Tuesday, March 29, 2011

Ecosystem wars

Back in 2005, I started to talk publicly about lifecycle concepts and the importance of ecosystems. In the next two posts, I'd like to draw a line in the sand and cover those basics of ecosystem one last final time.

I'll take the liberty of assuming notions such as lifecycle, organisational profile, componentisation and consumerization are universally understood and start with an explication of what a business is.

What is a Business?
A business is a living thing, comprising a network of people, a mass of different activities, and reserves of capital including financial, physical, human and social. It consumes, it produces, it grows and it dies. Like all organisms, any business exists within a number of ecosystems in which it competes and co-operates with others; it’s shaped by and shapes its environment, and hence needs to adapt constantly merely to survive.

People come and go, activities change, and hence all firms are in a constant state of flux. In any industrial ecosystem, new activities (innovations) are a consequence of competition and those that are useful will diffuse throughout the ecosystem becoming more of a commodity. This constant change creates a paradox, identified by Salaman and Storey:

”Survival requires efficient exploration of current competencies and ‘coherence, coordination and stability’; whereas innovation requires discovery and development of new competencies and this requires the loosening and replacement of these erstwhile virtues.”

These two extremes of survival (today and tomorrow) have diametrically opposite concerns, and the techniques, tactics and methods needed to manage each are entirely different. Those who manage organizations are therefore caught on the twin horns of a dilemma: how is it possible to be standardized and efficient as well as innovative and new, without prejudicing your survival - either today or tomorrow?

The effects of this on business can be seen in the constant restructuring to cope with new paradigms, and in the yo-yoing of popular management theories between opposites in a scramble to maintain order. A more effective balance can be found through embracing both goals simultaneously.

How do we balance both goals?
This requires a rethinking of how we organize, and a realization that what really matters is not innovation or efficiency per se, but how we continuously manage the path between the two. To explain why this is the case, let us examine a typical profile of an organisation (see figure 1) and consider how we build systems for the future.

Figure 1 - Using profile to build systems (click on image for higher resolution)

First, let us take those cost of doing business activities which act as underlying components of other business activities such as payroll, computer infrastructure, authentication etc. All of these activities are linear, well defined, ubiquitous and suitable for provision as standard re-usable components through utility services. Such an approach will increase our agility, rate of innovation (componentisation effects) and reduce the cost of gambling for any innovative activities built upon these utility services.

However, it is important to understand that all innovations (i.e. those activities which are uncertain and rare) are a gamble and whilst we can reduce costs we can never eliminate it. The future value of something is inversely proportional to the certainty we have over it, we cannot avoid this information barrier any more than we can reliably predict the future. However, there is a means to maximise our advantage.

By making these utility services accessible through APIs, we not only benefit ourselves but we can open up these components to a wider ecosystem. If we can encourage innovation in that wider ecosystem then we do not incur the cost of gambling & failure for those new activities. Unfortunately, we do not enjoy the rewards of their success either
Fortunately, the ecosystem provides an early warning mechanism of success i.e. adoption. Hence by creating a large enough ecosystem, we can not only encourage a rapid rate of innovation but also leverage that ecosystem to identify success and then either copy (a weak ecosystem approach) or acquire (a strong ecosystem approach) that activity. This is how we maximise our advantage.

To capitalise on this, we simply drive our newly acquired activity towards utility service provision and create the next wave of innovation through further componentisation effects. In this manner we create a virtuous circle of encouraging innovation in the ecosystem, leveraging the ecosystem to identify the next pattern and commoditising the pattern to utility services in order to encourage the next wave.

In effect, by being at the heart of this ecosystem we manage to create the simultaneous appearance of being highly innovative (as others in the ecosystem do this for us), highly customer focused (by leveraging the ecosystem to identify rapid diffusion) and highly efficient (as we focus on commodity provision). Tom Peter's old adage of choose one is a busted flush in this brave new world.

I've summarised these concepts in figure 2

Figure 2 - ILC model (click on image for higher resolution)

What is critically important to note, is that in essence both innovation of new activities and efficiency of commodity provision can be outsourced. The innovation of activities can be outsourced to a surrounding ecosystem building upon our services, whilst those commodity activities we consume can be outsourced to a marketplace of utility providers. There are benefits to retaining some element of control in those areas but the critical area to focus on is the transitional phase and how you leverage the ecosystem. Our ability to exploit the link between innovation and commodity depends upon the size, composition, engagement, speed of information and overall level of activity within that ecosystem.

Whilst each company comes with its own personal ecosystem (its staff, its partners) growing an extended ecosystem and using that to manage change is a powerful tool and a competitive weapon. It's not businesses but ecosystems that collide in the commercial world and woe betide that organisation which has the weaker. We've seen this story repeated many times before at many different levels through all the usual examples of BetaMax vs VHS or TCP/IP vs IPX/SPX.

It's imperative to understand that a well formed and large ecosystem leads to lower costs of innovation, creates higher rates of innovation, improves the rates of successful adoption, encourages greater efficiencies and can be mined to detect future successes. However, there are cost to this especially in the form of data collection which is why utility based ecosystems (where information is derived from consumption of APIs) have an advantage over product based ecosystems (where information is derived from market research). 

If it is just you and your employees then you'll find it difficult to survive a direct onslaught from any of the modern day monsters with well developed and extended API driven ecosystems (such as Google, Amazon etc). Not impossible, just damn difficult.

For more details, my OSCON '10 talk provides a useful overview of these concepts. However this is enough of a base to begin with.

In the next few posts, I'll cover some of the consequences of this and the strategies which are commonly deployed. Again, I realise this is nothing new and apologies to all readers who've had to endure me harping on about this over the last five years but I'm just scene setting for much later posts.