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COPYRIGHT 2006 Federal Legal Publications, Inc.
I. INTRODUCTION
For more than sixty years, markets and hierarchies have dominated our thinking about economic organization. (1) This article suggests that a third form, the ecosystem organizational form, has now become so important in practice that it should be accorded equal recognition in theory and in policymaking. Markets, hierarchies, and ecosystems are the three pillars of modern business thinking and should provide the foundation for competition policy, regulation, and antitrust actions. I am pleased to contribute to this issue of The Antitrust Bulletin as a member of the American Antitrust Institute Roundtable on Complexity, Networks, and the Modernization of Antitrust. (2)
The ecosystem form of economic coordination has become pervasive on the business landscape. (3) Business ecosystems surround, permeate, and reshape markets and hierarchies. Managers establish business ecosystems to coordinate innovation across complementary contributions arising within multiple markets and hierarchies. The activities of business ecosystems set the agenda for "co-evolution" (4) of markets and hierarchies and their outputs.
The focus of companies in most sectors has progressed from competing on efficiency and effectiveness to competing on the basis of continuous innovation. As companies have accelerated innovation in their own businesses, they have discovered that they can't change the world alone. For every advance there are complementary innovations that must be joined in order for customers to benefit. These complementary advances often must co-evolve across company lines because no single firm has all of the required specialized knowledge and managerial resources necessary for the whole system. Indeed, a substantial solution to a customer need may require the participation of dozens or even hundreds of diverse contributors, each of which is a master of fast-moving, complex and subtle developments in its own domain. (5)
A senior executive might say "we need to promote a business ecosystem around our new product" or "the iTunes ecosystem is becoming important for our company" or "our business ecosystem is becoming more standards-based and open." The term "business ecosystem" and its plural, "business ecosystems," refer to intentional communities of economic actors whose individual business activities share in some large measure the fate of the whole community. Companies making accessories for the Apple iPod can be said to be members of the iPod business community or, more evocatively, the iPod business ecosystem. The same can be said of the entertainment companies that license music through iTunes, the iPod-connected music downloading site, as well as the consumers who purchase and enjoy the music. As the New York Times summarized it, "lain entire ecosystem has emerged around the music player, introduced by Apple in October 2001." (6)
Some of the most interesting work on business ecosystems is being done in developing countries, where many of he most fundamental complementary contributions necessary for business cannot be taken for granted. Examples of this work range from the comprehensive analysis by C.K. Prahalad of "the symbiotic nature of the relationships between various private sector and social institutional players that can lead to a rapid development of markets" serving the world's materially poorest citizens, to targeted studies of key elements of a legal system that are necessary for Internet-centered digital business ecosystems to thrive in developing countries. (7)
A business ecosystem, as we will see, can also be conceived as a network of interdependent niches that in turn are occupied by organizations. These niches can be said to be more or less open, to the degree to which they embrace alternative contributors. One of the most exciting ideas in business today is that business ecosystems can be "opened up" to the entire world of potential contributions and creative participants.
In order for companies to co-evolve their goods and services, they must find ways to align their visions, so that research and development investments are mutually supportive, and capital investments and operating processes are synergistic. Companies must establish interfaces and protocols for putting together their contributions. Most importantly, they must dialogue closely with customers so that what is created is what the customer wants and is willing to pay for. Mastering these challenges, of what might be called "distributed creativity," is the aim of the ecosystem organizational form. The conventional hierarchical firm does not effectively address the breadth and importance of interfirm relationships. The unaided market is not able to achieve interfirm coordination sufficient to justify players' aligning their dreams, plans, and product road maps. (8)
Courts and regulators need to recognize the ecosystem form, appreciate its nature, structure, and operation, and seek to support its contributions to procompetitive and proinnovative social outcomes. Antitrust cases that do not recognize this level of organization run the risk of ignoring and possibly damaging important collaborative, innovation-furthering public goods. Cases also run the risk of being used by opponents of a particular business ecosystem to undermine the effectiveness of an innovating community, thus making the courts unwitting tools of narrow competitive interests and inadvertently impairing collective advances that might benefit the whole society. In instances when leaders of business ecosystems seek to use their power in predatory or narrowly collusive ways, it is vital that regulators and courts be able to "connect the dots" and understand why particular actions are being undertaken, and what their likely anticompetitive consequences are.
Yet it is often difficult for those outside the executive suite to connect the dots, to recognize business ecosystem leadership in action. From my experience, there are three principal reasons. First, companies keep their strategies secret. Even close stakeholders such as investors and employees, are often in the dark about how various imperatives are intended to fit together. This can be particularly true of ecosystem-influencing initiatives, as they are aimed not only at leading the internal processes and people of the company, but include shaping the behavior of groups and organizations that are outside the company boundary. Second, even when executives are willing to share their strategies, they often are acting intuitively or with only a partial understanding of their own actions. I know one major Silicon Valley firm that used maxims from the "Smith method" of driver education as strategic touchstones: "get the big picture," "aim high in steering," "leave yourself an out," "keep your eyes moving," and "look ahead for trouble" were the explicit guidelines of a sophisticated but largely unarticulated ecosystem-shaping strategy.
Third, traditional economic theory does not focus on business ecosystems as a distinct form of organization and does not provide conceptual templates that can be used to detect, inspect, and assess business ecosystems. By contrast, when it comes to markets and hierarchies, courts and policymakers benefit from years of systematic research describing ideal markets and firms, market failures, and failures of organization. They also have at hand a history of explicitly described regulatory, and antitrust interventions and outcomes. (9) It would be useful to have equivalent models of idealized business ecosystems, as well as theories of "business ecosystem failures" through which actions and effects in a case can be examined, and for which remedies can be devised and tried.
All three causes of invisibility are now being remedied. Ecosystem-affecting strategies are being described and discussed by business journalists, insiders, and scholars. Inside executive suites, business ecosystem strategy-making is becoming more of a conscious, disciplined process: articulate, structured, and analytical. The systematic study of business ecosystems and related ideas has moved to the forefront of literature and scholarship in business strategy, (10) marketing, (11) research and development, and the design of products and services. (12)
Legal scholars have taken up the charge. Perhaps the most promising work is being accomplished in the still young field of Internet law. Researchers are analyzing the impact of such ideas as open media, open systems, open standards, open networks, open spectrum, and the evolution of the open source software movement and similar systems of community "peer production" of information goods. (13)
It is thus appropriate that as we seek to modernize antitrust law and competition policy, business ecosystems should be considered carefully, and their public costs and benefits examined. Most importantly, government agencies and courts need to be able to interpret and evaluate the impact of specific tactics that participants use in business ecosystems, especially initiatives intended to shape collective action across the community. In some cases, we may conclude that tactics that seem on first glance coercive, collusive, or discriminatory in fact serve the public interest. On the other hand, tactics that seem on their face to be open and inclusive may be discovered to have detrimental consequences, either by design or by accident.
My hope in writing this article is to describe the reality of business ecosystems so that members of the judicial system and policymakers can better walk in the shoes of the executives and firms they seek to understand. First, I examine the origins of modern business ecosystems. Next, I consider public goods created by the ecosystem form. In part I do this to counter a tendency in the courts today to attack ecosystems and their mechanisms of coordination piecemeal, rather than to address their strengths and weaknesses whole. The fourth section of this article considers some ways the business ecosystem form may be abused, and for which explicit competition policy and antitrust remedies may be required. In the end, I believe the ecosystem form of organization has profound social and economic consequences. It is important that we address its special nature as clearly and sensitively as possible, in order to reinforce its value and remedy its deficiencies.
II. MILESTONES IN THE HISTORY OF BUSINESS ECOSYSTEMS
No organizational form emerges out of whole cloth. Approaches to organization are invented, experimented with, refined, and shaped by happy and not-so-happy accidents. The modern multidivisional firm was invented largely in the automobile industry in the first third of the 20th century, was immensely advanced by Pierre S. du Pont and Alfred P. Sloan, Jr., and written about by their brilliant chronicler Alfred Chandler. The challenge of early 20th century industry was, as Chandler has written, managerial control. (14) The auto industry was the paradigm of this task, a capital-intensive business with multiyear product cycles, massive retooling for each generation of cars, and a semiskilled labor force of thousands.
There indeed were automobile-centric business ecosystems, but no theory of their development has been recorded. A variety of complementary goods was necessary for cars to be useful: roads, gasoline service stations, retailers, as well as steel makers and component manufacturers such as tire makers and chassis builders. The biggest organizational challenges facing the industry were not the coordination of these complementary assets, which took years to establish and were relatively simple to envision, but rather the efficient running of armies of men and vast combines of machines, epitomized by Detroit's integrated auto production facilities.
By contrast the modern computer business grew from the seeds of semiconductors and software. Its core resources are not materials but complementary, systematically related ideas. And over the course of thirty-five years of making and managing these relationships, the executives of that sector have refined first a practice and then a theory of business ecosystems, and have gone to great lengths as well to share it with their clients and allies in other economic sectors. Thus, while business ecosystems have always been with us, the managed business ecosystem organizational form grew up in the paradigmatic innovation industry of the late 20th century: the high technology computer business.
How does one make a sustainable business of a profusion of ideas, an overwhelming richness of possibilities? How does one pull together a subset of advances into the design of a product or service capable of solving real human problems? How does one open that design to continuing advances in the various contributing subdomains of knowledge? This is the challenge the business ecosystem meets.
A. IBM modularizes technology, and HP establishes a flexible organization
Two developments in the late 1960s, one technical and one cultural, were part of the beginning of business ecosystems as an explicit approach to organization design and industry structure. The first was the modular architecture of the IBM/360, and an early ecological form of industry structure. Much has been written about this massive computer project. For our purposes, what is important is that it was the first to embody a completely and explicitly modular architecture. (15) Distinct tasks that faced the total system, from memory to printing to instruction processing, were divided up into what can be thought of as niches in a network of niches.
In designing the IBM/360, separate teams focused mainly on their specialties, with their work related to that of others through simplified interfaces that hid the complexity on either side. This modular design enabled the building of the most powerful and fully featured computer system of its time, without the interactions of its functions becoming intractable. Moreover, the machine once constructed had parts that could be interchanged and extended if one understood the interfaces among them.
As Baldwin and Clark report,
this new modular task structure in turn carried within it the seeds of new enterprise designs. In December 1967, less than a year after the new task structure became a reality, twelve employees left IBM's San Jose laboratory to form a company whose specific aim was to design, make, and sell disk and tape drives that would "plug into" System/360 and therefore compete with products that IBM offered.... [A]s the designs of computers changed, the industry began to change in structure as well: it began to evolve into its present form--a highly dispersed modular cluster of firms. (18)
During the same period a second great innovation was happening up the road in Palo Alto at the offices of the Hewlett-Packard Company. Engineers at Hewlett-Packard established a new type of...
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