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Strategy in the Ecosystem Economy

Michael G. Jacobides is a globally recognised thought leader on #ecosystem strategy. We discussed why companies should have ecosystem strategy, his articles in Harvard Business Review, MIT Sloan Management Review and more.

  • What is the Ecosystem economy and its drivers

  • How ecosystems are different from alliances, partnerships and joint ventures

  • How to start thinking about Ecosystem? “LeBron James challenge”

  • How to select your ecosystem strategy - from participation to orchestration

  • ECO-systems vs EGO-systems

  • 3 myths of ecosystem thinking

  • Open versus closed ecosystem

  • Google example of building strategically opened ecosystem

  • Key questions for defining ecosystem strategy

Michael G Jacobides holds the Sir Donald Gordon Chair of Entrepreneurship & Innovation at London Business School , where he is Professor of Strategy. He is Academic Advisor to the Boston Consulting Group, Visiting Scholar at the New York Fed, and Visiting Fellow at Cambridge.

We recorded this interview just before the pandemic, but it is even more relevant today with the explosive growth of tech #ecosystems and #platforms.

Michael, you are on the frontier of ecosystem economy, driving this entire space. Can you explain what is ecosystem economy and what are the key trends that are pushing it?

Well, I think that what changed and people started noticing was 2016, when the 5 biggest companies in terms of market cap were no longer big oil and big banks and big industrial conglomerates the likes of Exon and GE, or perhaps even better China and ICBC, that we had seen until then. Where they were substituted by Facebook, Google, Amazon and the rest of it. And I think what that signaled is that firm's that were using platforms and their ecosystems in order to gain advantage, were really becoming the ones that were able to dominate. And they have continued to dominating. And that is part of a trend that we have seen, and this trend is to start coordinating and organising through groups of companies that rely on orchestrators, and that's sort of a new thing an important part in the Internet economy. These firms that set out the parameters within which you can operate, and which you need to adhere to, in order to be part of a group. And also change of the way that we buy stuff that is mediated by technology usually on the basis of your mobile phone or other devices, it's going to start being wearables in a short while. We are interacting with the world and with products and services in a much more flexible way than we used to do in the past. And because it's mediated by ecosystems and because we need to choose which ecosystems to align with - that's why people started getting really excited about it. In your recent Harvard Business Review article you have brilliant argument I think, that's there are 3 key trends. One is opening regulation, second one is technology and then customers want complete products and services. Do you think that ecosystem economy is basically a realignment on the entire economy through the customer lens? I think that it does offer much more customer choice. I mean in a way we had built our economy, if you take a step back in structures that were essentially excluding firms. You needed to have particular licenses and you needed to have a particular structure in order to get some product and services. What that meant, is that as long as you were abusing your customer less than your competitor, you'd be able to do fine. And there are a number of firms that were able to benefit their production economies of scale and the reach the scale, sometimes scope would provide, with a relative aversion to be really nasty with regards to their customer. Now when these boundaries are starting to go down, then what you have is first entrepreneurs that say "hey, I can do things in a different way" and you also have customers who say "oh, blimey, if you're offering something that's more convenient I will go for that!". And this creates a self-fulfilling prophecy, which means that customers get more choice. So couple more things that were important in making that happen. One of them is scalability, because you see what's changing with today's economy is that the ease with which you can scale up is very different. Which means that there is much more variety and there are new ideas that can catch on through the use of ecosystems, can broaden their scope or broaden their reach. And as a result we have a much more fluid competitive terrain. That in general tends to be good for the customer, the only exception for that is that some of the things that make consumption easy and can also make us lazy. And that's where the firms that hold the bottlenecks and all the connections vis-à-vis the customer are able to leverage their position. And that's what happened with GAFA (Google, Apple, Facebook, and Amazon) and the equivalent Chinese firms like Tencent or Alibaba.

When you think about 10 years ago, a lot of companies were also engaged in alliances, partnerships, joint ventures. And now it's ecosystems. Do you think that ecosystem is a natural progression of it or how they tie together?

It draws on it and it's a little different. If you think about ecosystems, ecosystems essentially end up using the tools that we have. This has not come out of thin air, it builds on things that we know, but what we used to have before is fairly well demarcated types of relationships. Now if you were Volkswagen in the past you could say "I want to go globally, so what will I do? Well I'm going to go and work with SAIC". And Volkswagen created one of the oldest stable relationships with a Chinese firm, producing a heck of a lot of vehicles there. If today, you are Volkswagen and you want to have, as they do, a dent in autonomous mobility, you will see that their autonomous mobility ecosystem includes over 6 industries, 5 different deal types, which is M&A, minority participation, joint ventures, strategic alliances, more standardised alliances in 6 countries and has at least 40 key partners. So I think that what you see is a web of relations, which is much more complicated than it used to be in the past. That has its own rules and that's why we are starting to speak about the governance of ecosystems, the ways in which the dispute resolutions happen, the ways that we can figure out how to move forward or not. And what you see is that we have a use of a number of different deal types, ranging from the traditional M&A to the joint venture to the revenue sharing to all kinds of strategic or even standardised alliances.

Imagine I'm a new company or maybe an existing company, I'm listening to you and I'm thinking "Gosh, I need to do something with this partnerships or ecosystem play!" How would you advise to start thinking about it?

So first of all, the problem that you may have, and I have to say that this is a problem that I see mostly in large industrial firms, but sometimes you see that in smaller firms, is the LeBron James challenge. What's the LeBron James challenge? LeBron James is an amazing basketball player, but he's also more than six foot four (his height 6′ 8″, 2.03 m) and has an amazing ability of shooting three-point baskets from beyond seven meters. Now, what I always see companies are saying is like "hey look, Google is making money, Facebook is making money, copy it!" It's like saying "hey, look at what LeBron James is doing, he has these wonderful shots from seven meters, do some of these", which is apparently rather silly. And I think that many companies delude themselves and simply thinking that what they need to do to be successful is to orchestrate an ecosystem. You do that when you have something to offer, which is so compelling and the ability to manage it, which is so great that others will come within you. I think that the right choice is start by a rational approach of figuring out what ecosystem you want to participate in, what your role is going to be there, and what your progression is as you build your skills. So in ecosystems we have orchestrators, but we also have partners, organisations that work with the orchestrators but also engage other participants underneath, and then you have members. So you measure what your strengths are, you figure out what ecosystems you wanted to participate in, you see what the issues are. Is it going to be allowing me to multi-home, i.e. be in multiple different ecosystems? Does it give me some support in terms of IP, or is it asking too much and how far do you think that I am able to stretch it? And then you start developing a strategy of how you engage in ecosystems. That may also be a strategy that involves a number of different roles. There are some ecosystems, where you're going to say "I just participate there because that's where the money is and I want to make sure that I'm part of the Android ecosystem. Or I am going to be part of the ecosystem that Siemens or Phillips has in terms of telemedicine." And you decide how to play, which group to join. But you also try to figure out in the future, how do I want to grow and cement my role, where do you want to move and see yourself. So I think that we're now starting to look at templates that allow you to ask these questions. The HBR that you mentioned then, more work that's going to be coming is trying to provide a rational view of how to navigate what is becoming a choice that is sometimes bewildering for organisations.

I found your argument about difference in mindsets of ECO-systems versus EGO-systems very interesting. Please tell us about it.

One of the challenges that you see organizations say "Oh yes, I get it. I need to work with a number of different other firms, because it must all work together seamlessly." And it must and right now you have the possibilities that you can do crazy stuff - your fridge can figure out when you're out of milk and can order the milk for you. If you asked someone 10 years ago about what your fridge would do, they would probably look at you thinking that you're on drugs. And we're seeing an increase in the possibilities that are offered by technologies that are allowing us to link many different facets of our lives, and of course is offering a set of opportunities. The challenges for firms, usually also for medium-sized firms that have got some position, sometimes a position that they may have is a position that draws on a historical grasp of a particular area, is they say "Okay, well in that case I need to make sure that everyone is around me". And you're asking them to say "Well, draw me your ecosystem". And they put themselves in the middle and then they put possibly the big tech around them, and they may put the customer somewhere at the end, and the complementors are nowhere to be found. But I mean the whole bloody point is that ecosystems have emerged because of the opportunities of offering goods and services are far more complicated and customers have choice. So for better and for worse the customer must be at the center. Unfortunately for most corporates that I used in a world where they have a control, they say "Let me create a story", whether the customer believes their story or not, "where I am in the middle, perhaps I bring others that I can collaborate", and then say "there, you should be very happy to receive that". I think that the challenge is to start with an exercise of saying "what does the customer want?" So when I work in trying to help figure out with organisations “what is my ecosystem strategy”, the first question that I ask that is based on the where do we want to be, has to do with what is it that the customer sees, who else is able to fulfill similar goods and services? Who might be able to offer the packages that we aspire to offer? So that we focus on an ecosystem, which is customer-centric, rather than the center of the world which is focused on ourselves, becoming an EGO-system.

Let's talk about myths of ecosystem thinking. One that I found interesting is that you do not necessarily need to be a digital company, another one is that the ecosystem it's not necessarily a supply chain, and the third one is that the ecosystem should not necessarily be completely open, it could be a closed ecosystem.

The first few ones I agree with, and I think that they are a little bit more self-evident. Let me go to the open versus closed one, if you wish, because I think that that's where I see perhaps a lot of misunderstanding. I think there was a lot of excitement a few years ago and the and sort of open ecosystem is good, and I think it may also be feel-good, you know it's like open versus closed. And I think that it was also useful because it allowed for organisations to acknowledge that not every intelligent thing means to originate from within their own organizations and structures. And they accepted that perhaps we need to engage with others outside. In as much as that's what we mean with open, I'm absolutely fine with it. On the other hand when it comes to ecosystems what you will see is that the orchestrators, because usually when we speak about open versus closed we tend to have this view, the vantage point that starts from the orchestrator that's at the center of it. By the way that's a bit of an issue - our world has many more companies that need to decide whom they work with, as opposed to those who are orchestrators. And frankly Apple and Google are not coming to us for strategy advice, the people that are dealing with them do, and I think these are the ones that have the problems nowadays. But going back to the open versus closed, if you think about what is happening nowadays in ecosystems is that even those that sound open have a lot of the things that are strategically closed. Why? Well, because what organizations are trying to do is that they trying to control some important areas, some parts of the sector that will give them the bottlenecks. And then they are strategically opening up to the complementors that are offering things that they think are either not critical, or they can be replenished easily enough, or were the need for variety and the skills that you need are such that you just want to keep them open. Think about for instance what happened with Android, that it sort of a famous case of an operating system, here's a story. Google saw that people were moving away from the computer. But moving away from the computer it said "Blimey, if that continues I'm going to lose my franchise in search, which is what gives me advertising revenue, which is what makes me very rich. That's a problem." So then they said "We need to do something with mobile fast." Why? Well, they already knew that Apple was thinking about kicking Google out from its own search, when it comes to its phones. You may recall what happened when it even cooked up Google Maps before it had a good solution out. So they said "Hah, we're going to be totally marginalized if we don't find a way of having a foothold. So tell you what. We'll create this nice thing, we're going to buy a company", Android was not owned by Google, they just saw a company that was doing something that was hot and sexy. They are like "We're buying you" and then gonna say "we're good Boy Scouts, we're gonna open it up and all it's gonna be good." Now what did they do that it's something very cheeky, they said "Well, it's all going to be open, so we're gonna have the Android open software project, but on top of it, we will create something we call GMS (Google Mobile Services), and what you do is that we have all this wonderful development where everyone could participate and it's open. And why do we do it? Basically because we would like many people to create the things that we like, and all come link with us, because frankly it's one of us in the middle, because we've got the search and a couple of other things so that we care about. And for the rest, who cares? You guys can make money and we're going to take the big cuts that Apple has, because I know that I'm competing vis-a-vis other complementors. So then they said, essentially using openness as a way of competing for complementors - another important thing to consider, because companies need to fight for complementors. Then they said "Hm, okay so what we now need to do is to make sure that we keep a bit more control." How did they do that? Well this Google Mobile Services is the thing that allows you to do things like call some of the apps that you have in there, and also where they decided they will vertically integrate to produce things that they think consumers would like. That's Gmail that is Maps, another purchase that they had, that's YouTube, another purchase that they made, and they started putting these together. Now this became evident with a big debacle with Huawei, when Trump for totally different political reasons of himself said "Huawei is a security threat". And when the rest of the West didn't quite believe him, he says "Fine. Well, not only what we say that we don't like the network, but we're gonna kill the firm." Frankly because Cisco had been totally beaten in most of the relevant areas where Huawei was, and the Americans were feeling very itchy not to have an important firm there. Then they said "we will not allow Huawei to work with Google Mobile Services." I would have said "it's all open source!" Ah, no. Because if you don't have a contract with Google, you can't use any of these apps, and also you can't properly integrate or pre install or do anything of that sort. And that is when it became really evident that what Google was doing, was that it is keeping the balance between the open and the close, and over time the open source started becoming smaller and the Google Mobile Services started becoming bigger. So what do you see in big companies - strategic openness. They tell you of course they're good Boy Scouts, they tell you that we love you and we love openness. Why? Because they want you to work with them. But the reality of the matter is that there is a strategic view in terms of how open or close we are. And that's where the strategy in terms of ecosystem starts becoming important, because if you're a big company you're like "Let me figure out where I am? Who am competing with and what can I afford to do, whether I'll be open or closed." That's where the strategy also comes in terms of the complementor saying "Who do I want to play with? What is going to be my field and what will define it?" And these are some of the fun things that we're now looking at.

Where do you see this going? If you look at the future in 5-7 years, apart from big tech companies who are now dominant, including Chinese companies, who do you think are the next up and coming?

One of the things that we have seen in some research that I did with BCG Henderson Institute, published in MIT Sloan Management Review a short while ago, shows the longevity of ecosystems. And it is easy to forget that the companies that are thought to be entirely invincible in a technological area, saying that they have all the network externalities and so on and so forth, find themselves replaced more often than we would think. So looking at the data we saw that around 15% of the ones that started, ended up continuing dominating. And even from those that started and were able to have a near-complete hold on their market, over half were the ones that fell from grace. That means that there are significant changes in terms of the ecosystem. Why? Well, because you need to evolve as the customer needs change, you need to be able to continue having a leadership position and there are very few examples where you really have network externalities of the magnitude that allows you to have a stronghold. Sometimes you do and companies like Facebook, to some extent Google, a little less Apple - they do have this ability to tie them in. But they also need to be able to find something that makes them strong. So for instance, Apple has not just had the lock-ins and the network externalities, it has had the benefit that was given to it by really good design in terms of the products and the ability of offering something unique. And this subsides its ability to be the center - the hub of this rich ecosystem may also be challenged. Do I expect that it's going to be some change? Yes, for two reasons. First I think that in terms of regulation were also realizing that some, not all, but some ecosystems are based on network externalities, i.e. the fact that people like being in the network that other people are. That's areas like content, things with Google, and I'm sure that you know your listeners will know all about network externalities. But I think that they're not as frequent as people think they are, and this is why you see companies like Uber freaking out and trying to broaden out, because they understand that the narrow domain leads to losses, because they have no lock-in to the customers. That's why you see companies like WeWork that says that we create benefits from ecosystems, saying "great but how would you he lock people in?" and he'll then said "Oh blimey, hadn't thought about it." And now, a few billion dollars down the line, the owners are leaving with, you know, a nice big thick words and the others are staying put. So I do expect that we're going to see some shuffle. In terms of the power that I was mentioning, I think that regulators are starting to look into that, and you know, even some of us who have worked on the corporate side are now interested in regulations, and I think that there are clear moves whatever happens with election in the United States which will be an important driver of global changes. I was recently in the BRICS competition meeting in Moscow, where I felt there was a significant excitement from them trying to push in addition to the Europeans, who are pushing it because they don't have one of the big consolidators so they're happy to be a little more iconoclastic. And the other thing that's happening is technology is changing. And as we are shifting from the mobile phone to wearables, I think that you see in the realm of competition and you see new technological opportunities that may mean that we have the possibility of finding new firms that are key. In this race though, what we also think that it's going to play an important role is the ability of using data effectively and that's where AI, which comes also with significant economies of scale and information reuse, what may end up being important. That may be a force that would be driving larger organizations to dominate, much as it offers some opportunities for nimble firms.

Brilliant, thank you so much for taking time to speak with us, I've been very insightful.

Welcome, pleasure.

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