- Michael Hilb
From Corporate to Ecosystem Governance
Mastering ecosystems is increasingly seen as key to strategic value creation in highly dynamic environments. The role of governance has become a key differentiator between organizations that win or lose from the ecosystem game. This article discusses the importance of governance to the successful creation, development, and growth of ecosystems and presents eight challenges to be addressed along the ecosystem lifecycle. It continues with a taxonomy of ecosystem governance that provides a menu of effective governance mechanisms to address these challenges. The article concludes with advice on how best to manage the transition from a corporate governance to an ecosystem governance focus.
The Emergence and Evolution of Ecosystems
Digitalization is not only transforming societies, economies and businesses but it also has implications for how different players interact and transact to deliver economic value. There are four implications that are often highlighted when describing this new form of value creation:
From asset ownership to asset orchestration: As digitalization enables more effective ways to allocate resources, the focus of activities has shifted from creating value for tangible assets to orchestrating their use as highlighted by Iansiti and Levien (2004, 25): “Strategy is becoming, to an increasing extent, the art of managing assets that one does not own.”
From pipelines to platforms: As a result, the orchestrators, or platforms as they are often called, are able to capture more value than the manufacturers as highlighted by Gawer and Cusumano (2002) or Parker, Van Alstyne and Choudary (2016) in their description of the “platform economy.”
From competition to co-opetition: As an orchestrator by definition relies on others to produce and consume, the relationship between the different players goes beyond pure competition. Or as Birkinshaw (2020, 11) highlights: “(The platform’s) aim is to maximize the number of people coming through the turnstile, rather than increase the height of the fence or the width of the moat.”
From industries to ecosystems: This eventually leads to structural changes in the space where companies operate. While the strategic focus used to be on industries, it increasingly shifts to “ecosystems” (e.g. Ramírez and Mannervik (2016) or Williamson and Meyer 2020).
Welcome to the ecosystem economy. Business ecosystems, which is a term that can be traced back to Moore (1993, 1996), have gained escalating attention over the last decade although the discussion actually dates back more than 30 years (Rietveld and Schilling, 2020).
Based on the initial definition by Moore (1996: 26), who described it as “(a)n economic community supported by a foundation of interacting organizations and individuals – the organisms of the business world,” other academics have refined the term over time.
Adner (2017, 40), for instance, highlighted the importance of "the alignment structure of the multilateral set of partners that need to interact in order for a focal value proposition to materialize.” The value proposition is at the center of the definition by Ramírez and Mannervik (2016, 46), who stress that we should “(think) of value as co-created – not added – by two or more actors in a relationship, synchronically as well as sequentially. ” Jacobides, Cennamo and Gawer (2018, 2264) extend the understanding of ecosystems by stressing that there are “actors with varying degrees of multilateral, non-generic complementarities that are not fully hierarchically controlled.” From a governance perspective, this means “that their members all retain residual control and claims over assets” (2266) and “that ecosystems need to be both de jure and de facto run with decision-making processes that are to some extent distributed.” (2266).
The Role of Governance in Value Creation in Ecosystems
This brings us to ecosystem governance, which is a key aspect of ecosystems as highlighted by Rietveld and Schilling (2020) or Jacobides, Cennamo and Gawer (2018). How are interests aligned in the first place? How are these interests orchestrated effectively and fairly? Finally, how can governance maintain and develop as the ecosystems evolve?
This is also reflected in business practice: The failure of building or maintaining ecosystems is often attributed to a lack of effective ecosystem governance (Pidun, Reeves and Schlüssler, 2020). As a result, Fenwick, McCahery and Vermeulen (2019) propose the need for a distinct “platform governance”. In line with the arguments above, the notion should be extended to “ecosystem governance”.
This paper proposes a third perspective: the “ecosystem-as-governance” view. This builds on two conceptualizations proposed by Adner (2017): the “ecosystem-as-structure” approach, which takes an activity-centric view of interdependence, and the actor-centric “ecosystem-as-affiliation” perspective.
The Ecosystem-as-affiliation Perspective (actor-centric)
An important first step for discussing ecosystem governance is to better understand the different types of actors involved in an ecosystem and that roles that they may play. There is common agreement that different players interact in ecosystems. One player usually takes a lead, which some call “keystone” (Iansiti and Levien 2004) or “orchestrator” (Jacobides or Cennamo and Gawer2018). It is in the nature of ecosystems that only few players can be orchestrators (Greeven 2020).
Alongside the orchestrator are other important roles. I suggested in an earlier publication (Hilb 2020a) that five distinct roles can be found in ecosystems: The Platform Orchestrator, Feeder, User, Aggregator and Enhancer. These five players pursue distinctive interests, provide unique contributions and bring their own expectations to an involvement in ecosystems.
The Ecosystem-as-structure Perspective (activity-centric)
The second perspective proposed by Adner (2017) places the structure of an ecosystem at the center. Three structural dimensions are usually highlighted as Closed vs. Open, Centralized vs. Decentralized and Interaction vs. Transaction-focused ecosystems.
For Pisano and Verganti (2008), the choice between closed and open ecosystems is defined by the access conditions. They argue that closed ecosystems function well if the number of relevant problem solvers are small and known, whereas open ecosystems are recommended if the evaluation of the user quality is easy and everybody can contribute to the solutions. A similar explanation is offered to elaborate on the rationale for centralized vs. decentralized ecosystems. They suggest a centralized solution if the orchestrator has the capability to assess the solutions while preferring a decentralized approach if no single player can do so.
Finally, many authors stress the difference between interaction and transaction-focused ecosystems. While interaction-based ecosystems focus on the exchange of information and data, transaction-focused ecosystems promote the exchange of goods and services.
The Ecosystem-as-governance Perspective (direction-and-control-centric)
While the actor- and activity-centric perspectives are important to understand value creation in ecosystems, one central aspect is not yet addressed: how to direct and control those actors and their activities?
In order to discuss the most suitable governance mechanisms for ecosystems, it is worthwhile looking at the generic governance modes. While most distinguish between market- and hierarchy-based governance (e.g. Jacobides, Cennamo and Gawer 2018), I propose adding a third fundamental governance mode, community-based governance as suggested by Minnaar (2020). How do the three governance modes differ?
Market-based governance: This describes any coordination of economic activity that is based on transactional contracts, such as for trading goods, services and data. As the terms and conditions of the transactions are clearly defined, so are the consequences if contracts are breached. Hence, all parties have full control but little incentive to develop beyond the contractual obligations.
Hierarchy-based governance: If organizations hire staff, they believe it is more efficient to internalize the market. In that case, the coordination is based on instructions within the framework defined by labor laws or labor contracts. In order to increase the efficiency of employees, the employers are incentivized to train them.
Community-based governance: In this case, there is little more than a constitution which lays out the basic rules of the interactions. All parties agree on these rules and believe they can act upon them without needing any further enforcement mechanisms. Hence, this governance mode requires a trust-based relationship.
With regard to ecosystems, all three forms of governance are displayed. First of all, most players are in market-based relationships with each other, e.g. the behavior of users and feeders versus orchestrators are usually governed by transaction contracts. As many of the actors are firms, they apply hierarchy-based governance mechanisms within their organizations.
At the same time, some actors also apply community-based governance mechanisms when engaging in relationships that go beyond pure market and hierarchy-based governance mechanisms. For instance, the business relationships between a platform orchestrator and an aggregator or an enhancer are often defined by a complementary value proposition as defined in the co-opetition model (Nalebuff and Brandenburger 1996 or Brandenburger and Nalebuff 2021). As stated by Jacobides, Cennamo and Gawer (2018, 2261): “What sets ecosystems apart from market-based arrangements is that end customers choose from a set of producers or complementors who are bound together through some interdependencies.”
The Challenges of Ecosystem Governance
As highlighted by both academics (e.g. Rietveld and Schilling 2020 or Jacobides, Cennamo and Gawer 2018) and practitioners (e.g. Pidun, Reeves and Schlüssler 2020), ineffective governance of ecosystems is considered one of the main reasons for failure in creating, developing and, in particular, maintaining ecosystems. This was confirmed by Moore (1993), such that the nature of ecosystems, and hence the challenges that come with them, differ by the stage of ecosystem evolution. In line with Moore’s four stages, i.e. birth, expansion, leadership, and self-renewal, we shall apply the FACE lifecycle model (Hilb 2020b) to describe the eight primary challenges in ecosystem governance:
a. Matching challenge: The initial challenge of building an ecosystem is to identify parties that can contribute to the it and match the different interests. As none of the players usually knows all potential partners, this process is often iterative.
b. Alpha animal challenge: Even if all the key parties are identified and assembled, there is often a tendency that many players want to take the lead. As ecosystems only can live with one orchestrator, the different actors need to find the most suitable role which may not be that of the orchestrator.
a. Access challenge: As ecosystems evolve and grow, future expansion will depend on new parties becoming involved. This may lead to a rebalancing of power structures among existing actors if, for example, direct competitors join the ecosystem.
b. Consensus challenge: This creates the next challenge, i.e. defining and agreeing on common access rules as the ecosystem grows. As some parties may get stronger from developing the ecosystem, this may reduce the influence of other actors. This can make it difficult to reach consensus.
a. Self-interest challenge: As ecosystems start consolidating, the interests of each party return to the center stage. While the focus in the growth phase is to grow the pie, sharing the pie becomes central in the consolidation phase. This may lead to a number of challenges for finding agreement among all parties.
b. Benefit challenge: At the same time, the question about who benefits becomes a contentious issue as rules need to be defined about how to share the profit in the future. Some players may not agree and join other ecosystems instead.
Exit or Energization stage
a. Priority challenge: At some point, the players involved must decide whether the ecosystem has reached its expiry date or whether it is worth being rejuvenated. Here, the priorities among the actors may differ, and not all parties may be willing to remain a part of the game.
b. Commitment challenge: At this point, the true commitment of all parties involved is tested. Have they viewed the ecosystem mainly as a project to explore and develop capabilities, or are they committed to staying for the long term? The answer to this question may differ among the parties involved.
In addition to the stage-specific challenges, McGrath (2020) stresses the importance of strategic inflection points in determining the right time to join an ecosystem. This is because the expectations of value creation potential of an ecosystem can differ over time. An underestimation of the value creation potential in the beginning may be followed by a phase of hyped expectations, which will hopefully settle into a more realistic estimation.
Approaches to Effective Ecosystem Governance
How can we best apply these governance mechanisms to address the challenges outlined above? Apart from purely market- and hierarchy-based governance modes, there are several other governance modes that should be considered in the context of ecosystems. We shall distinguish four of these modes, i.e. cooperation, collaboration, consortium and confederation, whereof the first two are derived from Himmelmann (2002) and the third from Pisano and Verganti (2008).
Cooperation: The simplest form of transactional interaction between two or more parties involves clearly defined expectations by all parties.
Collaboration: This mode refers to a repetitive interaction between multiple parties with clearly defined expectations.
Consortium: On the other hand, a consortium functions within clearly defined rules and a time frame to achieve a common goal.
Confederation: A confederation refers to a standard set of rules that regulates basic issues, such as data rights or value creation.
As discussed above, there are two ways any governance mode can be formalized and codified, either by contract or by constitution. While contracts state the details of pre-defined transactions or interactions, a constitution lays out the basic principles and provides guidance for those committing themselves to the respective constitution.
How can we decide which mode should be applied to ensure effective governance of ecosystems? The optimal governance mode mix depends on two criteria:
Objective: The first question is about the objective of the ecosystem: Do the different players expect a shared output or outcome? Outputs are defined as tangible results of an interaction, e.g. new products or customers, whereas outcomes define the end-state, e.g. market or innovation leadership.
Time Horizon: Secondly, it is vital that the players are aligned in their understanding of the time horizon of an ecosystem: Do they see the interaction as a finite or infinite game? Here, we refer to Carse (2011) who coined the dichotomy. He distinguished between interactions “for the purpose of winning”, versus infinite games that are “for the purpose of continuing the play.” Ramírez and Mannervik (2016) stress that many ecosystems resemble indefinite games as actors play multiple roles at the same time, e.g. as consumers and producers.
Given the complexities of ecosystems, and the variety of roles different players assume in an ecosystem, the optimal outcome is usually a mix of governance modes applied concurrently. Nevertheless, it is important to define the dominant mode to avoid unnecessary target conflicts.
To reach this consensus is not easy. As the assessment of the two dimensions may vary among players, it is pertinent to ensure alignment. A lack of such alignment is likely to lead to governance failure. Therefore, a clear process should be established to agree on common assumptions. Furthermore, this process needs to be performed repetitively to take into account the different requirements as the ecosystem evolves. What is needed to make this happen? First and foremost, we need to move mentally from corporate to ecosystem governance.
Mastering the Transition from Corporate to Ecosystem Governance
The transition from corporate to ecosystem governance is more than just an extension of the scope of corporate governance. It brings a fundamental shift in perspectives and mindsets of those involved, and may also create overlapping dilemmas:
Competitor vs. collaborator: The strategic imperative changes from a pure competitive to a co-competitive mindset. This may have implications for the decision makers charged with control and direction, as other ecosystem players must be viewed as competitors and partners at the same time.
Today vs. tomorrow: Ecosystems are designed to create future value. This implies the increasing relevance of a future-oriented mindset with a continued focus on ensuring current performance.
Exploitation vs. exploration: In line with the above, companies need to refocus from exploitation of the existing status quo towards exploration of new business models. At the same time, the current business needs to continue succeeding.
Company vs. partnerships: Finally, this leads to an extended focus of governance that reaches beyond the firm’s boundary. This will include other parties in the ecosystem, their interests and contributions while preserving the company’s own interests.
Mastering these fundamental dilemmas requires boards to embark on four mental journeys:
From value addition to value co-creation: As suggested by Ramírez and Mannervik (2016), the value creation approach changes fundamentally in ecosystems. The focus is no longer on each party adding value but rather on co-creating it. This principle needs to guide any decisions in ecosystem governance.
From planning to experimenting: The co-creation focus has a direct impact on the predictability of the value creation outcomes. As detailed planning becomes more challenging, or even impossible, a disciplined approach to experimenting must become the accepted, or even encouraged, method for governance decisions.
From secrecy to transparency: Given the co-competitive nature of the relationship between the parties of an ecosystem, open communication and access to information becomes critical to ensuring smooth interactions and transactions.
From control to influence: Finally, governance bodies should acknowledge that activities can no longer be controlled in the way they were within the boundaries of a company. An influencing attitude replaces the established command and control approach.
As with any journey, there is usually no direct route. There are several junctions along the way and different decisions have to be taken at each stage. At the same time, there are many discoveries to be made. Timeless tools, such as a map or compass, can be useful. The concepts presented in this article hopefully serve as practical tools for navigating the mental journey from corporate governance to ecosystem governance.
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This article was published as a chapter in the book Governance of Ecosystems in October 2021.