New Dynamics of Business Ecosystems Implications for Strategy

1. New Dynamics of Business EcosystemsImplications for Strategy Marco Iansiti David Sarnoff Professor of Business Administration Harvard Business School

2. Mapping Research on Innovation and Transformation Argote, Day, ... Organization, Routines III Environment II Von Hippel, Tyre, Griffin, ... Henderson, Clark, Tripsas, Peters, ... I Technology, Architecture

3. 15 years of Research on Innovation and Strategy Innovation and Technology Management Technology, Strategy and Business Ecosystems Internal focus Strategy, process and capabilities Mergers, acquisitions, and ventures Research on hundreds of firms Core in technology sector, with extensions across several other verticals (e.g., automotive, medical devices, …). External focus Strategy, process, and capabilities Platform architecture Research on hundreds of firms Core in technology sector, with extensions across several other verticals (e.g., banking, retail, healthcare, …) Levien, Zhu, Strojwas, Brunner, … Clark, Khanna, West, MacCormack, Bergin, Westerman, …

4. Observations • Large differences in performance between competitors • Massive changes in the nature of the environment surrounding innovation • e.g., Baldwin and Clark, Gawer and Cusumano, …

5. The Changing Environment • Increasingly active markets for components, technology and operational capabilities • Increasingly distributed technological innovation and operations • Increasingly complex value chains that look increasingly like ecosystems • Innovation and business operations have become, to a significant extent, the art of influencing assets that you don’t own.

6. Outsourcing as a Manifestation of this Phenomenon * IDC, The New Face of BPO, April 2003

7. Do these firms have anything in common??? • Microsoft • Li and Fung • TSMC

8. MICROSOFT PARTNERS Top Total number: 38338 VAR (2,156) Partner Segment Firms Campus Microsoft Systems Integrator 7752 Resellers Development Srvc Co 5747 (4,743) Campus Resellers 4743 H ISV 3817 Small - Trainer 2717 Specialty Breadth VAR 2580 (2,252) Small/Specialty 2252 Top VAR 2156 Breadth VAR Hosting Srvc Prov 1379 (2,580) Internet Srvc Prov 1253 Business Consultants 938 Support 675 S Hardware Outbound 653 Consumer Electronics 467 Trainers (2,717) Unsegmented Reseller 290 Media Store 238 ISP HSP Mass Merchant 220 Software Outbound 160 DMR 105 Computer Superstore 51 ASP Aggregator 50 BC eTailers 46 Office Superstore 13 General/Aggregator 7 Systems Integrators Warehouse/Club Store 7 Development (7,752) Niche/Specialty 6 Service Subdistributor 6 . Companies ISVs Apps Integrator 5 (5,747) (3,817) MS Direct (Rslr) 2 MS Direct (Msft) 1 Network Equip Prov 1 Network Srvc Prov 1 Microsoft’s Operating Network Microsoft as the hub of a wide innovation network that is more than 100 times its size 40, 000 organizations as development partners 6 million developers that write software for the Windows platform Microsoft invests more than $ 1 billion yearly in tools, platforms and programs to support and shape the behavior of this network

9. Li and Fung’s Operating Network Li and Fung orchestrates supply chains. Builds on traditional relationships and invests in technology and business process innovation to improve efficiencies and manage its operating network Limited Gymboree American Eagle Tesco … 20,000 SME’s 3,600 internal employees More than 8000 manufacturers More than a million external workers

10. TSMC’s Operating Network IP Providers (cores and libraries) Mfg. Eqt. Providers Fabless Firms EDA Tools Vendors Integrated Device Manufacturers Service Providers

11. TSMC, Li and Fung and Microsoft Commonalities • Each firm occupies the center (hub) of a powerful and massive operating network • Each network functions in many ways as a collective unit (think about it as an ecosystem) • Each firm has a proactive strategyto manage and transform this network, and invests in programs, tools, and technologies to shape its ecosystem and make it productive

12. Business Ecosystem Properties • Organization is largely external to firm • Complex: large “N”, many domains • Evolution of “hubs” • Co-dependency, or shared fate • Crucial role of information technology

13. Managing and Transforming Ecosystems:Four Important Strategic Roles • Keystone: manage key ecosystem hubs, share value surplus, manage ecosystem health • Landlord: control key ecosystem hubs and extract maximum value from dependencies that are created • 3. Dominator: integrate forward to own and control key ecosystem assets and extract maximum value • Niche: focus on differentiated assets and capabilities

14. Looking More Closely at Keystone Strategies • A Keystone Strategy is a pattern of firm conduct that improves the overall health of an ecosystem and, in doing so, benefits the performance of the firm • Invest in programs, tools, platforms and technologies that make the network more productive, robust, and innovative • Examples: IBM, SAP, MSFT, Palm, Dell, eBay, Visa, TSMC, Li and Fung, etc…

15. Innovation and Organizational Transformation in the Software Industry Firm Survival Zhu and Iansiti, (2005): In the software industry, the greatest determinant of firm survival is ecosystem strategy (e.g., platform choice)

16. Why This Is Important • Business ecosystems are a broad, universal phenomenon • (from Information Technology to Automotive, from Pharmaceuticals to Banking) • Organizations are becoming increasingly distributed across firms • (often more than 1:100 internal to external assets) • An ecosystem is much larger than a single firm and a more powerful force for innovation and transformation • Organizational transformation is, increasingly, a collective phenomenon