The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability

1 rating: 5.0
A book by Marco Iansiti

In biological ecosystems, "keystone" species maintain the healthy functioning of the entire system. Why? Because their own survival depends on it. This book argues that business ecosystems work in much the same way-one company's success depends on the … see full wiki

Tags: Books
Author: Marco Iansiti
Publisher: Harvard Business Press
1 review about The Keystone Advantage: What the New Dynamics...

Valuable Perspectives on the "Ecology" of Strategic Alliance

  • Sep 6, 2004
As this book's subtitle correctly indicates, Iansiti and Levien explain "what the new dynamics of business ecosystems mean for strategy, innovation, and sustainability." They are quite correct when pointing out that, in recent years, in industries as different as personal computers and personal care products, "companies [have] leveraged multiple organizations in distributed supply chains, integrated technological components from a variety of business alliances, collaborated with a number of channel partners to distribute their products, and leveraged complementary services from banks, insurance providers, or retailers." As a result, many industries have been forced to create or become involved in a fully networked structure, one "in which even the simplest product or service is now the result of collaboration among many different organizations." (In fact, decades ago, American Airlines devised his "hub and spoke" strategy. However, this really is not what Iansiti and Levien have in mind.) For example, Microsoft and Wal-Mart have a decisive competitive advantage in large measure because they are "keystone" companies in their respective ecosystems. More specifically,

Both "of these firms understand that their fate is shared with that of the other members of their business network. Rather than focussing primarily on their internal capabilities (as many of their competitors did), they emphasize the collective properties of the business networks in which they participate, and treat these more like organic [in italics] ecosystems [end italics] than traditional supply chain partners. They understand their individual impact on the health of these ecosystems and the respective impact of ecosystem health on their own performance...[For that reason] "a new, holistic approach to strategy is critical to an increasingly broad range of firms in our economy as they face the new set of challenges and responsibilities created by competing in business ecosystems."

How? Given the evolution of business ecosystems which are analogous to biological counterparts, organizations today, regardless of their size or nature

(1) must decide if they are a keystone or niche "player" (Please see Part I)

(2) then formulate strategies appropriate to that role (Please see Part II)

(3) and finally, establish and build on one of three "foundations of sustainable performance in a business ecosystem" (Please see Part III)

"Keystone" companies such as Microsoft, Wal-Mart, Dell, and eBay create value within their respective ecosystems which is shared with other participants in that system. More specifically, they create high-value, sharable assets; leverage direct customer connections; create and manage physical and information hubs; support uniform information standards; create, package, and share state-of-the-art tools and building blocks for innovation; establish and maintain performance standards; build or acquire financial assets for operating leverage; reduce uncertainty by centralizing and coordinating communication, and reduce complexity by providing powerful platforms.

Obviously, few organizations can be (or should even attempt to be) a "keystone" or "dominator" company. According to the authors, keystone wannabes tend to pursue two quite different: "hub landlords" (e.g. Enron) extract as much value as possible from an ecosystem or ecosystem domain without integrating forward to control it whereas "hub dominators" (e.g. Apple) integrate vertically or horizontally to manage and control an ecosystem or ecosystem domain. Most organizations will correctly a strategy as a "niche" player by specializing in capabilities which differentiate them within an ecosystem domain. "Niche players are naturally dependent on other businesses. The essential step in defining a good niche strategy is therefore to analyze the firm's ecosystem and map out the characteristics of its key stone and dominator players." (Please see Chapters Six and Seven for a complete explanation of all this.)

All organizations involved in a given ecosystem must, of course, rigorously monitor but also take an active role in nourishing that system's health so as to promote and facilitate the leveraging of an enduring and evolving core. However, it remains for keystones to provide both the vision and the leadership needed, especially in response to market design, operation, and competition. They must also facilitate and support integration, innovation, and adaptation within their ecosystem. "This is the price that keystones must pay for their privileged position at the hub of a business network and as owners of enduring assets: Keystones [in italics] must [end italics] manage the health of their ecosystems as a key business strategy. The challenge for each niche player is to decide in which ecosystem to become actively involved with which keystones to be associated in a strategic alliance.

I wholly agree with Iansiti and Levien that "We are bound together by the nature of the relationships among products, technologies, markets, and innovation. Leveraging these relationships is critical to enhance firm productivity, to protect organizations from disruption, and to enhance their ability to innovate, evolve, and adapt. This means that no firm, product, or technology can be an island: No firm can afford to act alone, and no products can be designed in isolation." Those who share my high regard for this book are urged to check out Christensen, Anthony, and Roth's Seeing What's Next: Using the Theories of Innovation to Predict Industry Change as well as Kaplan and Norton's The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment.

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