The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability

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Summary: Describing a Trend in Modern Business
Review: As no man is an island, businesses do not operate in a vacuum. There are suppliers, customers, employees and of course the government. More and more, these outside influences are banning together in a perhaps unofficial but no less real ecosystem.

In the computer industry, which everyone reading this must have some at least sideline awareness, there are two principle 'keystone' players: Microsoft and Intel. Around these companies there are literally thousands of other companies somehow creating a business around their core technologies. This works pretty well, so long as you are very careful. If you sleep next to an elephant, you'd best sleep with one eye open, just in case he decides to roll over. Just ask Netscape.

These authors have attempted to provide a framework for analyzing such business ecosystems, drawing on examples from biology where such systems have been studied for many years.

Most of the examples used in the book are from the American market. Next, I'd like to see the authors do a book comparing the American and the Japanese systems. It appears that the Japanese started this philosophy but that we have taken it into new and different directions, certainly less formal (the Japanese methods would be illegal here) but seemingly headed in much the same direction.

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Summary: Valuable Perspectives on the "Ecology" of Strategic Alliance
Review: As this book's subtitle correctly indicates, Iansiti and Levien explain "what the new dynamics of business ecosystems mean for strategy, innovation, and sustainability." They are quite correct when pointing out that, in recent years, in industries as different as personal computers and personal care products, "companies [have] leveraged multiple organizations in distributed supply chains, integrated technological components from a variety of business alliances, collaborated with a number of channel partners to distribute their products, and leveraged complementary services from banks, insurance providers, or retailers." As a result, many industries have been forced to create or become involved in a fully networked structure, one "in which even the simplest product or service is now the result of collaboration among many different organizations." (In fact, decades ago, American Airlines devised his "hub and spoke" strategy. However, this really is not what Iansiti and Levien have in mind.) For example, Microsoft and Wal-Mart have a decisive competitive advantage in large measure because they are "keystone" companies in their respective ecosystems. More specifically,

Both "of these firms understand that their fate is shared with that of the other members of their business network. Rather than focussing primarily on their internal capabilities (as many of their competitors did), they emphasize the collective properties of the business networks in which they participate, and treat these more like organic [in italics] ecosystems [end italics] than traditional supply chain partners. They understand their individual impact on the health of these ecosystems and the respective impact of ecosystem health on their own performance...[For that reason] "a new, holistic approach to strategy is critical to an increasingly broad range of firms in our economy as they face the new set of challenges and responsibilities created by competing in business ecosystems."

How? Given the evolution of business ecosystems which are analogous to biological counterparts, organizations today, regardless of their size or nature

(1) must decide if they are a keystone or niche "player" (Please see Part I)

(2) then formulate strategies appropriate to that role (Please see Part II)

(3) and finally, establish and build on one of three "foundations of sustainable performance in a business ecosystem" (Please see Part III)

"Keystone" companies such as Microsoft, Wal-Mart, Dell, and eBay create value within their respective ecosystems which is shared with other participants in that system. More specifically, they create high-value, sharable assets; leverage direct customer connections; create and manage physical and information hubs; support uniform information standards; create, package, and share state-of-the-art tools and building blocks for innovation; establish and maintain performance standards; build or acquire financial assets for operating leverage; reduce uncertainty by centralizing and coordinating communication, and reduce complexity by providing powerful platforms.

Obviously, few organizations can be (or should even attempt to be) a "keystone" or "dominator" company. According to the authors, keystone wannabes tend to pursue two quite different: "hub landlords" (e.g. Enron) extract as much value as possible from an ecosystem or ecosystem domain without integrating forward to control it whereas "hub dominators" (e.g. Apple) integrate vertically or horizontally to manage and control an ecosystem or ecosystem domain. Most organizations will correctly a strategy as a "niche" player by specializing in capabilities which differentiate them within an ecosystem domain. "Niche players are naturally dependent on other businesses. The essential step in defining a good niche strategy is therefore to analyze the firm's ecosystem and map out the characteristics of its key stone and dominator players." (Please see Chapters Six and Seven for a complete explanation of all this.)

All organizations involved in a given ecosystem must, of course, rigorously monitor but also take an active role in nourishing that system's health so as to promote and facilitate the leveraging of an enduring and evolving core. However, it remains for keystones to provide both the vision and the leadership needed, especially in response to market design, operation, and competition. They must also facilitate and support integration, innovation, and adaptation within their ecosystem. "This is the price that keystones must pay for their privileged position at the hub of a business network and as owners of enduring assets: Keystones [in italics] must [end italics] manage the health of their ecosystems as a key business strategy. The challenge for each niche player is to decide in which ecosystem to become actively involved with which keystones to be associated in a strategic alliance.

I wholly agree with Iansiti and Levien that "We are bound together by the nature of the relationships among products, technologies, markets, and innovation. Leveraging these relationships is critical to enhance firm productivity, to protect organizations from disruption, and to enhance their ability to innovate, evolve, and adapt. This means that no firm, product, or technology can be an island: No firm can afford to act alone, and no products can be designed in isolation." Those who share my high regard for this book are urged to check out Christensen, Anthony, and Roth's Seeing What's Next: Using the Theories of Innovation to Predict Industry Change as well as Kaplan and Norton's The Strategy-Focused Organization: How Balanced Scorecard Companies Thrive in the New Business Environment.

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Summary: The foundational book for modern business networks
Review: Business networks represent the future for many organizations as capabilities and competition move beyond the individual firm. While many have heralded the rise of these networks, few have applied any discipline for figuring out how these new organizations work and are structured.

Iansiti and Levien's categorization of keystone, landloard,dominators, niche players etc is helpful in understanding the different ways and types of networks that exist. They are also careful not to push the ecology applied to business angle too much -- a welcome thing in this day of quick fixes and simple models that are supposed to be universally applied.

The focus on the foundations of competition are helpful and point up the value or architecture, platforms, and innovation. My one concern is that much of the book reads like a prescription for technologically advanced industries -- even though the authors use some low tech examples. This makes it seem more descriptive than advancing a theory from which I can understand what is going on and taking action.

This book forms the first real examination of business networks without the hype of the internet or the determination that everything will be connected to everything else. A solid foundation seeing business networks for what they are, and their dynamics.

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Summary: A Big Surprise
Review: Not at all what I expected from the reviews I've seen. Does a surprising job of mixing taking some ideas from networks (biology, and others) and applying them to business. Some of the management stuff in the second half might not be of interest to everyone, but the rest is interesting even if you are not in business and are just looking to understand how big companies shape the world we operate in, and why their influence can be both good AND bad.

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Summary: A New Strategic Dynamic
Review: The authors highlight the importance of these networks in the strategy creation process. Their discussion provides organizations with a roadmap that points out the importance and pitfalls of networks the tactics they will need to successfully navigate their futures.

Harvard Business School Professor Marco Iansiti and business leader Roy Levien employ the analogy of biological systems to describe the inner workings of business networks. Using 10 years of research and practical experience in a range of industries they identify three roles firms play within business systems:

1. Keystones. These companies improve system health and increase their own operational performance.
2. Landlords and Dominators. Firms with these operating strategies occupy a network hub.
3. Niche Players. Organizations that do not occupy a network hub.

Business networks and biological networks, the authors explain, are governed by a common fate. They base predictions on features that enable stability, longevity and productivity. The authors offer three predictions:

1. Expect more robustness in the face of external shocks. Although damage is accompanied by widespread collapse, most problems will be absorbed.
2. Expect networks to develop a capacity for creativity.
3. Expect a heterogeneous structure, with each individual organization playing a unique, dramatic role.

The authors view this evolving network as a renewal source, not an external threat.

Rating:
Summary: A good book -- but could go further
Review: The Keystone Advantage is a good book. It uses a biological metaphor to discuss and explain the success of various companies within a larger business 'ecosystem'.

But if you want to understand the fundamentals of WHY this metaphor works, and HOW to choose which strategy will be best for your particular business, you need to read "The Escher Cycle".

Marco Iansiti and Roy Levien describe examples of how companies have used different strategies to achieve success in the modern business ecosystem. "The Escher Cycle" explains from first principles (not just a metaphor) HOW that ecosystem came into being.

Iansiti and Levien focus on the impact that Information Technology (IT) can have on business performance. But IT is just one of the ways in which performance can be improved.

"The Escher Cycle" identifies the key activities that deliver strategic success. It shows layer upon layer how to improve skill at carrying out those activities (one means of which is through IT). And it shows how different businesses interact together to form the ecosystem that Iansiti and Levien describe.

Finally, "The Escher Cycle" shows how a business can imitate the natural flows of information and capability that circulate within the business ecosystem. It shows how a business can accelerate its own 'Evolution' within that system, and so create the ultimate competitive advantage.

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Summary: A rendition of powerful modern business dynamic forces
Review: The Keystone Advantage: What The New Dynamics of Business Ecosystems Mean For Strategy, Innovation, And Sustainability by Marco Iansiti (David Sarnoff Professor of Business Administration, Harvard Business School) and Roy Levien (Principal at Aldaron and Founder of Keystone Advantage LLC) is an in-depth examination of how economic battles between firms are increasingly becoming battles between networks of firms - businesses that share links and must collaborate effectively in order for each to thrive. The Keystone Advantage uses biological ecosystems as an analogy to the role and fuction of business networks, with the roles of "keystone species" in nature compared to "keystone strategies" used by companies such as Wal-Mart, Microsoft, and Li & Fung. Over ten years of research and practical experience shape the authors' understanding of such keystone strategies, which are presented in clear and direct terms. From the value of a niche to the power of a landlord, to the necessity of continual adaptation to maintain sustainability, The Keystone Advantage is a persuasively presented rendition of powerful modern business dynamic forces in terms the lay reader or entrepreneur can readily grasp.



Rating:
Summary: Provocative and Insightful
Review: This book does an unusually good job of transferring some insights from biology and the study of complex systems and networks to the domains of business management. This is a tricky task that can't be accomplished without doing some insult these sciences, but the authors succeed by and large in suggesting important insights for managers and others with an interest in business practice.

But as the New York Times's Steve Lohr notes, this book is causing an "admiring stir within the not-inconsiderable cottage industry of academics and consultants who study innovation, competition and corporate strategy" mostly because of its argument that "antitrust policy needs to be rethought": that our simplistic view that big always equals bad simply does not apply in highly networked complex industries. Because of this, The Keystone Advantage should interest a much wider audience than a traditional business book.