Research gaps - Ecosystem architecture design: endogenous and exogenous structural properties

1 INTRODUCTION

1.2 Research gaps

Inter‐organizational collaboration is evolving from control‐based, hierarchical and contractual linkages to more novel arrangements, such as ecosystems. To that end, different streams of literature have risen to address the design of collaboration between organizations. For example, the recently introduced meta‐organization design stream states that coalitions of formally independent firms now collaborate multilaterally as if one meta‐organization (Fjeldstad et al., 2012; Gulati et al., 2012), inducing cooperation through mutual dependence, sometimes even in the absence of binding contracts. Building on organization design literature, the extension in the unit of analysis from intra‐firm design to inter‐firm design relies of the approach of vertical, cross‐level theory borrowing, a tradition widely utilized in the studies on inter‐organizational relationships. In general, the theoretical and empirical examination of managing inter‐organizational arrangements has comprised the dyadic level or the so‐called relational view (Dyer & Singh, 1998; Teece, 1986), network or portfolio level (Lavie, 2007; Ozcan & Eisenhardt, 2009) and most recently the

ecosystem level (Adner & Kapoor, 2010; Iansiti & Levien, 2004) as the unit of analysis. The same shift in the unit of analysis is taking place in the examination of the design of inter‐organizational structures. Whereas the organization design literature at the firm level is quite explicit in explaining the properties and design principles of organizational structure and architecture (Galbraith, 1973), the internal fit between strategy and structure, and the external fit between structure and environment (Donaldson, 2001), the research on the new level of analysis is still in its infancy. Past research has indicated some properties of inter‐organizational design (Fjeldstad et al., 2012; Gulati et al., 2012; Jacobides et al., 2006), but no coherent framework of such design properties exists.

Further, it is unclear how such properties are interrelated and how they affect the desired outcomes (e.g., system‐level goals or value creation) of the ecosystems. This represents the first identified gap.

Previous research on the network or ecosystem level suggests that leading hub firms are often needed in order to orchestrate broad networks of complementary actors (e.g., Belussi & Arcangeli, 1998; Dhanaraj & Parkhe, 2006; Ritala et al., 2009). However, in sociologically rooted inter‐

organizational research, the larger socioeconomic context and the structure of the network have been emphasized over the actions (such as orchestration activities) of a particular actor. Similarly, in the industrial economic literature, the interactions, transactions or building blocks are emphasized. The deficit of such a focus is the neglect of firm‐level strategies, processes, and behaviours of individual actors. Not to lose sight of the forest for the trees (Jacobides & Hitt, 2005) or vice versa (Salancik, 1995), both the trees (the actors) and the forest (the structure of the network) should be paid equal attention. The previously unexplored actor‐structure duality (Dhanaraj & Parkhe, 2006) represents the second identified gap.

The third identified gap arises from the unequal theoretical and empirical examinations of the value creation and appropriation phenomena. For example, the boundary conception related to ecosystem level value creation and appropriation emphasizes value appropriation more due to the path dependency of this particular theorizing; the boundary conception builds upon transaction cost economics and evolutionary economics, as firm level theories traditionally have the tendency to emphasize profiting from innovation more (i.e., Teece, 1986). Another point of inequality rises from the strategic actions or moves which firms can employ to increase their individual share of the collectively created value. Again, burdened by history, the boundary conception states that in order to increase value appropriation and architectural advantage (proportion of the value created), the strategy and strategic action to emphasize is the modification of the boundaries of the firm (vertical integration or disintegration). Orchestration conception goes further in describing different processes through which the hub firm can influence the ecosystem’s innovation output (Dhanaraj &

Parkhe, 2006).

In line with the formulated research question, the purpose of this study from the theory building point of view is to produce a clear base on which scholarly work on ecosystem architecture design can ascend coherently. As a reflection on scholarly specialization, there is a tendency, similar to many other management fields, to create isolated silos of knowledge (Pfeffer, 1993) in ecosystem research as well. By utilizing a multiple‐lens perspective to organize quite discrepant references and to create intersecting areas between three acknowledged and developed research programs, this dissertation combines various theoretical conceptions, such as the boundary, design and orchestration conception, to develop a more comprehensive ecosystem architecture perspective.

16 1.3 Research objectives and research questions

The main objective of the dissertation is to increase the understanding of ecosystem architecture design and to examine it both from exogenous and endogenous perspectives. The dissertation firstly looks at the architecture of ecosystems, and the structural properties of the architecture.

Secondly, it discusses the implications of such structural properties on value creation and appropriation. Thirdly, the scholarly inquiry addresses the processes for designing and managing the architecture. Given the objective of the study, the main research question is formulated as follows:

How does the design of the ecosystem architecture affect the value creation and appropriation within a particular ecosystem?

To structure the research effort and to facilitate the analysis of the different aspects that are relevant to the main research, two separate sub‐questions are formulated. The first one concerns the examination of variation in different ecosystem architectures and the structural properties as the dimensions according to which variation takes place. Hence the first sub‐question is:

Sub‐question 1: What are the structural properties of ecosystem architecture?

The second sub‐question addresses the often neglected actor‐structure duality and is formulated as follows:

Sub‐question 2: How are ecosystem architectures designed and managed?

1.4 Key concepts and boundary conditions

This chapter clarifies and defines the central constructs of the dissertation, and elaborates their scope conditions and interrelations. The central constructs of the dissertation are ecosystem, ecosystem architecture, value creation, and value appropriation. Borrowed from biology, the term ecosystem appears frequently both in the jargon used by business practitioners and academics.

Morton (2012) explains that in 1935, opposing the dominant view of holism, British ecologist Arthur Tansley coined the term ecosystem. Tansley defined that ecosystems are like the human mind; dynamic and shaped by circumstances. In biology, an ecosystem is not composed only of plants and animals, but also of their mineral substrates and the energy they use. Unlike the communities of holism, which have a preordained endpoint, ecosystems are the product of the forces and flows that made them. While there are typical ecosystems, there can also be novel ones;

wherever living things come together there has to be an ecosystem of some sort, whether nature had envisaged it or not.

The ecosystem construct was introduced to organization and management studies by Moore (1993). With the term, he wanted to draw attention to the following issues. Firstly, he suggests that a firm is not only a member of a single industry but a part of a business ecosystem which might cross a variety of industries. Secondly, firms do not exist in a vacuum; they attract resources from various sources and they are subjected to changes in the external environment. Lastly, they co‐

evolve together with their partners and confront environmental changes together.

Building upon Moore (1993), industrial economics, organization design and sociologically rooted inter‐organizational research have tried to examine and understand systems where organizations come together. In terms of theoretical proliferation, it is not merely raining, it is starting to pour.

Different streams of literature emphasize different areas and so far, no stream has been able to offer a holistic overview of the architecture of an ecosystem and how to design and manage such architecture. As self‐contained theoretical islands seldom lead to integrated streams of empirical research that provide a source of continuity in the discipline, this dissertation offers an effort to produce an integrative examination of ecosystem architecture.

An ecosystem comprises interdependent, interconnected and interacting coevolving actors;

customers, agents and channels, sellers of complementary products and services, suppliers, and the firm itself (Moore, 1996; Gossain & Kandiah, 1998). The construct is based on the ecological metaphor that firms participate in a larger economic community, an ecosystem, where each actor occupies a contributing role and forms symbiotic relationships with other actors (Moore, 1993;

Moore, 1996; Iansiti & Levien, 2004; Basole & Karla, 2011). Definitions of ecosystems, such as the one of an innovation ecosystem tend to emphasize the interdependence: “a given innovation often does not stand alone; rather it depends on accompanying changes in the firm’s environment for its own success. These external changes which require innovation on the part of other actors embed the focal firm within an ecosystem of interdependent innovations.” (Adner & Kapoor, 2010, p. 306) Besides being called as innovation ecosystems, these communities are also more generically labelled business ecosystems.

In a related research stream, Gulati et al. (2012, p. 573) offer a strikingly similar definition of their

“competing” construct, meta‐organization, by stating that “meta‐organizations resemble biological super‐organisms, a multitude of individual organism that coexists, collaborate, and coevolve via a complex set of symbiotic and reciprocal relationships”. They further specify that meta‐

organizations comprise networks of firms or individuals not bound by authority based on employment relationships, but characterized by a system‐level goal (Gulati et al., 2012). A similar approach is taken by Fljedstad et al. (2012, p. 737) in their definition of the architecture of inter‐

organizational collaboration as the “use of flexible assembly of firms with specialized capabilities to achieve economies of scale and experience”.

The industry sector construct offers an alternative viewpoint in order to define multi‐actor collaboration. Malerba (2002) defines an industry sector as a network of firms in different sub‐

industries that supply complementary goods for making a set of system products. The systemic nature of a product refers to for example components of a technological system valued as complements by the customer (Ethiraj & Puranam, 2004). In a sector, various types of relationships, such as alliances, joint ventures, and competition may connect the firms. An industry sector is a system that emerges from the participation and interactions of self‐organized firms, coordinated by technical and economic forces. Thus it is not engineered by anyone (i.e., a hub).

Further, literature on two‐sided and multi‐sided markets (Evans & Schmalensee, 2007) identifies the structure of collaboration in terms of participants (intermediary or platform and two or more sides of the market). This stream of literature has however been focusing mostly on the nature and characteristics of such structure. Issues such as what are the functions performed by the intermediary or platform are left aside and the literature on two‐sided and multi‐sided markets is not full‐fledged enough in terms of defining who does what and who gets what in terms of value creation and appropriation.

Given these definitions, ecosystems can be differentiated from alliances, alliance portfolios, networks, clusters and other aggregates of co‐operating firms in several dimensions. Firstly, as traditional inter‐organizational forms, such as strategic alliances, are usually based on closed membership, ecosystems can include open memberships. Secondly, although interdependence and

reciprocity is a shared characteristic between an ecosystem and other aggregates of co‐operating firms, the notion of coevolution is unique to the ecosystem. Thirdly, the dissertation subscribes to the view that ecosystem architecture can both emergent and engineered. Whereas the definition of the industry sector (Malerba, 2002) states that no actor engineers the architecture, that it emerges based on multi‐actor interaction, the dissertation discards this view by turning to the emerging literature on agency and strategic action stating that inter‐organization collaboration can be given birth to (i.e., Ozcan & Eisenhardt, 2009). Further, this offers a point of departure from the deterministic view of inter‐organizational collaboration.

Architecture is defined as “the synthesis of form in response to function” (Alexander, 1964;

Fjeldstad et al., 2012); it is the configuration of a system taking into account how its components relate, work, and integrate to and with each other and the environment. Thus, structure should be consistent with purpose, meaning that form must follow function¹ or vice versa (Fjeldstad et al., 2012). The concept of architecture has been used in many levels including products (Sanchez &

Mahoney, 2003), organizations (Ethiraj & Levinthal, 2004), and industries (Jacobides, 2005;

Jacobides et al., 2006). In addition, previous research includes multi‐level examination of architecture and exploration of how the architecture of one system may affect the architecture of other systems, namely how product architecture may influence organization architecture or vice versa. This was labelled the mirroring hypothesis (Langlois & Robertson, 1992; Sanchez &

Mahoney, 1996; Baldwin & Clark, 1997, 2000; Schilling, 2000; Hoetker 2006; Fixson & Park, 2008;

Tiwana, 2008a, 2008b; Colfer & Baldwin, 2010).

Regarding the definition of ecosystem architecture, this dissertation builds upon the literature on industry architecture (Miller, 2001; Jacobides et al., 2006). Industry architecture represents “a structure of co‐specialized² agents and assets” (Jacobides et al., 2006, p. 1202) and as a template, it describes the distribution of labour and assets among a set of co‐specialized firms across a set of industries (Jacobides et al., 2006). Pisano and Teece (2007) further define industry architecture as the characterization of the nature and degree of specialization of industry players (or organizational boundaries and the structure of relationships between those players).

Synonymously to industry architecture, sector structure (Luo, 2010) and value creation architecture (Dietl et al., 2009) have been used to describe the division of labour between different actors. Luo (2010), adopting Malerba’s (2002) definition of the industry sector, defines sector structure as the transactional network of firms among the complementary industries in a sector and as the patterns of transactional relationships between all the firms in a sector comprising several levels of industries. By introducing value creation architecture, Dietl et al. (2009, p. 26) define it as the “structure and relationships of all the value‐adding activities that are carried out by various actors and companies to bring a particular product or service to market”.

Previous research has noted that ecosystem architectures are not static. Ecosystem architectures are shaped by legal and regulatory authority and also by industry participants who stand to benefit from a particular architecture. These stakeholders usually fight the introduction of new alternatives through legislative or regulatory means (Jacobides et al., 2006; Ferraro & Gurses, 2009). However, this study does not focus on these types of macro‐level exogenous factors affecting

1 Originally unidirectional causality was announced, for example in structural contingency theory, in terms of form follows function or structure follows strategy. This view encountered considerable criticism (Drazin & Van de Ven, 1985;

Peteraf & Reed, 2007).

2 Jacobides et al. (2006) use the term co‐specialization as their framework builds upon Teece’s (1986) framework for co‐

specialization and profiting from innovation. For a more detailed definition of industry architecture, see Jacobides et al.

(2006), p. 1203.

ecosystem architecture. Thus, industry evolution or the industry life cycle model is out of the scope of the theoretical examination of the dissertation and the definition of the ecosystem architecture construct. In contrast, the study does contribute to those literatures as depicted in the theoretical implications section.

As an ecosystem is defined to comprise several different types of interacting organizations, previous research has come up with a multitude of terms to address the positions which organizations can hold in an ecosystem. In a loosely‐coupled inter‐organizational system characterized by high‐centrality and low‐density (Dhanaraj & Parkhe, 2006) such as in an ecosystem one can usually distinguish between at least entities occupying more central positions and those occupying peripheral positions. The vocabulary referring to the entity occupying a more central position includes hub firm (Jarillo, 1988), key actor (Knoke, 1994), triggering entities (Doz et al., 2000), strategic centres (Lorenzoni & Baden‐Fuller, 1995), flagship firms (Rugman & D’Cruz, 2000), network orchestrator (Hacki & Lighton, 2001), keystone firm (Iansiti & Levien, 2004), platform leader (Gawer & Cusumano, 2002; Gawer & Cusumano, 2008), relationship‐centred organization (Gulati & Kletter, 1995), and ecosystem architect (Gulati et al., 2012). Given the scope of this study and taking rhetorical consistency into account, it would be anticipated from the dissertation to adopt the term ecosystem architect to refer to the actor in the central position in a given architecture. However, as architect has a strong connotation only to structure and design, the dissertation adopts the more connotation‐free, neutral and frequently used term of ecosystem hub³.

The notion of architectural advantage, a favourable position in certain ecosystem architecture, builds upon Teece’s (1986) co‐specialization framework and incorporates cooperative game theory (Brandenburger & Stuart, 1996; Brandenburger & Stuart, 2004), resource‐based analysis (Lippman and Rumelt, 2003; Winter, 1995), industry evolution (Langlois and Robertson, 1995; Jacobides and Winter, 2005), and theoretical economics (Deardorff and Stern, 1994). Jacobides et al. (2006, p.

1200) define that such “architectural advantage comes about when firms can enhance both complementarity and mobility in parts of the value chain where they are not active”. Thus architectural advantage can lead to high levels of value appropriation without the need to engage in vertical integration (Pisano and Teece, 2007). This study builds upon this notion, but instead of discussing the implications of the ecosystem architecture to architectural advantage, this study discusses the implications of ecosystem architecture for value creation and capture in more general.

Value creation and appropriation are not focal concepts only for innovation networks, but also for the whole field of strategy and management (see e.g., Pitelis, 2009), and therefore multiple definitions of the concepts exist depending on the chosen perspective. In general, value creation refers to mechanisms related to innovating, producing, and delivering products or services to markets, and value appropriation refers to mechanisms focused on extracting profits from the marketplace (Lepak et al., 2007). More specifically in the context of innovation networks or ecosystems (Adner & Kapoor, 2010), value creation has been portrayed as a collective activity among the collaborating actors, aiming to create value for the customer with new or improved offerings (Ritala & Hurmelinna‐Laukkanen, 2009). From the economics perspective, value is

3 Nambisan and Sawhney (2011) make a distinction between a hub firm as an innovation integrator and as a platform leader. According to their definition, a hub firm as an innovation integrator defines the basic architecture of the core innovation, invites network members to provide components to this core innovation, integrates the different components and then markets it. A hub firm as a platform leader also defines basic innovation architecture, and invites network members to build their own complementary innovation. With complementary innovations, the reach and range of basic innovation architecture can be extended and/or enhanced.

defined as the eventual willingness‐to‐pay for a certain product from the viewpoint of the end customer (Brandenburger & Stuart, 1996; see also Bowman & Ambrosini, 2000). Thus, in the end customers define what is economically valuable or not, and the value creation efforts – in both the organization and the ecosystem level – are eventually directed towards this goal. Value appropriation, on the other hand, has been defined as the individual share that an individual actor is able to capture from the value created in innovation activities (Ritala & Hurmelinna‐Laukkanen, 2009). Both of these processes are fundamental parts of the logic of innovation networks and business ecosystems – without value creation, there is nothing to appropriate and without appropriable value in sight, there are no incentives to create the value in the first place. Aligned with this thinking, it has been suggested that in the inter‐organizational level, value creation processes are often collective by nature, while value appropriation processes are fundamentally organizational‐level processes (Adegbesan & Higgins, 2010; Ritala & Hurmelinna‐Laukkanen, 2009).

Furthermore, the outcomes of these processes are defined through the lenses of value creation potential and value appropriation potential. The potential is emphasized, rather than the realized value created or the realized value appropriated, since the identified structural properties cannot fully explain whether something is eventually realized or not. However, they provide a framework for the potential to either create value or to appropriate value. Realized value creation or

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