Wednesday, June 27, 2007

Eco mumbo jumbo

I’m coming to the conclusion that the “business ecosystem” metaphor is nonsense. That’s a pity, since I speculated in Tweaking the Web Metaphor that the food web might be a useful metaphor for the internet, conceived as a “module ecosystem.” [1] Bugs in the business ecosystem mapping would be even more unfortunate for people who’ve made strategic business decisions on the basis of this flawed metaphor.

“Business is an ecosystem” is an analogy, and like any argument from analogy it is valid to the extent that the essential similarities of the two concepts are greater than the essential differences. I will try to show (at too much length for a blog post, I know...) that the differences are much greater than the similarities.

This biological analogy is very popular. A Google search on "business ecosystem" yielded about 154,000 hits, "software ecosystem" gave 76,000 hits (Microsoft’s in 47,200 of them), and “computing ecosystem” 18,000 hits.

So where’s the problem?

Let me count the ways.

1. A biological ecosystem is analyzed in terms of species, each of which represents thousands or millions of organisms. Business ecosystems are described in terms of firms: just one of each. A food web of species summarizes billions of interactions among interactions; a business web of companies is simply the interaction among the firms studied.

2. Species are connected, primarily, by flows of energy and nutrients. A is eaten by B is eaten by C is eaten by D, etc. Energy is lost as heat at every step. In the business system, a link primarily represents company B buying something from company A. Goods flow from A to B, and money flows back. Both A and B gain, otherwise they wouldn’t’ve entered into the transaction. Therefore, the system isn’t lossy, as it is in a food web. In fact, gains from trade suggest that specialization leading to more interacting firms leads to more value. The links between companies could also stand for co-marketing ventures relationships, technology sharing and licensing agreements, collusion, cross shareholding, etc; however, these have the same non-zero sum characteristics as monetary exchange does.

3. One might sidestep these problems by claiming that species are mapped to firms, and individual animals are mapped to the products that a firm sells. That solves the multiplicity mismatch in #1, and, if one just considers the material content of products, the entropy problem in #2. However, two problems remain. First, the value of products is mostly in the knowledge they embody, not their matter; knowledge (aka value add) is created at every step, the inverse of what happens with the 2nd Law of Thermodynamics. Second, companies sell many diverse products. The fudge only works if a species is mapped to a product unit (in fact, to the part of a product unit that produces a single SKU), rather than to a firm.

4. Species change slowly, and their role in an ecosystem changes very slowly; on the other hand, companies can change their role in the blink of an eye through merger, acquisition or divestiture. Interactions between firms can be changed by contract, whereas that between species is not negotiable except perhaps over very long time scales by evolution of defensive strategies).

5. Biological systems are unstable; the driving force of ecological succession is catastrophe. [2] Businesses seek stability, and the biological metaphor is used as a source of techniques to increase resilience; see e.g. Iansiti and Levien’s claim that keystone species lead to increase stability in an ecosystem. [3], [4] If one seeks stability, biological systems are not a good place to look.

6. Biological systems don’t have goals, but human ones do. There are no regulatory systems external to ecosystems, but many, such as rule of law and anti-trust, in human markets. Natural processes don’t care about equity or justice, but societies do, and impose them on business systems. If ecosystems were a good model for business networks, there would be no need for anti-trust in markets.

7. End-consumers are not represented at all in the “business ecosystem” model. Von Hippel and others [5] who study collaborative innovation could be seen to be pointing to customers - or at least some of them - as a node in the business ecosystem, but the same problems about singularity/multiplicity noted above applies here.

8. Companies are exhorted to invest in their ecosystem if they want to keystone species. Keystone species don’t necessarily (or usually) represent a lot of biomass, so it’s not clear why a firm would want to be a keystone. (And of course, the metaphor leaves unstated whether biomass maps to total revenue, profitability, return on investment, or something else.) More generally: being a keystone species isn’t a matter of choice for the animal concerned; the keystone relationship arises from the interactions among species as a matter of course.

The business ecosystem metaphor in use

Iansiti and Levien are high profile proponents of business ecosystems. [3] [4] In The Keystone Advantage, they motivate the analogy between business networks and biological ecosystems by arguing that both are “formed by large, loosely connected networks of entities”, both “interact with each other in complex ways”, and that “[f]irms and species are therefore simultaneously influenced by their internal capabilities and by their complex interactions with the rest of the ecosystem.” They state that the key analogy they draw “is between the characteristic behavior of a species in an ecosystem and the operating strategy of a strategic business unit.” They declare the stakes when they continue: “To the extent that the comparison of business units to ecosystems [I presume they mean “to species”] is a valid one, it suggests that some of the lessons from biological networks can fruitfully be applied to business networks.”

To caricature their argument: Ecosystems are networks; business networks are networks; therefore business networks are ecosystems. Hmmm...

They were more circumspect in the papers that preceded the book, where they try to dodge the weakness of the analogy that underpins their argument by contending that they don’t mean it: “[W]e are not arguing here that industries are ecosystems or even that it makes sense to organize them as if they were, but that biological ecosystems serve both as a source of vivid and useful terminology as well as a providing some specific and powerful insights into the different roles played by firms” ([4], footnote 10). They want to have it both ways: get the rhetorical boost of a powerful biological metaphor, but avoid dealing with parts of the mapping that are inaccurate or misleading. As they noted in their book: If industries cannot be compared to ecosystems, then their insights cannot be validated by the analogy. However, they do attempt a mapping. For example, they attempt to answer the question “What makes a healthy business ecosystem?” by examining ecosystem phenomena like (1) hubs which are said to account for the fundamental robustness of nature’s webs, (2) robustness measured by survival rates in a given ecosystem, (3) productivity of an ecosystem analogized to total factor productivity analysis in economics, and (4) niche creation.

In most if not all cases, the appeal to ecosystem is very superficial; no substantive analogy is drawn. For example, Messerschmitt and Szyperski’s book [6], which made it into softcover, is entitled Software Ecosystem, but its remit seems to be simply to examine software “in the context of its users, its developers, its buyers and sellers, its operators, society and government, lawyers, and economics”; the word ecosystem doesn’t even appear in the index. (Disclaimer: I haven’t read the book.) The word ecosystem is simply meant to evoke a community of interdependent actors, with no reference beyond that to dynamics or behavior.

A more generic flaw with the business ecosystem metaphor is that most people are more familiar with businesses than with ecosystems. Successful metaphors usually explain complex or less-known things in terms of simpler, more familiar ones. Shall I compare thee to a Summer's day? The rhetorical appeal of the business ecosystem analogy must lie beyond its rather weak ability to make domesticate a strange idea.

Why do careful scholars resort to the ecosystem metaphor in spite of its obvious flaws? The image of nature is so powerful that it is a symbol too potent to pass up. Nature represents The Good (at least in our culture at this time), and therefore an appeal to a natural order is a compelling argument if one’s claims bear some resemblance to what’s happening in nature. However, if nothing else, this reminds me of Hegel’s historicist cop-out that what is real is rational, and what is rational is real. Just because nature is constructed in a certain way doesn’t mean that industries should be.

Perhaps my standards for metaphors are too high. To me, a conceptual metaphor is a mapping one set of ideas to another; one has to take the “bad” elements of the mapping with the “good”. If the good outweighs the bad, and if the metaphor produces insight and new ideas, then the analogy has value. Others just take the “good” and simply ignore the “bad”. For me, a metaphor is a take-it-all-or-leave-it set menu, not something to pick from a la carte.

Tentative conclusion

Does this all matter? Yes, but I still have to work out the details. For now I just claim that the weakness of the mapping between biological and business systems means that any argument that one might make about the goodness of “business ecosystems” in general and “keystone species” in particular is potentially misleading. It could delude firms into make unsound investments, e.g. in “building ecosystems,” and lead policy makers into dangerous judgments.


[1] The module ecosystem differs from the business ecosystem in that species, the nodes of the food web, are mapped to functional modules, rather than to individual companies. However, the glaring weaknesses of the business ecosystem metaphor undermine my confidence in the whole approach.

[2] John Harte, in “Business as a Living System: The Value of Industrial Ecology A Roundtable Discussion,” California Management Review (Spring 2001), argues that the ecological sustainability practices under the banner of “industrial ecology” are worthy and important, but that they do not mimic the way natural ecosystems work. His ideas are reflected in items #2, #5 and #6. He also notes that human processes are much more efficient in using waste heat than natural ones are – photosynthesis is only about a half a percent efficient, whereas power plants at 30% are sixty times more efficient. Note, however, that Industrial ecology, defined as the proposition that industrial systems should be seen as closed-loop ecosystems where wastes of one process become inputs for another process (wikipedia, ISIE) differs from the business ecosystem idea as I treat it here, i.e. that industry organization (regardless of ecological impact) can be understood as an ecosystem.

[3] Marco Iansiti and Roy Levien, “The New Operational Dynamics of Business Ecosystems: Implications for Policy, Operations and Technology Strategy,” Harvard Business School Working Paper 03-030 (2003)

[4] Marco Iansiti and Roy Levien, The Keystone Advantage: What the New Dynamics of Business Ecosystems Mean for Strategy, Innovation, and Sustainability, Harvard Business School Press, 2004

[5] Eric von Hippel, Democratizing Innovation (2005), and e.g. Charles Leadbeater

[6] David Messerschmitt and Clemens Szyperski, Software Ecosystem – Understanding an Indispensable Technology and Industry, MIT Press, 2003

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