Subject BUSINESS ECONOMICS Paper No and Title 3, Business

____________________________________________________________________________________________________

BUSINESS ECONOMICS

PAPER No. : 3, BUSINESS ECOSYSTEM AND ENTREPRENEURSHIP

MODULE No. : 7, KEY CHARACTERISTICS OF THE BUSINESS ECOSYSTEM

Subject BUSINESS ECONOMICS

Paper No and Title 3, Business Ecosystem and Entrepreneurship

Module No and Title 7, Key characteristics of the business ecosystem

Module Tag BSE_P3_M7

____________________________________________________________________________________________________

BUSINESS ECONOMICS



TABLE OF CONTENTS

1. Learning Outcomes

2. Introduction

3. Complexity

3.1 Simple System

3.2 Complicated System

3.3 Complex System

3. Business ecosystem as complex system

4. Competition and cooperation co-existence

4.1 Competition

4.2 Cooperation

4.3 Co evolution

4.4 Value sharing

5. Symbiosis

6. Diversity

6.1 Layers of business ecosystem

6.1.1 Leaders

6.1.2 Contributors

6.1.3 Users

6.1.4 Environment

6.2 Diversity of roles

6.3 Diversity in the business environment

6.4 Example of diversity in business ecosystem

7. Innovation and Openness

8. Dynamic and Adaptive

8.1 Birth

8.2 Expansion

8.3 Leadership

8.4 Self renewal

9. Summary

____________________________________________________________________________________________________

BUSINESS ECONOMICS



1. Learning Outcomes

After studying this module, you shall be able to

Understand the key features of business ecosystem.

Analyze the difference between business ecosystem and business environment.

Identify the interplay of various forces in the business ecosystem.

Know the importance of understanding the nature of multidimensional business

ecosystem (for entrepreneurs as well as existing players) through the study of its various

aspects such as complexity, dynamism, diversity etc.

2. Introduction

The subject of ecosystem or more precisely the business ecosystem is an area of interest for

budding entrepreneurs, academicians and the corporate players. Therefore it is imperative to

understand the concept of business ecosystem, its approach and how it is linked with the

upcoming and existing business enterprises. This objective has been met with the discussion of

the key characteristics of business ecosystem in the present module. Generally when we talk

about business, the idea of economic activity with money at its centre, flashes through our minds

but when we come out of the boundaries of pre conceived notion (notion that business is all about

money) regarding business, we realize that business is not about money only rather it is one of the

many objectives of business and these objectives are accomplished within the business

ecosystem. An entrepreneur needs to adapt strategies as per the business ecosystem and business

ecosystem adapts itself in tune with business environment.

James F. Moore developed a basic understanding of business ecosystem by comparing it with

biological ecosystem. In his words, “a company is viewed not as a member of a single industry

but as part of a business ecosystem that crosses a variety of industries.” (Moore, 1993)

Before discussing the key features of business ecosystem we must know that business

environment and business ecosystem are distinct terms that are interrelated and interwoven

together. Business environment does not readily include the interplay of various forces and

relationship that exist among organisms and relationship between environment and organisms

(individuals and organizations). Business ecosystem specifically represents the relationships and

interactions between various elements (immediate stakeholders and related entities) of it. It also

considers interaction between ecosystem and environment.

Let us discuss the following key characteristics (also shown in fig.1) of business ecosystem in

detail:

Complexity

Competition and cooperation coexistence

Symbiosis

Diversity

____________________________________________________________________________________________________

BUSINESS ECONOMICS



Innovation and openness

Dynamic and adaptive

Figure 1: Key characteristics of business ecosystem

Key characteristics

of business ecosystem

Complexity

Competition and cooperation

coexistence

Symbiosis

Diversity

Innovation and Openness

Dynamic and Adaptive

____________________________________________________________________________________________________

BUSINESS ECONOMICS



3. Complexity

Business organizations are complex entities themselves and when we talk about business

community or business ecosystem, they are even more complex. Business ecosystem is a whole

made up of many intricate parts. The system becomes intricate due to the uncertainty of outcome

(what will happen!) because of the unpredictable ways by which the organisms or actors within

the system interact.

One should not confuse complex system with complicated system. Let us distinguish between

simple, complicated and complex systems.

3.1 Simple System

Simple systems are easy to understand and control. They may involve primary issues like

understanding the terminology or usage of techniques as in case of following a recipe to make a

dish. At first, one needs to have knowledge of ingredients and techniques mentioned in the recipe

and thereafter the steps are to be followed. Having done this, there are bright chances of success

that is, making a good dish.

3.2 Complicated System

A complicated system is, of course, difficult to comprehend but is predictable. Complicated

systems have high degree of certainty. Protocols, rules, formulae are necessary Here repetition

provides experience which in turn increases the chances of success. For example, sending a

satellite in the space. With repetition of such missions, there are greater chances of success. To

take another example let us view, a car, as a system. It seems to be a complex system but actually

it is a complicated one. We can disassemble the car into various components or parts and easily

understand the working and the role of each and every part in the functioning of the system (i.e.

the car).

3.3 Complex System

Complex systems are difficult to understand as well as difficult to predict how the system will

respond to the changes in the system itself or in the outer surroundings of it. For example, the

human body is a very complex system consisting of various organs that work together. Out of

many organs of the body brain is the most complex and intricate organ. Another example of

complexity could be the complexity of raising a child. Every child is unique and responds

differently to different stimuli. Raising a child once, does not ensure that you would be able to

raise another child successfully using your experience with the first child. Therefore the outcome

is uncertain.

3.4 Business ecosystem as a complex system

Having understood the concepts of simple, complicated and complex systems we are in a position

to say that business ecosystems are complex systems that are made up of many parts that work

____________________________________________________________________________________________________

BUSINESS ECONOMICS



together. We cannot separate the parts from the whole. Business ecosystems are made up of

various parts such as customers, suppliers, competitors, investors, and related

businesses/industries. One part cannot be separated from another and the role, purpose of one

entity cannot be studied in isolation. Moreover it cannot be predicted with precision, how the

business ecosystem will respond to the environment of which it is a part. How the parts of the

system will interact with each other in case of a change in a part of the system cannot be

predicted with certainty.

According to Sargut and Mcgrath (2011), three properties determine the complexity of an

environment.

1. Multiplicity, i.e. the number of interacting elements.

2. Interdependence, i.e. how connected those elements are.

3. Diversity, i.e. heterogeneity of various elements.

The greater the multiplicity, interdependence, and diversity, greater the complexity.(Sargut and

Mcgrath, 2011)

If we weigh the business ecosystem on the basis of these properties we can see that business

ecosystem exhibits these 3 properties i.e. multiplicity of diverse elements or constituents that are

interwoven together and continually interact with each other. From an entrepreneur’s viewpoint,

it is imperative to look into the complexity of business ecosystem of which he/she is going to be a

part of before embarking upon the implementation of the business plan to increase the chances of

success and to make more practical and feasible strategies.

4. Competition and cooperation coexistence

In a business ecosystem competition and cooperation coexists. Let us discuss this key feature in

four parts.

4.1 Competition

Competition or rivalry is the term that we often use when we talk about business. In a business

ecosystem we see rivalry when one company or organization attempts to go ahead of its

competitors. An industry (at the micro level) or a business ecosystem (at macro level) can be seen

as a competitive landscape. Regardless of the eagerness to embark upon a startup, an entrepreneur

cannot be said to be well equipped to start a business unless he/she has analyzed the competitive

landscape which in turn will affect the profitability of proposed business.

The Porter’s Five Force Model can be used as a tool by an entrepreneur to judge that whether the

industry he wants to enter is a realistic place to enter or not by analyzing the five competitive

forces as proposed by Michael Porter.

____________________________________________________________________________________________________

BUSINESS ECONOMICS



4.2 Cooperation

To cooperate is to help one another in a common aim. For example, in the business

ecosystem encompassing the film industry, various constituents of the ecosystem such as

actors, producers, directors etc. are the facilitators for each other. There has to be a

symphony among all the players to achieve the goal. They must move together to make

the system function.

It is in this sense that competition and cooperation move together to achieve the goal.

4.3 Co evolution

In an ecosystem, competition and cooperation co-exist. According to Moore, co evolution

implies the complex interplay between competitive and cooperative business strategies.

Whether to adopt a cooperative or competitive strategy depends on the stage of business

life cycle of business ecosystem. In fact both competitive and cooperative strategies

coexist. In a business structure, businesses enter into partnerships, tapping each other’s

strength and bringing out the synergistic effects to compete against others. This is what

we call cooperation among differentiating entities.

Co-evolution also means how the change in one company affect the other companies. It

can also be seen as interdependence or interconnectedness where one company’s actions

or strategies affect the fate of other company. For instance, Maggi debacle had hit hard

the flour millers, who were major suppliers to Nestle India. Some millers closed their

operations while others scaled down their operations. The ban on Maggi had a

catastrophic effect on its ingredient supplier ecosystem. The systemic and cascading

failure on part of Nestle had proved to be a knee jerking crisis for its suppliers.

Similarly business ecosystem and business environment co-evolve. Changes in business

environment lead to changes in business ecosystem. And they both co evolve through the

interaction between the two.

4.4 Value sharing

Value sharing is very important for the growth of business ecosystem. It means sharing

one’s success with others. For example if one wants to enter a market represented by a

pie, then one would not like to capture a large share of the pie rather, would try to

increase the size of the pie so that his share is also increased as well as others’. This is

called value sharing. It is about rethinking productivity in the value chain. Of course

business ecosystem is a broader concept than value chain. In the context of business

ecosystem value sharing implies improving the productivity of others in the ecosystem

that leads to decrease in the cost of your business. Making investment in others such as

____________________________________________________________________________________________________

BUSINESS ECONOMICS



giving them training and access to technology, developing clusters are some of the

examples of value sharing. It is a strategy for developing the entire ecosystem be it the

company’s offerings, or the offerings of others in the system.

For instance, Silicon Valley which houses headquarters of many high technology

companies and thousands of startup companies, is a startup ecosystem. It is a hub of high

tech companies, technology focused institutions, support organizations, research

organizations. Let us talk about Silicon Valley University located in SanJose, California,

U.S. that offers various programs in computer engineering, computer science and

business administration. Silicon Valley University was founded by Jerry Shiao and the

money or investment came from Chinese entrepreneurs in the Silicon Valley area. This is

the example of value sharing i.e. entrepreneurs investing in educational institution that is

a part of its ecosystem.

Another instance of value sharing is the Silicon Valley Startup Weekend that is a global

network of enthusiastic leaders from various industries and entrepreneurs, where

entrepreneurs get a chance to share ideas, make their team, build product and create

networks needed to launch an enterprise. Entrepreneurs learn from the mentors who are

there to educate, inspire and empower entrepreneurs. The weekend organized in July 25-

27, 2014 was themed around space technologies and the event in Dec 13-15, 2013 was

mobile based. All startup weekend events consist of activities mentioned below:

1. Sharing startup idea.

2. Receive feedback from leaders and mentors on ideas presented.

3. Team formation.

4. Creation of business model.

5. Presenting the business model before judges (through presentations).

6. Getting feedback on presentations presented before the judges.

7. Judgement and awards.

5. Symbiosis

Symbiosis means any interdependent relationship between two persons, groups, etc.

“sym” means together and “bio” means life, therefore symbiosis means “living together”

It describes the close relationships and interactions between organisms in an ecosystem.

In a business ecosystem symbiosis refers to the connection, dependence and

interconnectedness of various parties or constituents of it. Symbiotic relationship can be

positive sum, zero sum and negative sum. Here we are concerned with positive sum

relationship. It is a relationship between entities which are better off, as a sum. Long term

positive sum relationships are called symbiotic relationship where everyone benefits from

synergy. Let us take a very simple example to understand symbiosis. For instance, a

person who wants to make a beautiful painting, cannot do so, by using say, a pencil only.

____________________________________________________________________________________________________

BUSINESS ECONOMICS



To do so one requires pencil, markers, colors, brushes, canvas etc. Now suppose the

painter has everything required for making a piece of art but uses only one color in the

painting. The result would be a ‘not so good’ or a ‘dull’ painting, no matter how efficient

the painter is. But if he uses many colors, the result would be a vibrant, beautiful painting

that would be a treat to watch.

To take instance from the biological ecosystem, we can see the symbiotic relationship

between bees and flowers. Both are interdependent. Flowers cannot reproduce without

bees and bees cannot make honey without flowers.

In the business world we come across many examples of symbiotic relationships between

entities like event management. An event manager can work well with other service

providers such as photographers, caterers, musicians, speakers, entertainers etc.

depending on the requirements of a particular event. Event management requires many

organizations to work as a team. Similarly there is a symbiotic relationship between

advertising companies and companies making the product. Advertisers help in

developing advertising campaign suited for the product and the overall marketing

strategy of the company.

All actors in the business ecosystem are connected to each other regardless of their

strength or competencies and share the success or failure of ecosystem as a whole. In a

nutshell, organisms in a system or a network enjoy shared fate. This interdependence has

wide ranging implications for a business. It affects strategies and operations of a firm. It

is impossible to even think of working in isolation. Doing business can be meaningful

only if the other constituents of ecosystem are considered because products exist in the

context of other products.

6. Diversity

Diversity means difference, variety, unlikeliness, multiformity, distinctiveness. Business

ecosystem represents internal as well as external diversity. By internal diversity we mean

differences or heterogeneity of components of business ecosystem itself, whereas external

diversity refers to the variety in the surroundings of the business ecosystem. External diversity

can be better understood as the heterogeneity in the business environment. As the organizations

try to juggle with the diversity within the organization and business ecosystem, they need to

adjust themselves to the external diversity i.e. business environment.

____________________________________________________________________________________________________

BUSINESS ECONOMICS



Figure 2: Levels of diversity

In fig.2 three levels of diversity have been shown. While deciding about a strategy, it is

imperative to analyze if it is in sync with the system or not considering the heterogeneity of

various constituents of ecosystem and their respective roles and objectives. Diversity and

complexities are interrelated. Greater the diversity, greater the degree of complexity of business

ecosystem because the heightened diversity of individuals and organizations is capable to lead to

vagueness and ambiguity in analyzing business ecosystem or any of its components.

6.1 Layers of business ecosystem

Baghbadorni and Harandi have developed a conceptual model for business ecosystem which

consists of four layers namely, Leadership, Contribution, Users and Environment (Baghbadorni

and Harandi, 2012). These are discussed in brief below.

6.1.1 Leaders

A leader is a central contributor without whom other members cannot function. A leader is a

company who provides the platform for others to develop themselves. A leader sets goals and

influences strategies and fate of other members such as Apple in the iPhone ecosystem.

Diversity in the business environment

Diversity in the business ecosystem

Diversity within

the

organization

____________________________________________________________________________________________________

BUSINESS ECONOMICS



6.1.2 Contributors

Contributors are various interdependent organizations and individuals who perform tasks in

accordance with the platform set forth by the leader. Diversity at this level is normally high.

6.1.3 Users

Individuals and organizations who buy the offerings of business ecosystem.

6.1.4 Environment

Environment represents the surroundings in which the business ecosystem evolves. Environment

can be classified as economic environment, socio- cultural environment, political environment,

natural environment, technological environment and legal environment. These layers depict the

position of organizations and individuals in the business ecosystem and their respective roles that

are diverse.

6.2 Diversity of roles

Lansiti and Levien, in their book The Keystone Advantage (2004) have developed the roles of

various entities in a business ecosystem. The different roles as proposed by them are Keystones,

Niche Players, Recyclers, and Commodity Provide.

6.3 Diversity in the business environment

Having understood the diversity of business ecosystem, it is necessary to link it with the diversity

in the business environment. Business ecosystem does not exist in isolation. It is indirectly related

to the business environment, economic trends, social changes, technological improvements,

political and legal changes are the most vital environmental factors for entrepreneurs to

understand. Different environmental factors affect business ecosystem differently. For example

industries that sell food products high in sugar such as soft drink industry, are suffering as there is

more emphasis on health and fitness. Therefore an awareness of environmental trends is of great

help for entrepreneurs to better understand the business ecosystem they wish and plan to enter so

that successful businesses are built.

6.4 Example of diversity in business ecosystem

____________________________________________________________________________________________________

BUSINESS ECONOMICS



Let us try to understand the diversity with the help of an example. Ecosystem encompassing the

film industry includes actors, producers, directors, cinematographers, writers, music composers,

costume designers, media and many others. These all critical entities are different from each other

due to the different roles they play in the ecosystem of Hollywood or Bollywood or any other

film industry. The diversity is the key feature of ecosystem and is essential for the survival and

growth of the system. Every player in the system has its own role, energy, characteristics,

contribution, benefits, limitations which are peculiar to the performance and growth of the

business ecosystem.

7. Innovation and openness

Innovation is the process of developing and implementing a new idea. Innovative

entrepreneurs become catalysts for change. Innovation and openness are correlated. New

ideas will pop up only if there is a culture/environment of trust and openness. Innovation

and openness are essential, be it a small scale startup such as Rahul Mehra’s, ‘Rahul Egg

Corner’, a small shop in Delhi that has been serving innovative variants of omelettes in

more than 350 different styles to the customers over the last 25 years, or the business

giants such as TATAs, Apple etc. Rahul Mehra (an entrepreneur 25 years ago)

understood the latent demand of omelettes. He knew that there was a gap (unfulfilled

demand) in the market and how eggitarians had very few options. Understanding the need

of the existing and potential customers can be seen as a fabric of the entire web of the

business ecosystem.

In the context of business ecosystem, entrepreneurs are faced with the challenge of

managing their startups keeping in view the vision, goals and structures laid down by the

ecosystem leader especially in case of innovation business ecosystems like Apple iPhone

ecosystem. At the same time entrepreneurs must ensure that their offerings are

sufficiently different from leader and other players in the system and work for unique

value proposition in such a way that helps in survival and growth of the new venture even

if the platform provided by the leader fails. This is possible with innovation and

openness, in two ways as suggested by Nambisan and Baron (2012)

1. Survival as a member of an ecosystem- It requires entrepreneur to identify

opportunities within the system i.e. exploring the internal opportunities and

expanding the existing offerings that are compatible with the platform provided

by the leader or dominant player. It is important for entrepreneur to pursue only

those opportunities that are feasible, compatible and advantageous for the new

venture.

2. Survival as a going concern i.e. independent of leader company which requires

entrepreneurs to recognize the external opportunities i.e. opportunities outside the

ecosystem. This strategy allows the company to expand its offerings independent

of the platform provided by the leader company.

____________________________________________________________________________________________________

BUSINESS ECONOMICS



8. Dynamic and Adaptive

Business ecosystem reflects dynamism. A dynamic system is characterized by constant change,

activity or progress. According to Moore every business ecosystem develops in four distinct

stages- birth, expansion, leadership, and self-renewal. (Moore, 1993)

Let us discuss them in brief to understand the dynamic nature of business ecosystem. Each stage

represents interplay of competition and cooperation.

8.1 Birth

First stage represents developing the offering or product best suited to consumers’ need. At this

stage the best strategy on part of an entrepreneur is to work with customers and suppliers and at

the same time protect the ideas from competitors who might try to copy the offering. On part of

the leader firm, it is beneficial to cooperate with the entrepreneur to develop the full package for

customers and to prevent them helping other ecosystems.

8.2 Expansion

Second stage represents reaching the masses by expanding scale and scope. It is required to be

best in the class to prevent competition.

8.3 Leadership

This is the third stage of life cycle of business ecosystem. At this stage the symbiotic relationship

between suppliers and customers play an important role. When suppliers and customers work

together, the ultimate offering is improved manifold. Leader and follower must maintain their

bargaining power to flourish in the ecosystem.

8.4 Self renewal

This stage is represented by threat of obsolescence when the new ecosystems emerge and

rise and a lot of innovations are happening around. Business in this stage can collapse due

to the above mentioned reason and due to the change in the business environment that

surrounds the business ecosystem such as changes in the government policy and

regulations, change in the consumer behavior etc. Here the critical issue is the

implementation of new ideas. Innovators should be encouraged, but prevented from

building separate ecosystem. Such a strategy implies a proactive approach guaranteeing

long term survival.

These four stages depict the dynamic and adaptive nature of ecosystem that are the key

characteristics of an ecosystem. Dynamism represents changes in the immediate and

remote environment, and adaptation or adaption refers adjustment and the ability to keep

____________________________________________________________________________________________________

BUSINESS ECONOMICS



up with the surroundings. Adaptation gives stability to the business ecosystem by

reducing the volatility present in the ecosystem that results from the changing

environment.

9. Summary

Business ecosystem is a part of business environment.

It affects and gets affected by business environment.

Business ecosystem refers to the direct interactions between immediate stakeholders

and related entities of business. If we name business environment as supra system

then business ecosystem is a sub-system because it is concerned with immediate

surroundings, whereas business environment involves everything around us.

Business ecosystem can be viewed as a symphony of various instruments when they

work together for mutual benefits but at times there is a conflict of interest among

members of business ecosystem.

As the saying goes, “Survival of the Fittest”, the one who adapts and works

incorporating the changes will survive.

Everyone has a distinct role in a business ecosystem depending upon their nature and

objective.

Business ecosystem is multi-dimensional.

The constituents of business ecosystem are interconnected and interdependent.

Innovation and openness are the keys to achieve long term growth.

Dynamic nature of ecosystem sets forth the opportunities and threats for the

entrepreneurs and existing companies, whereas adaptive nature of ecosystem helps in

making the best use of opportunities and facing the threats with suitable strategies.

Documents

Subject BUSINESS ECONOMICS Paper No and Title 3, Business