Nobel-prize-winning economist Oliver Williamson writes that 100 years ago the profession of economics split along two lines: one group went toward a price model, the other toward achieving shared purpose in organizations.[i] The price mechanism had the great advantage of making our economy more friction-free because you and I can trade freely even if you and I don’t agree about values and purpose.
The combined effect of trillions of trades has shaped our society. And like the price mechanism for individuals, the unmanaged world market made conversations about values and shared purpose unnecessary. In the early 20th century this freed economies from the meddling of princes, from the whims of dictators, and from the oppressions of totalitarianism. It seemed a brilliant advance, a fundamental technology on par with steam, electric lights and telephones, medical specialties, cars and roads.
I look at our economic system as a technology, or more precisely as a combination of technologies. All technologies eventually “run out of steam”—an apt metaphor. All beneficial technologies follow an S-curve of effectiveness. They take some time to get going, take off and in the best cases transform society, and then reach a point of diminishing value. We invented a nearly value-free economic mechanism. The application of this technology in combination with others brought remarkable progress for many. Now in the 21st century our global situation has changed dramatically. We have different problems, we have modern science and engineering, and we are in global communication with each other. Yet, we are now up against the limits of our current economic technology.
As we entered the latter half of the 20th century our economic machine began to creak and grown. As a short-cut, it had left out of its accounts so-called “externalities”: the environment; the poor and others outside of the mainstream economy; as well as health degradation—obesity, heart disease, depression, diabetes and inflammation-driven diseases—even among those in the most affluent; and social unrest among those closed out, expressed in terrorism, rioting and small-scale but widespread resource wars. Our apparatus for shared action, for achieving shared purpose, is broken or non-existent.
In the pages that follow I will describe, working as a kind of business anthropologist, a new form of organization, a vast-internetworked collection of business ecosystems that shows promise in achieving shared purposes, sharing value among many contributors, and in bringing the benefits of technology to a range of people, cultures and problems far beyond what earlier systems have achieved. It was created by people with values and shared purposes interacting with each other and evolution over many years. Like most things that have evolved, it is more complex and more counter-intuitive and far more effective than anything a person could make up.
We need to have a larger conversation about the future. My contribution is to share the inner workings of a particular ecosystem approach that not only is disrupting large swaths of the tech industry, but may have the potential to mobilize talent to solve other big problems.
To start the conversation consider three phases of recent technology industry leadership:
- First generation business ecosystems led by monopoly or near-monopoly leaders;
- Second generation business ecosystems generated mostly by volunteers: open source, gift economy, DIY, and peer production communities pursuing well-considered ideals and values;
- Third generation business ecosystems that are a hybrid of the first two.
One of the third generation’s peculiar characteristics is that these ecosystems themselves form communities. At the base is a connected community that is an informal society of individuals and companies who share common purposes. These purposes include shared technology and standards, as well as business practices such as encouraging differentiation and cooperation to help all members succeed. Thriving on the base are many business ecosystems. We will examine these third generation business ecosystems later in more depth.
First generation: Coordinate large investments and build for scale
The Tech Community’s ability to do what it does is hard earned. More than twenty years ago it was recognized that business was entering into a new age where sharing across companies would become central to success. Science and technology were progressing so quickly that most companies needed to focus their capital and talent narrowly to keep up, while simultaneously partnering with others to be effective.
Thus first generation business ecosystems were formed, which enabled networks of companies to coordinate large investments in research and development, capital equipment, and market development. Apple, Tandy, IBM, Intel and Microsoft made important contributions. This kind of partnering continued into mobile telephony and Internet development. Large investments were made in collaboration across companies. The industry learned many things, such as how to make contracts and protect valuable intellectual property while partnering with others, and how to join in shared financing when necessary to grow the ecosystems—for example, IBM invested $100m in Intel and helped Microsoft build its management systems. Later Intel invested in a variety of players in the ecosystem including Micron Technology in memory. Intel also invested generously in the open source and Linux communities, helping establish the second generation open business ecosystems.
The first generation ecosystems depended on a central player, which had an effective monopoly on its contributions and exerted its pricing power to achieve high margins, giving it large amounts of cash. It would exert its power over weaker firms in the ecosystem in order to assure alignment and coordination. In a May/June 1993 Harvard Business Review (HBR) piece I used the unfortunate but accurate term “choke-hold” for this role.[ii] Marco Iansiti used the term “keystone” in his subsequent work on business ecosystems[iii] and identified in clear terms the problems with force and inequality in ecosystems—that indeed a keystone could exert so much economic leverage that it could weaken and force out of business the very partners on which it depended. In the first business ecosystems coercive leadership was tolerated by ecosystem participants because there were few ecosystems available and it was much better to be in than out. For better or worse, the leadership styles in almost all first generation business ecosystems were broadly similar.
Second generation: Software, social networks and social movements
As experience in business ecosystems matured, it began to be widely appreciated that software as a product had a unique characteristic in that its replication cost almost nothing. If the first generation ecosystems leveraged property rights to support capital investment, a second generation of ecosystems emerged that eschewed property rights on intellectual property—“information wants to be free” — and promoted the benefits of open inclusive communities of knowledge sharing.
Proliferation over profits became the maxim as people discovered that software with millions of users was valuable and that software with few users was not. Computer networks evolved from primitive bulletin boards, chat rooms and instant messaging tools to Web and mobile-based social networking apps that stream text, audio and video content 24/7. With these technical platforms, communities were able to spread widely. Clay Shirky wrote of a cognitive surplus in society: there were lots of smart people who were under-engaged in their jobs and lives and longed to join with others and solve interesting challenges.[iv] Networking and the open source movement developed this surplus into a powerful force for community building, learning and solving real problems. Yochai Benkler calls this “peer production”—a new and powerful input to our world economy.[v] The major product produced was software and computer networking, which in turn was a major enabler of further collaboration in a virtuous cycle of expanding participation.
With the advent of blogging, social networking and Twitter, the social power of second-generation ecosystems expanded. An example of this emerges in the political campaigns of the early 2000s, where politicians such as Vermont Governor Howard Dean began to amass real political power through social media. The Dean campaign gave way to the Obama campaign. Globally, the web and Twitter became the communications platform for the Arab Spring.
Third generation: capital-intensive flexible platforms enabling and enabled by social movements
If the first generation of ecosystems was about coordinating investment and the second generation was about streamlining the networks that enable us to collaborate and initiate social change, the third generation of business ecosystems emerged by combining the elements of both. The third generation of ecosystems saw the need and the opportunity of putting together the two earlier forms—a form that could manage and apply capital, and a form that could foment social movements and social change. This effect is seen most clearly in the most successful to date of the third generation form: the spreading ecology of smartphones.
The smartphone world involves some several thousand companies. The first thing I realized in researching this world is that it is not just one business ecosystem. There is no equivalent of the Microsoft Windows / Intel “Wintel” duopoly —though Apple and Samsung are quite powerful and Qualcomm has a high share of the core microprocessor and communications chips. What you have instead is what some members call the “connected community.”
The connected community is a vast global collection of companies that are unified by a few standards and core technologies—ARM-designed microprocessors most visibly, but other complementary technologies as well, such as radios and signal processors. But what unifies them the most—and this is most fascinating—is a set of values about openness of ideas and technologies, treating each other well, and finding creative ways of profit sharing and risk mitigation so all members can thrive.
The connected community for smartphones depends on so-called “fabless” semiconductor companies such as Qualcomm and NVIDIA. Fabless companies design and sell chips, but they contract out the manufacturing to “foundries” including Samsung, Taiwan Semiconductor Manufacturing Company (known universally as TSMC), GlobalFoundries and others. These foundries do contract manufacturing at “fabs”—fabrication plants—and for all practical purposes are open to anyone who can pay them.
At the core of the connected community are the design disciplines. Electronic design automation—EDA—software translates high-level chip designs into instructions that in turn program computers that control manufacturing in the fabs. The electronic design for any given chip pulls together modular sub-designs from libraries, which in turn are “synthesized” into a master design—and then this design is refined and tested through many steps on the way to being tried in the fab. There are literally hundreds of firms that supply pieces of intellectual property that could be synthesized into a chip. These organizations range from cottage-industry companies, to complex EDA firms, to engineering groups inside the fabless semiconductor companies, to microprocessor design companies like ARM Holdings.
At the heart of this activity are the microprocessor design and licensing companies, with ARM Holdings having well above 95 percent share in smartphones. ARM designs and licenses microprocessor architectures that provide an overall order and orchestration for the design elements. The value of this architecture, among others, is that a shared architecture enables the industry to create a wide variety of chips and still have them run the same software and operate broadly interchangeably. ARM also sells its own intellectual property, both to feed modules into EDA synthesis, and to be used in conjunction with fabs for controlling physical processes. Most importantly, ARM has championed the open, networked ecosystem model that is the basis for the connected community and its many third generation ecosystems.
The connected community is most visible in the smartphone business. However it extends far beyond. There is a world of smart devices built on microprocessors that control everything from automotive engines, stability control, GPS and entertainment systems, to building controls for heating, lighting, security and fire protection. These processors are the brains of your cameras, the thermostat in your home, the medical devices you may depend on, and entertainment systems you enjoy. Coming soon is the so-called “Internet of things” — wearable, ingestible, implantable. One of my favorites is a type of chip that can be strewn into concrete by the hundreds as it is being poured, and that send out temperature readings that are used to determine if the concrete is curing properly.
The latest new frontier for the connected community is the data center and the servers that fill it. Servers are evolving quickly from racks of cards — each being a server — to racks of cards with dozens of servers on each — to, coming, banks of system-on-a-chips, SoCs, each comprising several microprocessors, linked together by the thousands. The data centers of the largest cloud companies — Facebook, Google, Microsoft and Amazon — are heading toward millions of servers. These in turn are being located in places where electricity is cheap—near hydroelectric dams in the Pacific Northwest, on the plains of Iowa where wind-power is plentiful. This market is the newest opportunity for the connected community and its myriad business ecosystems.
The culture and leadership of the connected community
As I began interviewing leaders of companies associated with ARM processors, I realized that I had dropped into a sub-culture of socially sophisticated, highly networked people, many of whom partook of the social values—the sharing and collaborating—of the open source movement. They feel they are onto a very special approach to their work that functions well for business and is fun to boot. Camaraderie is a big part of open social movements after all.
The open source communities have developed what Eric Raymond calls “gift economies” and have a social psychology uniquely and powerfully their own: A culture of shared learning, shared work and shared products.[vi]
Apply these ideas to a very large business sector—smartphones and the associated businesses that make up the connected community—and you have a worldwide revolution in business. The result is a social movement, a cultural milieu, an ethos and an extended community of tens of thousands of people.
Now layer on top of the worldwide-connected community a concept of business ecosystem that blends sharing and investment—the third generation ecosystem. In the rich growth medium of the connected community these business ecosystems multiply and interpenetrate, overlap and span.
The business ecosystem concept has become completely generalized. Every leader has at least one ecosystem and many have several. Business ecosystems are wrapped around products and services, they are used to solve technical problems, and they are used to open up markets. And of course they are used to bring app developers onto platforms. Business ecosystems are a widely understood social and business tool, applied at any scale for almost any shared purpose.
Leaders increasingly think in terms of multiple ecosystems. They look for ways in which two or more can strengthen each other, for example. As I got farther into my study, I realized that business ecosystems and their leaders sometimes travel in packs, hunting for opportunities together. An ARM ecosystem could join with a Dell ecosystem and a fabless semiconductor company in pursuing a lead for supplying data centers to Fidelity Investments. There is a third generation of business ecosystems, but there is in almost no meaningful sense an isolated third generation ecosystem. There is instead a complex, constantly changing topology of ecosystems.
Leadership lessons and the process of differentiated growth
As I asked for leadership lessons from across the connected community, I found a startling result. The leadership lessons were related to a set of roles being played in the community. And the roles, when seen together, formed a system for listening to customer pain and turning it into customer pull that in turn would organize a cross-community response and deliver an appropriate product.
The leaders, in their minds, were sitting “above” a landscape of customers and pain, companies, ecosystems and the connected community as a whole. They were occupied with monitoring and tweaking and developing a vast, sprawling worldwide “differentiation machine” that heard the cries of a myriad of customers in a multitude of settings. The machine generated in response a wild array of products and services. As the cries changed, as new markets opened up, the elements in the machine self-organized into new configurations to serve up new and different products.
Below are some of the key lessons in brief. In the following sections, each of these will be developed further:
1. Demand disruption
Sometimes technology stagnates and markets don’t give us what we want. What can we do when this happens? Demand disruption! As a buyer we can insist that our suppliers form a collaborative, idea-sharing business ecosystem—with their direct rivals. We can insist that those who are central to the current industry do what they can to lower barriers to entry for newcomers. We can ask unthinkable things of our suppliers. We can demand better.
2. Explore beyond the edge
Business ecosystems form around problems to solve and pain to soothe. More problems are beyond the frontier of our current business landscape than within it. Nurture new business ecosystems beyond the frontier. Get to know the people beyond the edge, whose opportunities are cut short by problems we may be able to solve. Survey and map problems, catalogue the pain that needs to be relieved, understand the roots of pain. Connect new customers with new partners to create new ecosystems in new places.
3. Reach to everyone
Liberate powerful technologies from the few. Let everyone gain access to technology and expand their personal opportunities. Applied technology enriches daily life, saves labor and reduces costs and risks. As technologists we know this from personal experience. To reach a wider range of customers we can design our business ecosystems to produce a range of products, prices, benefits and tradeoffs. Differentiate our offerings, be flexible in our options and diversify whom we serve.
4. Wrap an ecosystem around every product and service
Every product and service is also a marketplace for further products and services that enrich the opportunities customers can pursue. We provide value by selecting and recruiting these resources, categorizing, testing and certifying them. We are in prime position to collect and publish customer feedback, continuously improving the ecosystem. When we increase the access of members to each other by making markets we increase productive exchanges. Increasing exchanges creates more value faster and advances the whole.
5. Draw deeply from science and engineering
Science and engineering are the most fundamental inputs to innovation in a business ecosystem. University and private labs are rich sources of ideas. Bringing an idea forward requires a team of experts including those who understand the discovery and those who know the industrial situation. The typical time frame for moving a discovery out of the lab to market is a decade or more. Our business ecosystems must have at their core processes of science translation — Bell Lab’s “reduction to practice” — where people can work closely, in secret, at the highest professional levels, for a decade or more. This is in fact what does happen in our best ecosystems, an incredible feat little appreciated beyond the inner walls.
6. Take just enough
Greed spoils business ecosystems. Open ecosystems are gift economies that depend on reciprocal care. They require considering a situation from all sides. Get clear on a fundamental choice: you can grow your business by growing the ecosystem and advancing the opportunities for your customer. You can also grow a business — at least in terms of revenues and profits — by taking from your ecosystem and from your customers. The philosophy of “just enough” is not about austerity. Indeed, those in the connected community are thriving. It is caring about your partners, not “sucking the life out of them” by exerting your bargaining power when they are weaker. It is about gaining your security and your enjoyment and your accomplishments with others — in ways that are sustainable as a business, organization and person.
7. Open it
The human, technical and economic benefits of open ecosystems and the connected community are so dramatic that it seems nothing can stop it. On the other hand, a problem internal to the community itself might be posed by the actions of a rogue operator — for example a patent troll or hostile takeover opportunist. In an open, connected economy, the role of senior leaders includes being alert for challenges to the integrity of the community and leading preemptive, corrective or defensive action as necessary. Overall, the connected community and its ecosystems are growing, scaling and differentiating as organizations. This provides an opportunity for new forms of co-leadership across the community.
8. I thou
Emotional intelligence is perhaps the most important attribute of effective members of an open business ecosystem. Professional expertise matters a great deal, but if not expressed with maturity and care, the close relationships on which the ecosystem depends cannot function. Human resources strategies can be designed to recruit, train, motivate and promote those with emotional intelligence. The Jewish philosopher Martin Buber presented this idea well. He said we can treat each other and ourselves as an “it” — as objects to be driven, threatened, used. Or we can treat each other as “thou” — persons to be respected, cared for, learned from, with values, creativity and giftedness.[vii]
NOTES[i] Williamson, Oliver E., 2007. “Transaction Cost Economics: An Introduction,” Economics Discussion Papers 2007-3, Kiel Institute for the World Economy.
[iii] The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation and Sustainability, Marco Iansiti and Roy Levien, Harvard Business School Press, 2004
[iv] Cognitive Surplus: Creativity and Generosity in a Connected Age, Clay Shirky, Penguin Books, 2010
[v] The Wealth of Networks: How Social Production Transforms Markets and Freedom, Yochai Benkler, Free Press, 2006
[vi] The Cathedral & the Bazaar: Musings on Linux and open source by an accidental revolutionary, Eric S. Raymond, O’Reilly Media, 1999
[vii] I and Thou, Martin Buber, 1923, English trans. 1937