Organizing Beyond Boundaries. An essay that is included in the book “Ecosystems Inc. — Understanding, harnessing and developing organizational ecosystems”.
This article is part of “Ecosystems Inc. — Understanding, harnessing and developing organizational ecosystems” published by Thinkers 50, ECSI Consulting and Haier Model Institute. Download the ebook here. Among the contributors Julian Birkinshaw, Rita Gunther McGrath, Bill Fischer and many great management thinkers of our time.
The version you’ll find in the book is slightly edited.
Special thanks to Stina Heikkilä for the editorial review and strong contributions to the text.
As we enter the third decade of the twenty-first century, organizations face stunning challenges. New risk factors are arising and unpredictability in our societies and economy is en route to becoming a constant background: as the Word Economic Forum anticipated in its Global Risk Report 2020, “turbulence is the new normal”.
The start of 2020, with the covid-19 pandemic leaving shaky grounds and hard to predict long term consequences, adds up on a world already threatened by the effects of climate change, by rising geopolitical instability and more common social unrest — the facts of the end of 2019 speaking clearly — and a somewhat hard to control technological change that offers both exciting opportunities and radical challenges.
Business ecosystems — with their capacity to quickly reorganize in networked fashion, and to leverage on emerging niche speciality — offer new organizational perspectives to modern organizing and — at the same time — are truly changing the nature of the corporate organization to an extent that is hard to size properly. At first, it seemed possible for traditional organizations to just “adopt” ecosystem mobilization strategies mediated by a platform intended as a technological artifact. This seemed a good way to create new business models able to complement drying up traditional ones that quickly became too sclerotic and largely unadaptable to a world in constant flux. It is increasingly clear now that no, it’s not just a business model matter and that the profound need to move away from the linearity of twentieth-century business lines and value chains won’t stop there and will require a structural reinvention of the theory of the firm, and — to some extent — of its raison d’être.
Joseph Pine once explained in a special HBR report how “customer experience is a fundamental dimension of how a company competes”, touting a direct reinvention of the organizational structures — beyond “customer service” — in a way that the organizational structure could provide its customers with excellence in experiences. Both functional and divisional organizing — with the latter being made of more loosely coupled units and pervasive P&L and the former more vertically integrated with the organizations divided into macro-functions able to perform specific business processes such as human resources management, finance or marketing — has been adopted by organizations that have been leading on the market. The mind comes to Apple as a champion of functional organising and Amazon, on the other hand, leaning decisively on the side of divisionality: both these companies are famous for their capability to provide excellent experiences to their customers and generating innovations.
The question arises now though, about what could be the cascading effects of two powerful trends. On one hand, there’s the radical re-prioritisation of user perception of value like the one we’re seeing in this start of 2020 with the coronavirus outbreak; on the other a tremendously rising unpredictability: what would be the impacts of such trends on defining the optimal the shape of the organization?
As users reconsider priorities in light of culture shaking events, and employees and teams reconsider practices of work — especially in the services sector — towards more distributed and remote working, the very idea of the experience economy, may be the first that needs to be reinvented.
If we correctly see the pandemic as an expression of more common and widespread systemic instabilities and review our assumptions about the persistence of markets and customer habits as we know them today — recognizing, for example, that among other structural shifts we are most likely living through a demand-side peak oil event — globalization, definitely one of the organization shaping forces of the twentieth century — as we’ve been thinking about in the last two decades is put into deep questioning.
This article will offer a review of the meaning of ecosystemic organizing in the wake of changes that — unfolding in real-time — are today hard to predict in their long term impacts, despite appearing already as far-reaching, structurally changing and ground shaking.
Adopting a Conway’s Law lens to chronicling the evolution of organizing
I’ve often referred to Conway’s law when describing the evolution of platforms and organizations in the past as: “organizations that design systems mirror their communication structure”. For example, I normally make it clear with the organizations I work with that to be able to thrive in a truly a post-industrial, networked ecosystems’ world, an organization needs to mould into one.
There is reason to believe that being able to look through Conway’s law lense will take on a new level of importance as two major trends emerge. First, working practices evolve towards much more distributed patterns of work (as Mary Meeker noted in her early reflections on the pandemic, most companies believe that “after the experience of forced remote work — they will shift to more distributed work”).
Second, value chains will need to be reorganised to work differently across regional geographies, to ensure better resilience and less dependence on supply chains that — in the mind of policymakers and national leaders have substantially “gone too far”. New organizational players and entrepreneurial opportunities will arise to take a fundamental role in the creation of a somewhat less “efficient” and “just in time” economic paradigm, in favour of a more resilient and hardened one. This new paradigm will favour value chain elements that, on one hand, are more directly bounded regionally and, on the other, are more redundant, featuring alternative routes for the sourcing of needed components and contributions to the key processes. In the transformation, that will have tremendous impacts on pricing, priorities and value, multinational organizations will need to rethink their organizational structures, and brands will need to adapt to play a role.
If we focus for a moment just on the remote work dimension, for many types of companies — for example, startups and software development firms, widespread lockdown and “shelter-in-place” orders did not constitute a big break in terms of workflow and organising: a lot was done remotely and asynchronously anyways and already by people only accidentally co-located. For many more traditional players, this new situation radically changes the way work is organised, including human skills, organizational best practices on knowledge management and explicitation and technological requirements. Clear and well-structured communication becomes essential to allow teams to carry out their work efficiently, which may further result in increased autonomy and distributed work. This leads to thinking that as organisations go fully online and remote this may end up re-shaping them beyond simply a matter of on- or offline work.
In this reflection, one can also take inspiration from some of the leaders that have already transformed their organizational development practices. Amazon, for example, is often depicted as “probably the best-known case of a divisional organization” and “one of the clearest case manifestations of Conway’s Law”. Besides its well known divisional model — with divisions looking after specific product offerings such as AWS or Kindle, or macro-parts of the business such as publishing — the main advantage of Amazon resides in its radical policies in new business creation and internal communication structure.
As once depicted by Benedict Evans, Amazon has two main platforms: an e-commerce one and a logistic one, and top of those, a radically decentralized machine: atomized teams sitting on top of a standardised common internal system. This loosely coupled structure comes from a — now-iconic — choice that Bezos and the company leadership enforced in the early days: according to CTO Wogels they broke down functional hierarchies and restructured organization into small, autonomous teams, small enough that could be fed with only two pizzas giving them extreme autonomy on one hand and the obligation to interoperate and communicate with each other in an asynchronous API mediated programmable interface. In the words of Evans, this structural decision on organizational architecture produced three main effects: virtually infinite scalability, tendency to produce lowest common denominator in the product buying experience and — lastly but of utmost importance — the substantial equivalence of internal and external units with regards to the contribution to the business model. In Evans’ words “the constraint to the model’s growth is how fast you can hire product teams and sign supplier agreements, letting other people do it for you and charging them a margin (and of course the internal teams also have margin targets too) lets you scale faster and with less risk.”
Allowing mass collaboration to happen at scale between loosely coupled units emerges as a pattern in modern competitive organizing, not only in terms of internal communication but also in the massive transition that — in the context of business models — we’ve seen emerging on markets for almost a decade now. There is a continuity between the adoption of the platform mediated business models that made the success of companies such as Airbnb, or Shopify (and before they drove the explosion of social media) and the reinvention of the organization through pervasive P&L and radical divsionality. The common denominator of this transition is indeed the acknowledgement of the plummeting of transaction and coordination cost and of the possibility to substitute complicated business processes — typically managed through bureaucracy — into software as a service mediated and powered contexts. A good example of this may be found in the health and social care company Buurtzorg: during the Drucker Forum 2019, Dutch entrepreneur and Buurtzorg CEO Jos De Blok properly framed this pattern by explaining how the company effectively “transformed bureaucracy into software” and — in this way — succeeded to empower a pervasive network of nurses to facilitate the creation of a holistic healthcare context around the patients, by leveraging on the collaboration with the networks surrounding them. Buurtzorg professionals “attune to the client and their context, taking into account the living environment, the people around them, like a partner or relative at home, and on into the client’s informal network; their friends, family, neighbours and clubs as well as professionals already known to the client in their formal network.” and can do this also thanks to a set of software and coordination tools that the company built to let the work being organized at the edge, beyond control and micro-management, towards full independence and self-organization.
In the application of such an outside-in pattern of organizing, defining the boundaries of the organization becomes a complex and — to some extent unhelpful — task. Allowing outsiders to get involved, becoming insiders — as transaction costs plummet due to technology — becomes of paramount importance and the creation of an organization that can facilitate patterns of networked collaboration, self-organization and blurring of boundaries. To allow external contributions to the business model, and the innovation process, becomes a key competitive edge: as Ulrich Pidun, Martin Reeves and Maximilian Schüssler of BCG have noted:
“Ecosystems compete on their degree of openness”.
The case of Haier Group is emblematic: not only are employees incentivised to start their Micro-Enterprises (adding a node in the internal network) as a way to facilitate fast and frequent interactions with consumers but also companies outside the group are allowed into the competition for providing services to the Micro-Enterprises. The company also created in 2019 a new organizational artefact called the Ecosystem Micro Community (EMC). The EMC is a self-organized and self-led coalition of enterprises coordinated by the emergent leadership of one Micro Enterprise. Powered by a solution of smart contracting that allows the fast implementation of rules of collaboration based on shared objectives (smart goals) and the committing of resources for the achievement of them. In a sort of fractal platformization pattern, the very business model of the most of the innovative Micro-Enterprises also leverages strongly on independent producers and professionals: a good example is the online logistics marketplace Goodaymart (that even attracted massive investments from other groups such as Alibaba) where many independent logistic providers are organized through a technological coordination platform.
Despite fragmenting an organization into small nodes, moulding it with its broader ecosystem and facilitating the creation of means of communication through software interfaces — in substitution of a bureaucratic process — is certainly the core part of the role of organizational leaders in an ecosystemic organization (as Bezos and Zhang), the implementation of such software powered, interface mediated, organizational marketplaces also unveil all sort of data about how the parties in the network interact and the patterns that are affirming. Ecosystems become effectively “future sensing engines” as in the words of Simon Wardley. As Wardley explains, not only the organization needs to enable coordination between the nodes of the ecosystem but also create tools to allow the players in the ecosystem to innovate with a lower risk of failure. These tools — in the form of enabling blocks and enabling services — will be used to create the new value propositions, sitting on top of the enabling ones in the value chain. As a key and complementary responsibility, eventually, the ecosystem enabling organization must act to standardize the novel value propositions emerging from the periphery, institutionalizing innovations for broader adoption, pushing the ecosystem entities to develop new propositions, on top of the newly standardized ones. The organization’s reference ecosystem appears to be the most effective mean for an organization to move — as in Lisa Gansky’s words — from the “no more” to the “not yet”.
In the continuous Innovate-Leverage-Componentize cycle that will result from this virtuous circle, the organization will transform emerging innovations into either: modular elements for the rest of the ecosystem to start again to build upon or will take over the complexity of vertical integration and create the strictly necessary functional organizational structures for the production of more “industrialized” or “curated” experiences that may need management cultures, processes and infrastructures that don’t necessarily overlap with a loosely coupled marketplace based structure.
The application of such a mechanism of unbundling and re-bundling is not new and has been thoroughly explained — for example by Ben Thompson in connection with Christensen’s so-called “Law of conservation of Attractive Profits”. As Thompson explains, the pattern is the following:
“breaking up a formerly integrated system — by commoditizing and modularizing it — destroys incumbent value while simultaneously allowing a new entrant to integrate a different part of the value chain and thus capture new value.”
In many examples (Thompson makes the ones of Airbnb modularizing real estate properties and integrating the process of reservations with trust, or Netflix modularizing content and integrating production and subscription management and distribution) organizations modularize a basic element of the value chain that was previously integrated then reintegrate an upper layer of the value chain, by controlling it, often favouring aggregation through the attraction of now modularized parts of the value chain, often in the form of independent ecosystem players (such as property owners in Airbnb or content producers in the case of Netflix). Such ecosystem players will effectively reshape to optimize their interaction within the interface that the organization provides. As an example, recently brought to my attention by Stowe Boyd, Rent the Runway and other clothing rental services are contributing to reshaping the ecosystem around fashion design, as designers become less focused on getting their clothes into department stores than to distribute them through such rental and subscription-based platforms.
In this recurring pattern, organizations first modularize a specific part of the value chain (inventory in the case of direct to customer marketplaces, teams able to produce entrepreneurial ideas for market-facing innovations in the case of Haier’s or Amazon’s organizational structure) providing clear rules and interfaces for engagement. Later, as the “disobedient” and independent ecosystem players create something radically new that attracts customers and needs to be scaled-up, these innovative propositions are integrated vertically into the platform’s core set of services — or practices.
As an example, Airbnb captured an emergent behaviour of co-hosting among its users (third parties managing properties in the place of busy hosts) and successfully vertically integrated a set of tools for co-hosting in the platform both: providing a more consistent experience, and further modularizing the co-host role for better scalability. Similarly, Haier Micro-Enterprises sometimes scale up so big and quickly that surge to a role of “platforms” taking over the responsibility to functionally integrate parts of the services enabling further their reference ecosystem of third parties, including other micro-enterprises that are still in earlier stages of maturity.
It appears then that a modern ecosystemic organization needs to be able to play on a full bidimensional spectrum of management and organizational models from customer focus to ecosystem services, from modularized to integrated products, from radical divisionality (such as with Haier’s Micro Enterprises and Amazon’s two-pizza teams) to functional integration in the form of supporting platforms providing basic services such as scalable manufacturing or HR, like in Haier’s case.
The impacts of such a transition towards divisional organizations and more modular products (and services) may be far-reaching. The covid19 outbreak seems to have exacerbated the speed of change but needs to be framed as a harbinger of times to come with unpredictability becoming a structural aspect of our economies. This growing unpredictability seems increasingly hard to manage by a traditionally functional organisation.
Functional organizations (where profit and loss are centralized and units are distributed according to key support functions such as Marketing, HR…) are great at producing “integrated” product experiences: this kind of companies have evolved in the industrial age and can ensure coherence more easily when needed, thanks to vertical chains of command When product management nails it, functional organizations can bring innovations to the market not only quickly but also with a relevant quality of experience. By doing so they often achieve network effects, economies of scale and strong advantage positions that allow them to capture a somewhat unfair value over the long term. On the other side of the coin, their success often protects pockets of inefficiency, technical dept and bureaucratic structures just because the vertical integration of their products and services effectively impedes competition from happening at any of the product layers.
Functional organizations and integrated products might be — in light of this — more fragile to rapid and continuous change, due to unpredictable phenomena that may cause supply chain or value chain disruptions or even just deep — sometimes unexpected — behavioural changes. As I’ve explained quickly in the first part of this essay, to build more antifragile capabilities in society, the economic paradigms seem to be starting to shift back towards more locally-redundant, and more unbundled business processes where pieces and players are more interchangeable and continuity of service can be ensured more easily during disruptions. Functional organizations, with their need to vertically integrate, protect, and control the whole chain may fail to keep their organizational structure sustainable over the long run in such a context, due to the constraints and rigidities that they accumulate.
Despite proving to be more adaptive to local and contextual conditions, more flexible and more organic, even organizations that are divisional but with substantially large and bureaucratic “divisions” may end up suffering the same adaptability issues. Emerging trends of organising have — as we’ve seen in this article — pushed organising towards more networked structures with smaller, networked divisions whose interactions are mediated through different types of artifacts, normally providing enabling services (platforms). To some extent, such a direction of evolution for the organization can be seen through the lenses of David Ronfeldt’s seminal work on the TIMN (Tribes, Institutions, Markets, Networks) framework as these four stages are mirrored into the theory of the firm. As society transcends markets, and networks take hold as the main creation, production and governance means — a manifestation of the maturation of the information age — human organizing, in interplay with its changing context, is embracing the network structure.
The trend that brought us to see first independent individuals, and then teams networked through emerging organizational artifacts (such as Haier’s platforms) inside the same firm, it’s starting to point out to a new direction that goes beyond the single organization towards a widespread collaboration between organizations, at the societal level: Haier’s Ecosystem Micro Community, by including organizations inside and outside of the group, is a signpost in this evolution. As John Hagel explains the evolutive pressure — also due to increasing rate of change and asymmetric risks that can quickly reshape markets — will push an organization’s customer (or more broadly, a user) to look for flows of value creation that go beyond a specific vendor, beyond a specific organization and reach the possibility to create value with anyone, everywhere. This will also, in turn, push the entities connected to the ecosystem on the production side to shapeshift to remain able to produce value in exceptional times when markets are re-shaped in an unpredictable way: the case of the dark kitchens emerging to serve customers without a “front-end” publicly open shop in the verge of Covid-19 outbreak seems iconic of the change[11b].
In a few words, the markets of the age of networks may end up being made by a plethora of smaller, more independent, small scale organizations, all interconnected through new means of communication that are also quicker to reconfigure. Organizational nodes become smaller while at the same time more powerful and more specialized in their niche, more transient and more adapted to the dynamics of a “fluid” society, the society of the information age: in Deleuzian terms a society of control. In this context, a new theory of the firm might be emerging to confront the crisis of capitalist governance as the “limits of using enclosure as a tool of capitalist accumulation” become clear in a small world where externalities are quickly exacerbated and globalized.
As a result, an effective organizational theory — and praxis — for the post-industrial and somewhat post-capitalistic age, may need to be heavily based on relationships and systems thinking and feature an unbounded way of relating to the commons that don’t separate between in-groups and out-groups.
Decentralization and the emergence of cooperative coordination layers
Despite more research and experimentation is due, some questions that arise in this context are the following: where are the structures that can ensure both coherence and learning going to emerge from if suddenly the space between small organizations becomes a non-organizational one? And how’s this inter-organizational space going to be characterized? Is this space public or private? Is it agent- or data-centric? How are those “coherence ensuring” systems going to be created, evolved and governed? At what scale? How are these new emerging systems going to confront with existing incumbent organizations that today seem to monopolize the infrastructures of the information age?
Experiments with blockchain technologies in decentralised infrastructure governance are already maturing: Hyperledger project may be seen as an example of a collective, multi-organizational consortium, though is mostly focused on the development of the technology and less into the potential deployment of a shared infrastructure. More independent blockchain projects — above all Ethereum for example — born to overcome centralised power, can easily turn out to be “tilted” playing field, as noted by Holochain’s chief architect Arthur Brock where influence and wealth accumulate and centralise over time harming trust.
Among the many approaches proposed to amend this tendency to re-centralization that may harm the real promise and potential of distributed ledger, different approaches have been proposed. Andreessen Horowitz’s Jesse Walden touts crypto-networks as “pioneering a new form of “cooperative capitalism” and explains that “beyond the ability to crowdsource funds from members of the network, crypto networks can compete with better-capitalized corporations on other dimensions — especially those that require high degrees of trust”. It’s therefore not an unlikely outcome to imagine how these highly trustable commons needed to enable collaboration between firms (such as smart contracting platforms) could emerge through what Walden suggests in another post — a careful process of “Progressive Decentralization” where — with mechanisms similar to the natural emergence of a leading Micro-Enterprise in an Ecosystem Micro Community in the Haier mode of organising — one organization may take care of creating these common communication layers to, within time, transitioning the ownership and governance of a broader set of stakeholders, effectively acting as a keystone ecosystem species, at least for the time needed to get mass scale collaboration on these intermediate structures off the ground.
More than thinking about the evolution of a single organization in an ecosystem, it appears that — accelerated by the pandemic, and more generally by the resurgence of unpredictability in our economies — we may be witnessing the dawn of a new age of organising. The developments of this new wave will happen within a firm but also in the space between them, from individuals to communities to bioregional playgrounds, states, and civilization and in the realm of fluid cooperation for a world in constant flux more than at the scale of single market opportunities and in the groove of competition.
Once Zhang Ruimin said to me “companies are going to disappear, while organizations won’t” and we can probably generalize this thought more clearly by saying: “companies will disappear, while organizing won’t”: more research is therefore needed and we surely don’t know yet how the future of organizing looks like. One thing that seems every day clearer though, is that this future is approaching faster and faster everyday.
As my friend Tomas Diez once said “future is a word of the past” and, when it comes to organizing, I certainly feel his word truer than ever today.
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 This aspect is really well explained in Thompsons and Allsworth podcast mentioned before in the text and in the following article — Ben Thompson. (2019). Integration and Monopoly. [online] Available at: https://stratechery.com/2019/integration-and-monopoly/ [Accessed 30 Apr. 2020].
Ronfeldt, David ”TRIBES, INSTITUTIONS, MARKETS, NETWORKS:A FRAMEWORK ABOUT SOCIETAL EVOLUTION”
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