Introduction: The Age of Ecosystems: Taking Stock of a Transformation in Progress

The future has never seemed more exciting or more confusing. When we look outside today, we are confronted with a multitude of exhilarating, sometimes vexing, and vitally important trends unfolding in the realms of culture, business, and technology. For the uninitiated, it all might seem overwhelming: cryptocurrencies, artificial intelligence, Web 3.0, quantum computing, automated cars, the internet of things, smart homes, and biomedical miracles. The list goes on and on. What it adds up to is a kaleidoscope of overlapping, cataclysmic changes all happening at once, each of which carries the potential to transform the world-and each of which is probably complex enough in its own right to spend a whole book contemplating.

However, if we take a deeper look-if we cut through the noise-we can see something else. On closer examination, almost all of these dizzying developments unfolding in the world today are related to another phenomenon altogether. The phenomenon is this: the borders between the traditional sectors of our economy are fading away. We're used to thinking about the economy in terms of sectors like construction, real estate, information technology, automotive manufacturing, energy, financial services, and health care-to name just a few. We've always understood these sectors to be discrete categories, and each has traditionally operated in its own sphere. But now, the economy is changing on a fundamental level. And as the borders between sectors blur, new organizing structures are forming in their place. If this seems like an abstraction to you, consider this: many businesses are already starting to adapt. This is more than just a theory-it's actually happening.

The transition away from sectors is such a fundamental change, it can be difficult to wrap our minds around. We are facing one of the biggest market shifts in economic history. For our whole lives, we've understood our economy in terms of sectors. As we'll see in Chapter 1, the concept has been around for thousands of years. It seemed like the lines dividing sectors were carved into the very bedrock of the marketplace-they were considered not only real and tangible, but inescapable. Now, that is changing. Sectors are becoming a less and less compelling way of describing the economy because, increasingly, the borders between them are dissolving. Why is this? We'll spend a significant part of this book exploring this question, but for now, it will have to suffice to say that in the early twenty-first century, we hit a turning point that made it possible for businesses to ignore these borders and do something new-in the true interest of delivering value for all.

What does this mean? In short, for many businesses, everything is changing: their customers, their competitors, their business models. They will have to reinvent themselves to operate in an entirely different environment. As the borders between sectors fade, businesses are organizing into new, more dynamic configurations, centered not on the way things have always been done, but on people's needs. These new formations are what we call ecosystems: communities of interconnected digital and physical businesses that work across traditional sector boundaries to provide customers with everything they could want related to a particular need or set of needs, whether it's housing, health, or entertainment. Businesses form ecosystems by collaborating with one another-by sharing assets, information, and resources-and ultimately creating value beyond what would have been possible for each of them to achieve individually. These business are doing more than just finding new ways to slice the pie-by working together, and working across industry boundaries, they are creating value propositions that actually expand the pie, that accomplish more collectively than each can individually. Because each business that takes part in an ecosystem contributes to this collective process of value creation, each also shares in the upside that is generated. The result is a dynamic, creative, powerful new kind of business formation that stands to transform the economy as we know it (Figure I.1).

FIGURE I.1 Definition of an ecosystem

Why do we use the word ecosystem to describe this sort of community? When we're talking about the natural world, we often use the word to mean a community of biological organisms that are interdependent, or which together form a web of symbiotic relationships that meet the particular needs of each organism. In a forest ecosystem, for example, we can imagine how this web would look: bears eat the deer, while the deer eat plants that are fertilized by the bears' droppings, as well as decomposed leaves and other vegetation. The vegetation is converted into soil by worms, which are eaten by birds, which also eat small rodents, which subsist on tree nuts, which are sustained by the soil and the decomposing vegetation. Each organism is dependent on the web that connects them all. Similarly, businesses can come together to create webs of mutually beneficial relationships centered on meeting customers' needs. The analogy is far from perfect-of course, there are many differences between the workings of business ecosystems and natural ecosystems-but the core concept is similar enough to be instructive.

Chances are you've heard the term ecosystem thrown around quite a bit in a business context. The concept is widely recognized. Somewhat counterintuitively, this poses a bit of a problem. Because it is so frequently discussed and so commonly cited, there is a lack of clarity about its real meaning-and in many cases, people use the term to mean something much more limited and less meaningful than what we have in mind. There are CEOs today who will look at their traditional vendor and client relationships and fool themselves into thinking that this constitutes an ecosystem. When we use the term in this book, we use it to refer to much deeper connections between businesses-alliances that are about collectively creating and sharing value in the best interests of the customer.

To better understand how and why businesses form these ecosystems, consider the supermarket. When we speak of ecosystems today, our thoughts tend toward high-tech businesses. But these companies have non-digital precursors from decades before the rise of the internet that illustrate the same core concept. Before the rise of supermarkets, families purchased their food from a wide range of different specialized vendors. Milk was delivered by a milkman; fish came from a fishmonger; meat from a butcher; produce from a greengrocer; rice, beans, and other staples from a dry goods store. The innovation of the supermarket was to combine each of these previously separate functions into a single, comprehensive, one-stop source for all grocery needs. Rather than being organized by supply chain, as the older, specialty shops were, the supermarket was organized according to customer needs. Customers did not want to visit five to ten different vendors in order to do their shopping for the week-they did so because it was the only way they had ever known, and it was the only way to get the items they needed. It was the way food distribution had developed over years and years. What people truly wanted was simplicity-a one-stop shopping experience. As soon as the supermarket was introduced, it quickly became the dominant form.1

Today, with a big push from new technological advances, businesses are increasingly coming together to form comprehensive ecosystems that similarly cater to multiple needs simultaneously-essentially replicating the supermarket effect on a much larger scale. These pioneers are using digital platforms (both hardware and software) to spur innovation by organizing businesses into new collaborative formations like app stores and digital marketplaces with innovative economic models. Think of a company like Rakuten, in Japan, which offers loans, credit cards, fintech, travel booking, instant messaging, and food delivery. Or a company like Amazon in the United States, which offers music, video, gaming, cloud computing, supermarkets, and online retail. Or still others, like Apple, Tencent, Alibaba, or Google. Here's a challenge: try to identify a single sector that each of these companies belongs to.

It is an impossible task. The reason is that these are ecosystem businesses-and as such, they span multiple sectors. In fact, they are organized in a way that completely disregards the traditional borders between sectors. Of course, another kind of sector-spanning company has been commonplace for ages: the conglomerate. You might wonder how ecosystem companies differ from conglomerates. We'll tackle this question more fully in Chapter 1, but for now, the short answer is that ecosystems are centered on customer needs-whereas conglomerates are not necessarily. As we'll see, there are different ways of being an ecosystem player. Some involve collaborating with select partners to build your business across sector borders in order to meet customer needs in a particular category or set of categories. Others involve working closely with many partners or facilitating a large platform on which other players can come together. The core concept, though, is that players are crossing sector borders in the service of meeting a set of customer needs holistically.

To illustrate how ecosystems work,...