Competition is tough for small businesses. The United States Small Business Administration estimates that there are 30.2 million small businesses in the country. These represent 99.9 percent of all U.S. businesses and just less than half of all U.S. employees.
Small business owners and employees may feel as if they’re up against the world when it comes to competing for customers and brand recognition. That’s not the case, however. Small business owners should think of each other as colleagues, participants in a larger commercial ecosystem.
When small businesses operate from this mindset, they can then form alliances and relationships with companies whose work complements their own.
“A business ecosystem is the network of organizations — including suppliers, distributors, customers, competitors, government agencies, and so on — involved in the delivery of a specific product or service through both competition and cooperation,” says Adam Hayes at Investopedia.
An excellent ecosystem model was first suggested in a 1993 Harvard Business Review article by James F. Moore, who today is an advocate of open science and engineering. In Moore’s business ecosystem model, companies conceptualize their behavior and result in terms similar to those of a biological ecosystem. There are entities that help one another, even other companies in direct competition.
Businesses within an ecosystem thrive when they find their niche and when they build the necessary cooperative relationships to adapt to changing pressures from competitors. The animal kingdom follows the same rules.
This is a different model than one of partners and supply chains. The ecosystem approach means businesses see each other as more than a means to an end. Ecosystem-minded businesses understand that each participant in the ecosystem affects the others and is affected by them in turn. By responding as a team to rising challenges and market pressures, ecosystem participants improve their chances of survival through cooperation and adaptation.
For example, imagine a small-town health food store. Members of this store’s ecosystem might include the companies that supply various bulk items and canned foods for sale; local farms that supply fresh vegetables; and local restaurants that specialize in fresh, organic, in-season meals.
A conventionally minded health food store owner might see all these connections merely as business arrangements. By adopting an ecosystem-based point of view, however, the company’s leaders will find it easier to visualize opportunities such as coordinating with local farmers and restaurants to highlight the region’s best in-season ingredients.
Within a natural ecosystem, each species occupies a niche. In its niche, the species may compete with other species for similar resources, but it doesn’t compete directly for every resource it needs to survive. Small businesses can do the same.
“Ecosystems emerge through cooperation of a wide range of different players — startups, companies, platforms, services providers, consultants, research hubs and more, to solve common problems,” says Florian Semle, a digital transformation commentator.
For small businesses, then, the first step is to determine what role or roles the company can play within the ecosystem. For instance, the health food store that wishes to build stronger relationships with other local businesses may position itself not only a specialty grocery, but also as a place for community news and events surrounding health and nutrition. From this position, the health food store’s owner may see opportunities to build business partnerships with other local organizations, like a gym or community center.
By identifying and naming its niche, a small business can also find ways to innovate or even disrupt business in its industry while also managing risk. As researcher Emmi Welin notes in a 2019 paper, disruptive innovations can lead to failure, making businesses hesitant to embrace them. Disruptive innovations within an ecosystem, however, may generate more value because the ecosystem serves as a buffer to failure and provides a greater pool of resources from which to draw.
Small businesses often operate on a shoestring, both financially and in terms of available time. As a result, small businesses seeking to move into an ecosystem world will need to be smart about their methods and approach.
The first step in the development of any business ecosystem is trust, Elizabeth Reynoso and Santiago Carrillo at Living Cities write. Building trust and reliable relationships among businesses lays the foundation for a thriving business ecosystem.
For instance, in working to create diverse small business ecosystems in New Orleans, Living Cities found that “we needed to take a step back and acknowledge any past harm done by not naming race since the beginning of our relationship,” Reynoso and Carrillo write. Once these past mistakes were acknowledged, the organization found it could “build up more trust and go from working relationships to making firm, multi-year impact investment commitments.”
Trust is also essential for small businesses to access the ideas, talent, customers, and capital necessary to strengthen an ecosystem, says George Deeb, Managing Partner at Red Rocket Ventures.
No business can build an ecosystem on its own. “You must collaborate as a symbiotic community with a shared set of common goals between people that are equally happy helping others as they are at helping themselves,” Deeb writes.
The environment in which a business is embedded was once seen as a fixed, external influence on the company. Today, many organizations see their environment as flexible and the result of their own interactions with other companies and customers, Benoît Demil, Xavier Lecocq, and Vanessa Warnier write in a 2018 research article in the journal M@n@gement.
This flexibility allows small businesses to conceptualize and communicate their value as ecosystem partners in new ways. For instance, the health food store may no longer be simply a grocery store with a specific mission. Instead, the store may also serve as a community hub, source of education on nutrition and diet, and a collaborative space for restaurants or local specialty food companies like brewers and cheesemakers.
Spend time thinking about how your business can benefit your ecosystem partners. “The key to recruiting partners is understanding they need a business reason to become a member of your ecosystem,” says Norma Watenpaugh, Founder and CEO of PhoenixCG. “Be clear on how they will benefit, and create a plan for how you will partner to create that benefit.”
When considering your small business ecosystem, think about the various aspects of your business. Whom do you serve? What are your areas of expertise? Who can benefit from what you know and the connections you have made?
Use the answers to these questions as the basis for your attempts to build or move within an ecosystem.
Small businesses can build ecosystems that include larger enterprises. In fact, larger businesses and financial institutions are increasingly enthusiastic about ecosystem partnerships with small business.
In June 2019, Chira Barua and fellow researchers at McKinsey recommended that banks take an ecosystem approach to working with small businesses. For instance, banks that work on becoming a one-stop shop for small business owners can help these businesses meet their biggest challenge: “giving entrepreneurs more time to focus on their core business activities,” as Barua and the research team write. Small businesses that seek an ecosystem approach from their bank can reap the benefits.
Similarly, large global businesses are also embracing ecosystem models that include small business in order to innovate and remain agile, says Tarek Sultan Al Essa, CEO and Vice-Chairman of the Board at Agility.
These ecosystems stand to benefit both large companies and small businesses. For instance, small businesses now have the means to collect large amounts of data, says Hal Varian, Chief Economist at Google. When those small businesses partner with larger companies, they gain access to new skills and new tools that can identify important insights in that data, while also building their business by providing a product or service the larger company needs.
Let’s return one more time to the health food store. A local health food store might promote the sale of local, organic produce with things like flyers, recipes and events. By making its farm suppliers part of its business ecosystem, however, the health food store can not only move quality produce. It can also get out in front of unpredictable events — such as a poor growth year for carrots or a bumper crop of potatoes — allowing both the store and its suppliers to do business more effectively.
Think about how your business fits into the ecosystem in which it’s embedded. As a starting point, here are a few questions to help guide your thinking: