Professor Peter Williamson; International Management at the Judge Business School; University of Cambridge

From Machine Controllers to Ecosystem Leaders

by
PROFESSOR PETER WILLIAMSON

Professor of International Management at Judge Business School, University of Cambridge

Peter Williamson, an Honorary Professor of International Management at Judge Business School, University of Cambridge, examines how one Asian giant of e-commerce adapted to volatility in the trickiest but most rewarding of ways: by rewiring its mindset

Looking out at the geopolitical landscape after the Cold War, the American military saw a VUCA — volatile, uncertain, complex and ambiguous — world. The old certainties of a known enemy with reasonably predictable strategies had disappeared. Today, the same could be said of the Asian business environment. The real threats are no longer coming from the usual competitors, but digital disruptors who are rewriting the rules. Now, risks are less about taking the wrong decision and failing, and more about the danger of standing still and watching your existing business model become obsolete as the world races by. The value of incumbency is plummeting as a new breed of much better informed and fickle customers demand new products and services delivered at ever-more competitive prices.

And on the economic and political front, growth rates remain unpredictable while increasing trade and investment cooperation across Asia is simultaneously accompanied by rising regional tensions. So what does all this mean for 21st century organisations and workforce readiness? In a nutshell, it means leaders and their employees need to stop thinking about their organisations like well-oiled machines and their all-powerful roles as controllers.

It means equipping people to thrive in a world where the organisation and its value chain is an ecosystem of partnerships that can be nudged, catalysed and shaped, but not commanded.

This is key to unlocking the agility and innovation necessary to thrive in a VUCA world.

The Alibaba Group is one example of a company where leaders and employees have successfully made this shift from machine controllers to ecosystem leaders. It might seem strange that Alibaba, a company with innovation and entrepreneurship in its DNA, had to transform its mindset and re-equip its workforce in this way. Yet the fact that it knew it needed to do so, and that the shift proved difficult and time-consuming but ultimately successful, is a lesson for all of us.

Alibaba’s journey

Alibaba Group was founded in 1999 by 18 friends, led by Ma Yun (also known as Jack Ma). Their big idea: the website Alibaba.com, a business to-business (B2B) portal to connect Chinese manufacturers with overseas buyers. Today as the world’s largest e-commerce company with a market capitalisation of over US$240 billion, Alibaba describes its role as providing “technology and services to enable consumers, merchants, and other participants to conduct commerce in our ecosystem; empower[ing] our customers with the fundamental infrastructure for commerce and data technology, so that they can build businesses and create value that can be shared among our ecosystem participants; and to strive to expand our products and services to become central to the everyday lives of our customers.”

Looking back, Alibaba’s senior management discerned three broad stages in the development of its business model towards an ecosystem. The first stage began after it nearly ran out of cash in 2001, having relied on offering free services to grow its user base. Alibaba had shifted from a pure platform to become a service provider charging membership fees to users. It had already recognised that reaping economies of scale was critical to spread fixed costs and hence drive down unit costs.

But it would never be able to achieve a massive scale in e-business if it acted as principal (a buyer or seller in its own right). To gain scale would require harnessing the power of a huge number of partners.

The launch of Taobao in 2003 heralded a second stage in developing an ecosystem: Taobao was conceived as a marketplace that encouraged others to serve customers. Alibaba would concentrate on providing the platform through which e-commerce could flow and on which partners could differentiate themselves.

This lead to a third stage in the emergence of ecosystem thinking at Alibaba: that it needed to become an “ecosystem enabler” — trying to back off and focus on becoming a provider of e-commerce infrastructure services for all participants. As Alibaba Group moved to further strengthen its existing marketplaces such as Alibaba.com, 1688.com, Taobao and TMall and to move into new areas including logistics, O2O (online to offline), financial services, and the rural economy, it learned how best to catalyse different ecosystems and engage a wide variety of partners.

Along this journey, Alibaba’s leadership and employees have had to change their mindsets and skills in four fundamental ways.

From Controlling to Cooperating

Most managers feel more comfortable when they control the value chain of activities behind any product inhouse, rather than relying on partners. Employees often ask, “Can’t we do that better and more reliably if we do it ourselves?” The first lesson Alibaba’s people had to learn in order to access a broader set of capabilities and meet customers’ rising expectations was to make space for partners.

Put simply, Alibaba’s people had to learn to stop doing things. As Ming Zeng, the Group Strategy Officer put it: “We realised our ability was so limited compared to both the potential of the market and the task facing us.” As Alibaba developed, it “learned a lot of painful lessons by trying to over-control and becoming the bottleneck” says Zeng. One of his strategy team adds: “Someone in Alibaba will, perfectly reasonably, say: ‘We see a new application (app) is becoming popular, why don’t we build an app to do this?’ But a good ecosystem leader needs to say ‘no’; we should instead encourage partners to build this type of app so that we draw in the capabilities of partners and drive improvement and learning.”

This collaborative, cooperative mindset gives the company more allies, opportunities and answers, they add. “Today, whenever Alibaba comes across a new opportunity or faces a problem, its first question is: who can bring us the capabilities and experience to deal with it?”

From Contracting to Attracting

Like most companies looking to establish a new partnership, Alibaba’s employees’ initial reaction was to search for the right partners and then write a contract for what the partner needed to deliver. Yet in many cases the partners it approached turned out to be wrong. Alibaba found, for example, that the best initial partners usually weren’t industry leaders — they were too wedded to their traditional models and thus in some ways complacent.

Instead Alibaba needed to engage new, up-and-coming firms who believed in the future of e-business and could see the upside of the ecosystem. The best way to do this was to create a “honeypot” of high-quality platform features that would attract the right partners (as Alibaba’s platforms were to become) and to make it easy for partners to interact with the company by sharing information and tools.

The old “contracting” mindset also turned out to be ineffective because it imposed a straightjacket of contractual obligations in the face of uncertainty. Essentially, it closed down the creativity and trialand-error approach that was key to converging on the right solution. “Giving more room to everyone encourages more experimentation and flexibility, resulting in more co-learning and innovation in the ecosystem” observes Zeng.

From Individual Inspiration to Learning Together

As the lead firm in an ever-evolving, unpredictable ecosystem, says Ming Zeng, “every problem comes at you”. But he points out this burden has an upside: “You are also sitting at the hub of a system that generates lots of new knowledge — so you can continuously learn from experience, problem solving, ‘learning by doing’, and contact with the front line.” To realise this potential, employees need to move beyond innovation based on individual inspiration and the myth of the isolated inventor.

Instead, they need to learn by drawing on customer feedback and proactively “watch what is happening and learn from (and with) partners and other participants in the ecosystem”. Harnessing the innovation potential of business ecosystems requires a workforce that is focused on learning together with all partners, as well as with corporate leadership that emphasises collaboration.

From Carving up the Pie, to Expanding the Pie

Key to the competitiveness of flexible, innovative business ecosystems in a VUCA world are network effects. These effects are virtuous cycles, meaning the larger and more diverse your network of partners becomes, the faster it will generate new knowledge. What’s more, its unit costs will be lower and it will be more attractive to new participants. The route to success for both you and your partners, therefore, is to focus on increasing the size of the overall pie.

Yet many employees are still focused on how the pie gets carved up, locked in the zero-sum mentality that “if you gain, I lose”. They need to forget how much money partners are making and simply ask the question: “If we do this, will we be better off?” In the long run it is being a vital part of a healthy partner ecosystem, one that continually innovates and adapts, that will ensure your company’s sustained success.

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