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CHAPTER V - Creating Synergies: Platforms and Ecosystems

As they explored the future of the firm, the Roundtable participants returned, as they had in previous meetings, to considering the purpose of a business enterprise that was first articulated by Ronald Coase in 1937 in his classic paper on “The Nature of the Firm” (which also provided a starting point for Thomas Malone’s 1987 paper cited above). Coase noted that even though it is theoretically possible to obtain all sorts of goods and services at the lowest cost in open markets, there are transaction costs associated with doing so, and bringing more components of a business into a single entity can reduce these costs and make it easier to get work done. Therefore, to achieve maximum efficiency, it makes sense to do as much as possible within an enterprise. However, as firms continue to expand, the overhead costs of managing a large, diverse enterprise increase, and at some point, a firm will reach a point where further growth is not profitable. A well-run firm will strike a balance between what is done inside and what is done externally.

As we move into a digital economy, Wladawsky-Berger sees more aspects of business being carried out through networks rather than hierarchies. Since, as Malone had predicted, the Internet has dramatically reduced the cost of obtaining goods and services, it now makes sense to recalibrate the balance between internal and external operations and think about the role of the firm in a new, more dynamic way:

Companies need to focus their energies on their true point of differentiation instead of squandering competitive advantage by dispersing focus and investment. Given the intense, global and unpredictable nature of competition, firms need to realistically assess their strengths across the board. They need to decompose their organization into its key component parts so they can understand what is truly differentiating—where the organization has strengths and weaknesses—and then make decisions about how to build, buy or partner for world-class capability. They should essentially become an aggregation of specialized entities with complementary interests—expanding, contracting and reconfiguring themselves in a way that best adapts to or even anticipates market dynamics.

This shift brings with it the challenge of what Wladawsky-Berger called, “distributed management.” As companies disaggregate and reconfigure themselves, they will find themselves increasingly managing operations that are distributed across a network of interconnected firms and individuals, which is best described as an ecosystem. Such a structure is more complex than more traditional models of the firm and call for highly skilled managers.

The challenge for managers in the new economy goes beyond managing complex processes; it also involves leading people. Effective leaders need more than just analytical skills; they need to have passion and commitment, the ability to motivate others. And it is not just a matter of leading one’s own employees, but all of the participants in a company’s extended ecosystem.

Unfortunately, the track record for managing highly complex activities, such as large-scale software development projects, is not good. Peter Schwartz suggested that the ability to lead an ecosystem, which involves the ability to marshal fragmented resources into a coherent whole, is a new kind of skill that is not part of the traditional training for managers. But, today, the lack of these skills can be literally disastrous: the 2010 oil spill in the Gulf of Mexico can be traced back to the ineffectiveness of BP in leading its ecosystem of multiple players who needed to work closely together to maintain safe drilling operations on the Deepwater Horizon.

Wladawsky-Berger argued that the U.S. is, in general, better at “distributed leadership” than other countries where more hierarchical models persist. What is the basis for America’s advantage? Robin Chase proposed that America’s strength in this area derived from a democratic political system that has required different groups to find ways of collaborating constructively. Ken Cukier suggested that America’s advantage could go back to the country’s colonial period, where settlements without a royal leader had no choice but to govern themselves. Charlie Firestone of the Aspen Institute added that the U.S. is a nation of immigrants and strivers who understood the need to work together in order to get ahead.

The need for trust. One of the critical requirements for a well-functioning ecosystem is to build trust among the participants. But how can long-term trust be built in an era of rapid change? Part of the answer is personal relationships: leaders of large enterprises can make things happen quickly if they have created a network of personal connections and built a reputation for being trustworthy. Trust can also be developed through a shared culture and shared values that can create a coherent whole out of a collection of separate entities. And there are mechanisms developed to build trust such as eBay’s reputation system and LinkedIn’s chain of personal referrals. Yet another approach to building trust is what Terry Young, Founder and CEO of sparks & honey, called “radical transparency” which essentially treats all members of an ecosystem as if they were all employees of the same firm.

oDesk is an online service that matches employers with freelance workers to perform specific tasks. Founded in 2005, the company has signed up more than five million freelancers and attracted more than one million employers. In addition to matching jobs and job seekers, oDesk makes it possible for “distributed teams to work together and help instill trust in work happening via the Internet,” according to oDesk CEO Gary Swart. Swart believes a key to the success of the company is the ability for individual workers to develop a reputation based on the work that they have done via oDesk that is visible to potential employers. As workers build a good reputation, they can move quickly from jobs that pay $5 per hour to earning $50 per hour, based entirely on the quality of their performance. It is, in other words, a meritocracy where quality is what matters.

From platform to ecosystem. What oDesk has done is to provide a platform that has enabled millions of individuals to find work from a million different employers. Salesforce has created a platform on which many small companies have been able to build and distribute applications that are useful to enterprises that rely on Salesforce’s core CRM and collaboration tools. Google’s Android and Apple’s iOS mobile operating systems represent platforms that offer a way for app developers to easily reach a majority of smartphone users. Facebook has become a platform that has become a vital tool used by a billion people to maintain their social networks.

A platform is a system that provides value to its users by reducing transaction costs that previously made it too costly to do things that people wanted to do. John Hagel added that, from a technical point of view, a platform is a set of enabling standards or resources that connect people. Although the most well-known platforms are digital, they need not necessarily be technologically based. For example, Li & Fung uses little technology other than faxes and the telephone to orchestrate a large global network of apparel manufacturers.

No matter how they operate, all platforms are critical tools in building and maintaining an ecosystem of participants who connect to collaborate, co-create, co-build or co-distribute together. According to Jeff Huber, the classic definition of an ecosystem is “a community of living and non-living things that interact as a whole system” through mechanisms such as incentives and feedback loops.

While a platform, once it is built out, may be able to function more or less automatically (in fact, it is through the automation of functions that platforms can drive down transaction costs), a unique and compelling characteristic of an effective platform is its ability to scale. As Robin Chase noted, the more that interactions with an ecosystem can be “platformized,” the easier it will be for participants to interact with that ecosystem. But ecosystems also need strong leadership to operate effectively. Leaders are typically the creators and operators of the core platform, and take a key role in building the ecosystem around it. They also take responsibility for maintaining the quality of a platform, which means making sure that it does not grow too complicated to use.

It is helpful when a platform is embodied in the person of a charismatic individual—Marc Benioff at Salesforce, Larry Ellison at Oracle, Sergey Brin at Google, Jeff Bezos at Amazon, and Jimmy Wales at Wikipedia. When something goes wrong, it is the leader who takes responsibility to fix it: one of the reasons for Amazon’s success is that it stands behind the transactions that take place on its platform, even if they involve third parties. The same is true of American Express that takes responsibility for the experience of its users.

A taxonomy of ecosystems. Not all ecosystems are created equal. John Hagel identified a dozen different kinds of ecosystems, each of which has its own distinctive characteristics. At one end of the spectrum are “centralized” ecosystems in which a single large entity takes responsibility for organizing and maintaining connections within the ecosystem. Classic examples are the “collection” model represented by P&G’s Connect + Develop initiative through which the giant consumer products company opened up its in-house innovation process to outside companies that offered resources that P&G did not have, but included no provisions for making connections among the participants. Another model for a centralized ecosystem is illustrated by Goldcorp, a large multinational mining company that released geological data on an Ontario mine to outsiders and invited participants to enter a contest to identify the most promising excavation sites.

At the other extreme are what Hagel describes as “self-organizing” ecosystems in which participants collaborate around a shared goal without having a clearly identified leader and that typically lack “defined standards, forums, barriers to entry or rules for participation.” Examples include “grassroots” ecosystems such as the group of construction companies that collaborated to develop methods to make use of a novel building material and a “pack” ecosystem represented by the informal collaboration of young surfers who shared experiences and techniques for riding big waves.32 Typically, these ecosystems function for a finite period of time and disband once the goal that brought it into being has been accomplished.

Between these two extremes are what Hagel calls “sequenced” ecosystems, such as Li & Fung, which orchestrates the elements of a value chain that links apparel manufacturers at one end and designers and retailers at the other end; and “facilitated” ecosystems that are typically maintained by a single party but permit participants to collaborate with each other in multiple ways around a common goal. (An example is the Apache Foundation that serves as a hub for developers who participate in the community responsible for the open source Apache web server software).

The main difference among these models is their dynamism. “Static” ecosystems retain a hierarchical structure and exist largely to serve the needs of the central organizer. Dynamic ecosystems provide a significant opportunity for accelerating participant performance improvement—whereby all participants get better faster by working together on a larger and larger scale. It is this latter type of structure—represented by the process network, web, open development, community and pack ecosystems—that provides something genuinely new and valuable: support for collaboration that can lead to unprecedented levels of performance and progress. According to Hagel, these dynamic ecosystems:

are highly scalable and enable a high degree of interaction among participants. In addition, they have the potential to foster deeper trust-based relationships, and/or create the incentives necessary to attract a wide and diverse group of participants.

An ecosystem is larger than an individual company, even if one firm is responsible for building and maintaining it. Dale Dougherty, Founder and CEO of Media Maker, noted that in the most successful ecosystems, control is not tightly held, but is shared, allowing participants to self-organize in ways that meet their individual needs. In such a distributed model, the role of the leader is to serve as a recipient for feedback and ensuring that that feedback is used to make necessary changes to keep the whole functioning in an optimal way.

The ecosystem of the automobile. This taxonomy does provide a means of categorizing a wide range of collaborative initiatives across multiple sectors. But can the model be used to understand what is happening in a specific industry or economic sector, or used to predict where that sector might be going? To explore these questions, the Roundtable participants focused on one specific sector: the automobile industry that was highly fragmented in its earliest days (when there were scores of independent car manufacturers), but evolved into one of the most highly concentrated manufacturing sectors, long dominated by the Big Three auto makers who controlled approximately 15 percent of the whole U.S. economy. Eventually, they were joined by a handful of giant global car makers who expanded the range of choice for consumers but did not really change the prevailing industry structure. In recent years, however, there have been several developments that suggest that the industry is about to experience major disruption—the 2009 bankruptcy and government rescue of GM and Chrysler; the emergence of new players such as Tesla and Wikispeed that are proposing to change the definition of what a car is and how it is made and sold; the advent of ride sharing services; and the rapid advancement of the technology for self-driving cars.

What happens to the ecosystem of the automobile if the system of mass production that was pioneered and perfected by auto makers from Henry Ford to Toyota gives way to more decentralized, more customized, perhaps even more participatory manufacturing? What happens if a majority of Americans stop considering owning a car a necessity? What happens if the car changes from a product to a service? What does the industry ecosystem look like if car ownership becomes an optional lifestyle choice, if cars are able to drive to us and take us where we want to go and if the cost of using a car depends on our willingness to share it with others?

To help explore these questions, Thomas Malone offered an analysis of the structure of the automobile industry that describes a series of functional “layers”:

Selling services to provide transport (e.g., taxis)
Routing (mapping, navigating)
Routing variables (whom you will travel with)
Renewal of product (innovation)

Each of these layers involves a substantial amount of activity; some are multi-billion dollar sectors in their own right (e.g., auto insurance alone accounts for nearly $200 billion in revenues annually). Some of these functions are likely to experience greater concentration, while others will undergo fragmentation. Although virtually all sectors are vulnerable to disruption, it is to be expected that entrenched interests will resist change. Taxi companies have already raised objections to services that enable sharing of private cars, while car dealers in several states have attempted to block Tesla’s selling cars directly to consumers (just as hotel operators are challenging the legality of services like Airbnb). And it is likely that the gating factor on the take up of self-driving cars is more likely to be legal and regulatory considerations rather than technical feasibility. Joe Justice of Wikispeed proposed that one way to address regulatory barriers is to focus on what he called “test-driven legislation” that does not protect a particular technology or business structure but rather provides a system in which any solution that can meet a specified performance test is deemed to be legal.

Another way to accelerate change is to create a compelling vision of a future that is different—and better—than the present. One of the most skilled practitioners of this art has been the automobile industry itself. GM’s Futurama exhibit at the 1939 World’s Fair, which was designed by Norman Bel Geddes, is described as “grandest of all predictions, an enormous scale model ‘city of 1960,’ which promised a network of national highways for middle-class businessmen to drive home to their wives.” The popularity of Futurama is credited with helping to build support for the Federal Interstate Highway system that was constructed after World War II (the new system was also sold on the basis of its role in making it easier to move tanks and other military equipment around the country).

Beyond the car. In fact, the ecosystem of automobiles is much larger than just the industry that makes and sells them. Cars have had enormous impact on cities and the built environment. The rise of global megacities and the growing awareness of the costs of carbon-based economies provide further evidence that a new vision is needed for the world of tomorrow. A number of progressive cities have already begun to visualize different futures for themselves. Technology companies such as IBM and Cisco are actively promoting the concept of “Smart Cities” where technology is used to improve the efficiency of all urban systems, including transportation. While he was mayor, Michael Bloomberg supported a number of initiatives to make New York a healthier city that included reducing traffic and pollution through imposing congestion pricing and expanding support for electric vehicles. And Park Won-soon, the mayor of Seoul, Korea, articulated a new vision of that city as “the City of Sharing” that would, among other things, dramatically change the role of the automobile in the urban environment (see “Is Seoul the Next Great Sharing City?”). The vision leverages the fact that Seoul is generally ranked as the top city for broadband service in the world to support a social and economic transformation based on sharing and collaboration.

Is Seoul the Next Great Sharing City?

Imagine this scenario: You wake up in a bustling city and have breakfast with the guest you rented your spare room to. You then ride in a shared car to your job where you give tours of the city to out-of-towners. On your lunch hour you participate in a public transportation flash mob and after work you swing by a tool sharing center to finish a project. Once home, you enjoy a community meal at your neighbor’s apartment and spend the evening packing for a trip using borrowed luggage that you found via your smartphone.

One of the great megacities of the world, Seoul, South Korea, is positioning itself to be a model city for sharing. A new, city-funded project called “Sharing City, Seoul” aims to bring the sharing economy to all Seoul citizens by expanding sharing infrastructure, promoting existing sharing enterprises, incubating sharing economy startups, utilizing idle public resources, and providing more access to data and digital works.

Created in September of 2012 as part of the Seoul Innovation Bureau’s plan to solve social, economic and environmental problems in innovative ways, the Sharing City is a move to better the lives of Seoul citizens through sharing. It’s also a way to maximize the city’s resources and budget.

In fact, the most compelling unit of analysis may not be a specific industry or economic sector, but one that embraces a larger context. John Clippinger suggested that by focusing our analysis on existing sectors, we may be reifying old structures rather than thinking about what could be. For example, it might be an interesting exercise to look broadly at the city as a platform for collaboration and innovation.

Another important perspective is that of the individual who is presumably at the center of most if not all of the changes going on. One of the most consequential results of the digital revolution has been the shift in the locus of power from large institutions to individuals. Ultimately, it is the empowered consumer who stands to benefit from the expansion of choices that are occurring in one sector after another.

While we are able to get glimpses of a future that is dramatically different from the current reality, we still lack a compelling vision of a new economy, a new culture. What is needed, according the John Hagel, is a “shaping strategy” that has the power to mobilize support around a common vision. As an inspirational model, he cited the story of Malcolm MacLean, the American businessman who invented the shipping container in the mid-1950s, established a company, which became Sea-Land Services, to build and operate the ships that could hold the containers and built ports that could load and unload the ships efficiently. He then spent several decades convincing shippers and other key players to reconstruct the entire shipping industry around a better way of operating. MacLean not only had to contend with the inertia of an industry that had operated the same way for a long time, but also had to overcome the fierce resistance of the Longshoremen’s Union whose livelihood was based on unloading cargo by hand. When MacLean died in 2001, Secretary of Transportation, Norman Minetta, commented that MacLean was responsible for modernizing the process of loading and unloading ships that was “was previously conducted in much the same way the ancient Phoenicians did 3,000 years ago.”

Other, more recent examples of shaping strategies that have helped catalyze large-scale change include Bill Gates’s persistent evangelism for the power of personal computers; Dee Hock’s radical vision for a virtual, decentralized organization to offer credit to individuals that led to the trillion dollar VISA empire; Li & Fung, the Hong Kong-based enterprise that recruited thousands of small suppliers to serve the apparel industry by envisioning a global network that benefited all participants; and Marc Benioff’s eloquent advocacy for the future of software as a service that helped to change the economics of the industry and establish as a ubiquitous platform for large enterprises and for millions of individuals. In the end, even in the age of amazingly powerful technologies, there is still no substitute for the power of an individual to lead and to inspire others.

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