James Moore defined a business ecosystem as a network of organizations and individuals that co-evolve their capabilities and roles and align their investments so as to create additional value and improve efficiency.

I attempt to evaluate here whether this form of organization is better to both the traditionally integrated firm and a supply network based on principal-agent relationships. I contend that a vibrant ecosystem enables rapid response to competitive pressures. In particular the following benefits accrue to participants in an ecosystem:

1. Dynamic reconfiguration of capabilities in response to competition or market changes
2. Knowledge sharing helps create products with better market fit
3. Pluggable partner model enables speedy innovations to see light of day
4. Followership encouraged rather than challenged

Advantages of an ecosystem strategy to lead firm

Assuming the leading firm implements strategies that maximize value derived from the ecosystem, there are numerous benefits attainable:

1. Meet demand for integrated solutions by mobilizing complementary capabilities
2. Diminishing need for intervention once key strategic partners are integrated into a self-organizing system
3. Avoids the costs of acquisitions and subsequent integration thereby helping keep business focus on core competencies
4. The entire activity chain is setup to harness the knowledge and joint capability of ecosystem participants.

The traditional vertical integration strategy

The strategies that create vertically integrated organizations have certain key benefits including the following:

1. Ability to align internal suppliers and implement transfer pricing
2. Reduce supplier or buyer risk
3. Lower transaction and relative costs
4. Minimize or eliminate profit leakage to partners

Integration, as Peter Drucker stated, is complexity and only works out, as a rule, if the problem of ‘wrong size’ is addressed, i.e., the firm is too big or small to venture into the area of expertize itself. Even though a firm stays in the same industry it moves into areas it does not have core expertize in and therefore it needs new skills and takes on new risks. Weighing the short and long-term costs of, and payoffs from the integration to arrive at an optimal integration balance- between opportunities and risks- is the only way to be successful using this strategy.

An ecosystem strategy ‘fits’ better

Lets return to my contention that ecosystem strategies are increasingly becoming a better fit for the changing business landscape with firms facing pressure to reduce the current set of core activities. One of the more important strategic goals for small and large firms is cash flow management that requires limiting investments in non-core activities, preferably sourcing those operations from strategic partners. However, outsourcing as a general trend is slowing down in favor of using more reliable and mutually dependent partners. This is probably due to the closer and more complicated interactions needed to best competitors today; lock step with suppliers is harder to achieve in the offshore model.

Another driver for increasing suitability of ecosystem strategies is the need for reconfiguring activity chains to meet consumer demands. Subcontracting relationships, including offshore contracts, are slow moving entities that are not easy to change or reconfigure without sufficient handholding by the lead firm. Another issue is with changing requirements that are harder to build into contracts and require a more favorable climate of partners who are amenable to changing specifications deeper into the product or service cycle. This new model of employing “pluggable partners” into the product development cycle helps decrease time to market and gives the lead firm considerable flexibility in meeting consumer demands. This also helps remove any defective inputs or parts by replacing the supplier with another one from the ecosystem with a better track record in quality.

Followership in the context of pricing and product is another lesser-known advantage of an ecosystem strategy. If the leading firm plays it right, partners do not feel threatened by the ecosystem. Their individual product niches are not invaded and they could even continue to compete with a similar product line albeit differentiated sufficiently in order to remain an ecosystem participant.