In the latest installment of the Salzburg Questions for Corporate Governance, chairman of the Center for the Future of Organization, Roland Deiser, addresses how business leaders successfully engage the new horizontal stakeholder ecosystem
This article is part of the Salzburg Questions for Corporate Governance series, facilitated by the Salzburg Global Corporate Governance Forum
Over the past two or three years, the topic of business ecosystem management has gained increasing attention, almost to the level of becoming the latest fad. The buzz is not surprising. The degree to which a company can actively design, shape and leverage the dynamics of its business ecosystem has become a critical element of competitive advantage - especially in light of ongoing digital transformation dynamics, which continue to disrupt industries and redefine the way business works in the 21st century.
As it often happens with fads, a term tends to get picked up and used in a variety of contexts. For our work at the Center for the Future of Organization (CFFO), an independent Think Tank at the Drucker School of Management at Claremont Graduate University, we use a simple definition based on a dynamic understanding of what constitutes the extended enterprise [1]. We define a business ecosystem as "an interdependent value-creation network of an organization, that reaches beyond its boundaries. It includes customers, suppliers, distributors, technology partners, Joint Ventures, alliances, government agencies, industry associations, and others, who play a role in the overall creation and delivery of a company's products and services."
Ecosystems are nothing new, of course. Organizations – like every social entity – cannot escape the complex portfolio of interdependent relationships with their environment, no matter if they are aware of it or not. Over the past decade, however, digital technology has become a powerful catalyst of business models based on network and platform economics. Leveraging these opportunities, ecosystems can now be much more easily designed by players who have the influence and ability to aggregate and orchestrate the necessary stakeholders.
To thrive in this new ball game, organizations and their leaders need new capabilities and a new mindset. Most companies who jump on the bandwagon engage in ecosystems as "ego-systems;" they see themselves as the center of the universe, blind for the bigger interconnected picture. They try to maximize their benefit - usually via bilateral transactions structured in linear value chains – and they disregard the opportunities that come with active management of the interdependencies among the actors of their business ecosystem. This is particularly true for large and bureaucratic organizations that tend to be inward-oriented and so busy with their internal dynamics and micro-politics that they have a hard time looking beyond.
Ecosystem leadership requires a decentered perspective that views the company as part of a larger system of interconnected and interdependent players
Inward orientation and a narrow, egocentric mindset are major barriers in a world of networked value creation, which is all about collaboration and cross-boundary management. Ecosystem leadership requires a new type of strategic acumen not based on outsmarting other stakeholders. It requires a decentered perspective [2] that views the company as part of a larger system of interconnected and interdependent players. It requires humility and an operating model that leverages network dynamics for the benefit of the entire ecosystem.
With its hierarchical inside-out/top-down processes, the traditional mechanistic paradigm of organizations does not work well in an ecosystem context; it lacks flexibility and is a structural barrier for system empathy. To thrive in the new ball game, business operations need to be designed as decentralized, self-editing horizontal networks of carefully selected value co-creators, with institutionalized inter-organizational support mechanisms (such as shared values and mission, rules, policies, and incentives) to make their workings transparent, manageable and developable for all involved stakeholders.
This leads us to the governance challenge of and within ecosystems.
The Ecosystem Governance Challenge
It is more art than a science to shape network dynamics without suffocating them by too much formalization or unilateral power – a temptation especially for ecosystem participants who would have the ability to call the shots. What makes ecosystem leadership so difficult is that companies face two concurrent and interdependent governance tasks: the governance of their organization and the governance of the ecosystem. They are two sides of one coin: both need to be addressed, and both come with their distinctive challenges.
Internal governance is usually designed for optimizing linear, transactional business processes – an operating model that conflicts with the agility requirements of ecosystem engagement. Especially challenged are large and complex organizations that have a hard time letting go of a command-and-control paradigm. They suffer from a bureaucratic culture that slows them down and makes them unattractive for nimble, more agile players who thrive on flexibility and speed.
Central and vertical control must give way to an empowered periphery of micro-organizations which can adopt various operating models as needed situationally.
To succeed in an ecosystem context, the emphasis on central and vertical control must give way to an empowered periphery of micro-organizations which can adopt various operating models as needed situationally. The centrifugal forces released by peripheral semi-autonomy must be countered by a strong framework of values, strategic orientation, and purpose.
Governance of and within ecosystems is quite a different challenge as ecosystems lack the constitutional framework that an organization's legal entity possesses. Members of an ecosystem are likely to have radically different operating models; some of them may be large corporations, others may be start-ups, VC firms, license holders of critical IP, government agencies, and more. Folding the diversity of these operating models under one legal roof is virtually impossible, exacerbated by the fact that ecosystems are fluid and change continuously.
Without a shared legal framework, the system members must deal with an ever-changing and often unpredictable dynamic determined by blind market forces and each player's relative power. To mitigate this conundrum, ecosystem participants need to create a deal structure based on a mutually negotiated understanding of value contribution. Depending on the nature and the number of partners and deal types, the resulting contractual architecture can become overwhelming [3].
Organizations that lack internal structures, mechanisms, and policies that help govern their ecosystem involvement can easily become victims of ecosystem dynamics. Their engagement – if any – will be uncoordinated; it will lack a shared strategic rationale, leading to opportunity costs and structural disadvantages related to their overall position within the system. A recent CFFO survey shows that companies who have established a dedicated unit that focuses on business ecosystem management are more agile and outperform those without such a unit in every capability dimension we investigated.
Addressing the Challenges
As the impact of ecosystem-enabling digital technologies grows, the task to develop ecosystem leadership capabilities has moved center stage in many executive board rooms. Research about this topic is still in its infancy, and we sense a significant interest from academia, business, and consulting to explore this topic in more depth.
To respond to this need, the Center for the Future of Organization is about to launch a global, interdisciplinary dialogue and action learning platform that will address the many open questions and challenges related to ecosystem leadership and organization. If you want to learn more about this initiative and/or want to receive an invitation to join, send a brief note to research@futureorg.org.
Notes
(1) Our recent research paper, Organizing for Business Ecosystem Leadership, which includes data from a global survey among 200 executives, is available at Amazon and can also be downloaded from CFFO.
(2) For an early and more detailed discussion of the concept of "decentration competence," see DEISER, R: Postconventional Strategic Management - Criteria for the Postmodern Organization. In: THOMAS, H. (Ed.): Building the Strategically Responsive Organization. Wiley & Sons Ltd (1993)
(3) The prominent role of Hollywood lawyers and agents and the insane amount of legal paperwork required to align key stakeholders of a motion picture is a great example for dealing with ecosystem governance issues.
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