Building healthier business networks

Citation

Leavy, B. (2005), "Building healthier business networks", Strategy & Leadership, Vol. 33 No. 5. https://doi.org/10.1108/sl.2005.26133eae.001

Building healthier business networks

Building healthier business networks

The Keystone Advantage

Marco Iansiti and Roy LevienHarvard Business School Press,2004,224 pp.

Nearly a decade ago James F. Moore in The Death of Competition proclaimed the “end of industry as a useful concept in contemplating business” and suggested “business ecosystem” as a more insightful alternative. Visionaries of the time, like Kevin Kelly in New Rules for the New Economy, were strongly proselytizing this network view, and it seemed set to take off. But this didn’t quite happen.

No doubt the dot.com bust and Enron scandal played their parts, but taking a cue from another Moore (Geoffrey), the concept of “business ecosystem” had yet to cross the “chasm” from the prophets to the pragmatists. This book by Iansiti and Levien should help the idea make the leap into common use, a goal of the authors, who have both academic credentials and commercial experience. Marco Iansiti is the David Sarnoff Professor of Business Administration at Harvard Business School and a cofounder of Keystone Strategy Inc., a consultancy focused on strategy and innovation management. Roy Levien is a principal at Aldaron and founder of Keystone Advantage LLC.

The authors begin by reaffirming the most essential insights of the business ecology perspective, that in the evolving competitive landscape “the crucial battle is not between individual firms but between networks of firms” and that strategy is becoming “the art of managing assets that one does not own.” They are also careful to stress from the start: “We are not arguing here that industries are ecosystems or that it even makes sense to organize them as if they were, but that biological ecosystems can serve as a source of vivid and useful terminology as well as provide specific and powerful insights into the different roles played by firms”.

For Iansiti and Levien, the main reason why companies such as Microsoft and Wal-Mart have been so successful to date is that they have “figured out how to create, manage and evolve an incredibly powerful business ecosystem.” Both played central roles in the establishment of shared platforms, in the form of services, tools or technologies that could be leveraged by a large number of firms in symbiotic ways to “increase productivity, enhance stability and use as building blocks for innovation.” In Wal-Mart’s case the network platform is Retail Link, its information infrastructure, and in Microsoft’s it’s Windows.

Interdependency is the governance principle at the heart of business networks, co-evolution the main dynamic, and balancing cooperation and competition a major strategic challenge. Such networks are not a new phenomenon, nor are they confined to a narrow range of sectors. Even in traditional industries like apparel, examples can be traced back to the wool trade in fourteenth century Italy. Today, in the same industry, Li & Fung, the hundred-year-old Hong Kong trading company, operates at the hub of a international network involving more than 8,000 firms, spanning over 40 countries and linking well-known retailers like the Limited and the Gap with yarn weavers in China, dyers in Thailand, cutters in Bangladesh and final assemblers in South Korea. Such business ecosystems have their advantages and pathologies. The advantages are to be seen mainly in the efficiency, robustness and innovative capacity that they can exhibit when well organized and managed. The pathologies are most dramatically evident in the capacity of such systems for sudden collapse when poorly led. eBay provides an excellent example of business ecosystem strategy at its most effective, and Enron a cautionary lesson in how such a strategy can implode.

The book is organized into three main parts. Part I, the ecosystem framework, introduces the principles of interconnectedness and shared fate, and it outlines the broad implications of this perspective for business strategy. In this part also, the book offers three measures for assessing the health of a business ecosystem – productivity (return on invested capital), robustness (capacity to absorb disruptions, such as unforeseen technological change) and niche creation (capacity to increase meaningful diversity and enhance innovation). Parts II and III deal with the main analytics, including three operating strategies – keystone, dominator and niche, and three execution fundamentals for competing in a network setting – architecture, integration and market management.

The typical network comprises one or a few leading participants, with the majority being smaller, more specialized players. The three operating strategies reflect this composition, but the two alternative leadership strategies, “keystone” and “dominator” have very different implications for the viability of any network over the longer term. A business ecosystem is at its most effective when it is built around an interactive platform that attracts a diverse set of specialized players with a wide range of capabilities, willing to make their own specific investments in the ever-widening functionality of the network to further enhance its value. Such a system matches competencies and customers in ways more innovative and more flexible than those exemplified by more traditional value chain configurations. Niche players “typically provide the majority of the network’s functionality” in terms of activities, products and services, but the contribution of network leadership is crucial to the ability of these players to leverage “the broad capabilities and opportunities” provided by the ecosystem as a whole.

Compare Enron and eBay

Keystone leaders typically exercise a system-wide role while remaining a relatively small part of their ecosystem’s mass, and are generally more effective at both creating and sharing value across the system. Compare the cases of eBay and Enron. During the late 1990s, both succeeded in harnessing the power of the Internet and leveraging the assets of others to create new markets. But the one that “shared the wealth ended up making the money.” The primary challenge for a keystone leader is to ensure that the marginal value of its platform over the marginal cost of creating, maintaining and sharing it, continues to rise rapidly with the number of players using it. Any firm occupying a hub in a business network “faces powerful temptations to exploit that position for short-term gain,” and this is the mark of a dominator strategy. “Value dominators,” such as Enron, tend to use their position to extract too much value from the network, while “physical dominators,” such as IBM in the 1970s, tend to take too large a direct role in their ecosystem’s activities. Both diminish the attractiveness of the network for existing and new niche players, undermining the health of the ecosystem and increasing its vulnerability to rapid collapse.

Microsoft is a good example of the keystone profile. While it remains the most influential player in software provision, its market capitalization as a percentage of this domain has rarely gone above 40 percent (compared with 80 percent for IBM in the computer domain of the 1970s), and its influence far exceeds its relative share of its network’s aggregate revenues. The company employs around 40,000 people, just a fraction of the 5 million or more that currently program using the Microsoft platform, and more than 70,000 applications have been written for the Windows platform to date. The company supports its developer network with the efforts of 2,000 employees and a budget of some $600 million per annum, and the authors show how the Microsoft platform contributes to the productivity, robustness and niche creating capability of the entire network. However, network leadership strategies are always dynamic. Microsoft could easily fall into a dominator role in its videogame ecosystem, unless it takes care to avoid it, while one-time dominator, IBM, is currently showing itself to be an effective keystone in its promotion of the Linux platform and in its relationships with deNovis and Empire Blue Cross Blue Shield, in the health care sector.

Nvidia, the microchip graphics technology specialist is seen as “a textbook case of a highly successful niche player” in the videogame and multi-media domains. Such players need to be able to assess whether the networks of interest to them are keystone or dominator led, and the strategic imperative for a niche player is to keep pushing out the boundaries of innovation in its own domain, in order to enhance its capacity for value creation and bolster its influence within the ecosystem. Niches always need to be mindful that keystones share the wealth because it is good strategy, not for altruistic reasons, and they must continue to earn the right to remain in the network. They also need to be careful not to become too tightly coupled to the specialized assets of others in the network, and limit unduly their future business ecosystem options.

The final part of the book is focused mainly on the execution challenges involved in a successful network strategy. Valuable advice is offered on the design and management of effective business platforms that lie at the heart of network strategy, on how to develop the kind of integration capability needed to be able to “combine the impact of different competencies, both internal and external to the firm” in order to maximize the value of the network, and on the effective design and management of the complex, many-sided marketplaces that are an inherent part of business network leadership.

Keystone strategy

Overall, the concept of keystone strategy is the biggest single contribution of the book, and the one that takes it well beyond the earlier perspective developed by James F. Moore (see Figure 1). This and the associated ideas on how to measure and manage ecosystem “health” are, in themselves, welcome additions to the strategy toolkit. The keystone idea “is virtually absent from existing theories of management” and it conveys a more subtle approach to business strategy than more stand-alone traditional positioning or competency approaches. It is also an idea with implications for public policy, if healthy business ecosystems are not to be seriously undermined by the misguided intervention of well-intentioned regulators with insufficient understanding of the keystone leadership role.

Figure 1 An idealized keystone in a business network

Brian LeavyAIB Professor of Strategic Management at Dublin City University Business School and a contributing editor of Strategy & Leadership (brian.leavy@dcu.ie)