplications.AlthoughWal-MartandMicrosofthavebeencriticizedforbeingtoughontheirbusinesspartners,thecomplexinterde-pendenciesamongcompaniesthattheseindustrygiantsencouragedhavemadetheirbusinessnetworksunusu-allyproductiveandinnovative-andallowedthetwocom-paniestoenjoysustainedsuperiorperformance.Eachoftheseecosystemstodaynumbersthousandsoffirmsandmillionsofpeople,givingthemascalemanyordersofmagnitudelargerthanthecompaniesthemselvesandanadvantageoversmaller,competingecosystems.AlthoughWal-MartandMicrosofthavebeenastonish-inglysuccessfulinorganizingandorchestratingtheirvastbusinessnetworks,theirtwoecosystemsaren'tanomalies.Mostcompaniestodayinhabitecosystemsthatextendbeyondtheboundariesoftheirownindustries.Themovesthatacompanymakeswill,tovaryingdegrees,affectitsbusinessnetwork'shealth,whichinturnwillultimatelyaffectthecompany'sperformance-forillaswellasforgood.Butdespitebeingincreasinglycentraltomodembusiness,ecosystemsarestillpoorlyunderstoodandevenmorepoorlymanaged.Weofferaframeworkhereforassessingthehealthofyourcompany'secosystem,deter-miningyourplaceinit,anddevelopingastrategytomatchyourrole.WhatIsaBusinessEcosystem?Considertheworldaroundus.Dozensoforganizationscollaborateacrossindustriestobringelectricityintoourhomes.Hundredsoforganizationsjoinforcestomanu-factureanddistributeasinglepersonalcomputer.Thou-sandsofcompaniescoordinatetoprovidetherichfoun-dationofapplicationsnecessarytomakeasoftwareoperatingsystemsuccessful.Manyoftheseorganizationsfalloutsidethetraditionalvaluechainofsuppliersanddistributorsthatdirectlycon-tributetothecreationanddeliveryofaproductorser-vice.Yourownbusinessecosystemincludes,forexample,companiestowhichyououtsourcebusinessfunctions,institutionsthatprovideyouwithfinancing,firmsthatTheEcosystemEdgebenefitsattributabletoecosystemmanagementglobalprocurementcentralizedbuyingoptimizedproductmixdistributionefficienciesotheroperatingefficienciesinformationsharinglowershrinkageratespreferredrealestaterentalrateslowerlaborcosts0.5%2%2%2%2%6%0.5%2%5%Wal-Mart'stotalmarginadvantage229/inretailgroceriesMorethanhalfofWal-Mart'scostadvantageintheretailgrocerybusinessresultsfromhowthecompanymanagesitsecosystemofbusinesspartners.Forexample,bysharinginformation,Wal-Martisbetterabletomatchsupplyanddemandacrosstheentireecosystem,increasingproductivityandresponsivenessforitself-andforitspartners.Source:authors'analysisofcompanydata.MarcoIansitiistheDavidSarnoffProfessorofBusinessAdministrationatHarvardBusinessSchoolinBoston.RoyLevienisthemanagerandaprincipalatKeystoneAdvantage,atechnologyconsultancyinLexington,Massachusetts.TheyaretheauthorsofTheKeystoneAdvantage:WhattheNewDynamicsofBusinessEcosystemsMeanforStrategy,Innovat