Season 1 Episode 1: Professor Michael G Jacobides
Embark on a compelling journey into the realm of business ecosystems as we welcome the distinguished Professor Michael G Jacobides to share his profound insights. In this enlightening discourse, we unravel the significance of understanding and harnessing the power of business ecosystems. Professor Jacobides unveils how these intricate networks of interdependent organisations influence market dynamics, foster innovation, and shape the success of businesses today. Join us as we explore the transformative potential of business ecosystems and discover new avenues for growth and collaboration in today’s rapidly evolving business landscape.
Season 1 Episode 1: Michael G. Jacobides Edited Transcript
Section one: Defining business ecosystems
Chris: Thank you, Professor Michael Jacobides, for joining us today. It’s an absolute pleasure to be sitting down with you and having this conversation. And as I mentioned, this is a Conversation on Climate with the Business School Alumni Energy Club. And we’re here to discuss all things climate.
We’re here in the Natural History Museum in Athens, your hometown. Thank you very much for inviting us and hosting us here. Would you mind briefly describing your journey to this point of being a Professor at London Business School, and your interest in ecosystems?
Michael: At the risk of speaking a little too much about my own journey, let me speak a little bit about the journey of the ideas that we’re going to be discussing today, which relate to ecosystems. I have been an industry scholar; I was interested in how industries are structured, how things become more or less vertically integrated, and the broader question of economic organization.
I started realizing that what we call sectors are not givens from the technology, and are not things that are created and are stable, either in time or across different countries. They are the result of the conscious efforts of industry participants to shape the rules of the game, that define who does what and who takes what. That was the idea of the construct called industry architectures.
It was interesting to me because I could see how they change over the time, how policy affects them and how firms are trying to shape the rules of the game to their own advantage. Now, over time, I started hearing this word ‘ecosystems’ over and over again. Initially it was sceptical – I thought that it was just a lot of hot air.
So I started looking into it: why is everyone speaking about these ecosystems? And I realized the more I looked at it, it was closely related to the things I’m interested in because that represented a new way of organizing. We had the dissolution of these industry boundaries, the fact that things stopped being organized in simple ways so that you can easily define who your buyers and suppliers are, what are the limits of your own activities. You start seeing lots of companies that need to collaborate to bring together new value propositions, and that span sectors that were previously unconnected. They find ways of linking with each other in order to develop as a joint value-add.
That made me look into ecosystems and ask, even theoretically, what is new here? Why is this not just a buzzword? Why isn’t it something that we have already seen, simply with a trendier skin? And I think that we are seeing a true transformation in the way the world is organized now. Of course, it doesn’t take a genius to know that now – you just look at where the market capitalization goes, and you look at firms that build their own ecosystems.
Look at power, and the concerns that we have. If you think about the regulatory context today, it is about these big orchestrators. ‘Big tech’ isn’t only technology – they are firms that organize how things are structured. What I have spent the last few years working on is understanding not only how industries evolve and how value is created and distributed; but also how these ecosystems are structured and what we can do to ensure that we have a level playing field, and also how we can harness that power in order to arrive at more complicated goals, and that includes some of the climate emergency issues that are not always as evident as they should be.
Chris: So you’re defining ecosystems as very much focused on the organization, the interrelationships between organizations. Would you also define it more broadly, to bring in governmental agencies or other factors? Scientists, academics, and so on.
Michael: One of the challenges of the word ‘ecosystem’ is that it is used in many different ways. First of all, it is a wonderful bit of poetry. It’s evocative. People think about how they can bring together different types of institutions to add value, and part of the more poetic element is the fact that you need to create the context – often geographical – for these things to coexist. It is perhaps a new version of what we used to call clusters.
That certainly relates to government, it relates to academic institutions, it relates to policy that facilitates it. But I think that in addition to the loose idea of co-location, which is something that is not terribly new (people had started looking at it from the 1980s), what we now see is something which is much more operational. So moving from the poetry of ecosystems to the strategy of ecosystems, you see that there is an increasing set of firms that consciously works together to create an outcome.
Why? Because things need to interoperate in ways that are quite concrete. It’s not just having a beer with someone who lives in the same town: here is the funder, and here is the academic, and here is the company that has a startup, and perhaps a bigger company is going to buy the startup…and isn’t that great to have them in the same spot? It is something that says, in order for us to be able to do something that works together, we need to think about the interfaces and the standards that allow us to create these joint value-adding activities. We need to find ways in which we organize and delegate the responsibilities and the upsides. And what you see in these ecosystems, for instance in these technology firms that are building their own ecosystems, is that they are very consciously structuring these relationships.
When we speak about these ecosystems, we mean both things: what you see is that the industry standards are usually not sufficient; and behind that are changes both in regulation and in technology. In terms of regulation, the way that we used to organize ourselves is that we used to have sectors that had strictly limited areas of operation. The same way that in the past we used to have guilds, so that we know what it is to be a shoemaker or be a lawyer or be a doctor. Nobody else is going to do that. Well, now regulators have understood that is rent-seeking and the like, so let’s experiment a little bit more. That’s part one.
The second thing is technology, and in particular digital technology, which means that, rather than focusing on one product in itself, you may want to think about things that are connecting them. In order to make them interconnect better, you need to ensure that you find the technology that binds them. Mobile phones pervade our day. Essentially, what they consist of is not only complicated technologies made by intermediate players that have been assembled by one producer, but also the interfaces that allow Apple or Google Android to create ecosystems of their complementors, that make them work.
When we think about these ecosystems, they are these groups of organizations that make a solution work. Going back to the climate emergency that I mentioned, I think that it is becoming clear that what we need is something that is more thought through and less disparate. I think that energy is an area that is calling for, but has not yet witnessed as much of, a revolution in terms of ecosystems and what they could deliver in this area.
Section two: The role of the orchestrator
Chris: I guess one of the big differences between an ecosystem in nature and ecosystem in business is that you don’t have a lion going and telling a tree to grow some leaves so that the giraffes can eat them! But in the energy sector that’s very much what you need to do. You need to have a coordinator saying, put the solar panel up there, that’s where the energy can be produced and that’s where it needs to be filtered down.
Michael: Absolutely. So if you think about what we have seen in other sectors where we see these ecosystems, we see that usually it’s one player. Or sometimes it could be a looser affiliation of different players that are setting the rules of the game – the orchestrators, the ones that define what are the parameters that allow different players to come and contribute.
If you think, for instance, in terms of what the technology firms like Google and Microsoft and Facebook are doing, they are saying, we’re going to create a set of rules that will define what it is that you will contribute. By the way, I’m going to tell you how much revenue we’re going to get – usually 30% if I can get away with it, perhaps 15%, and if people push me I might reduce that. In addition to that, I the orchestrator will make sure that the system hangs together nicely. The reason that you need an orchestrator rather than a set of industry standards, is that there are a number of choices that are needed to adjust to the interdependency between parties. Not wanting to be too technical, what we have seen is that modular technologies (which means that you have separate areas but that still are interconnected) lend themselves to be organized through ecosystems. You need someone who minds the architecture of the entire thing, and then you can allow different players to innovate and come up with ideas. But there is this critical role of the orchestrator.
What do we see in other sectors? We usually see one strong firm. More rarely you might see something like Linux in the programing world; it wasn’t a firm, but it was a decision to create something in a more decentralized fashion. Why? Well, because the person who put it together was a bit of an idealist. In the energy world, given that the objective isn’t just to make a buck, I think that there is a great opportunity for coming up with these ecosystems. The orchestration – who’s going to put it together – is one of the things that is still a little bit up for grabs.
You could say that a normal orchestrator would be a government actor. The problem, though, is that it may be a little difficult with government actors to come up with the idea. Now I mean no disrespect to regulators, but let’s be real. What we have done, unfortunately as a result of populist politics, is that we have reduced the compensation and skills that exist [in the governmental sector], and we have increased the number of problems the people in policy need to tackle. Is it statistically likely that you will find someone with such a good understanding of the system who’s going to come up with a great idea in terms of how they can put it together? Probably not. So you need some people who come from the private sector, and I think there is now the beginning of some interest from players who understand the structural gap, the need for someone who can come and coordinate and orchestrate these players.
The question of who it is going to be in the sector is still up for grabs. Will it be engineering firms? Will it be energy players? And clearly, depending on who orchestrates it, you’re going to have different emphases and different results. Just to give you a final little aside, in the most unlikely of examples, think about a study that I’m doing now in terms of the metaverse ecosystem. What you see is that the big technology firms have an entirely different vision of what the math of this is. What Microsoft does, and what Sandbox wants to do, is very different. Why? Well, because they want to create a world to their own advantage that still delivers the benefits. So if it comes back to energy, clearly different players will have different visions of the future. But there is a big existential question out there, of needing to do much better than we’re doing in a short period of time. We need it; and we can see how the details will pan out, I think, over the next few years.
Chris: It’s even conceptually difficult, and perhaps misleading, to be calling this a ‘climate crisis’ because there’s a whole series of smaller crises on a global basis, on a local basis, that all feed into one overarching problem. Trying to find a single co-ordinator to take it all on…unless there’s an entirely different world and we’re all ruled from say, Beijing, where they’re being very effective at rolling out their renewable technology. There you have a single government actor who is saying, ‘we need to make these changes,’ and they’re just going out and doing it. It is more difficult in the US and Europe, because we don’t have to have that type of centralized government.
Michael: Absolutely. Let me give you one simple analogy. If you think about one of the reasons that all these big technology firms became so profitable, it is that they were able to build ecosystems when nobody operated [in them]. The types of things that you’re now able to do through your phone are magnificent in terms of the fact that they are new, which also means that there were nobody’s particular toes that you would tread on.
This is very important. Now, think about some of that did tread on some toes. Think about Uber and the extent to which taxi drivers were out in the streets trying to block it, saying, ‘this will never go ahead; I’m not going to allow that to happen.’ If you just think about the political power that taxi drivers have, and you compare that with the political power that fossil fuel companies have, I think you can start seeing what the main difference is.
One of them is the amongst the biggest campaign contributors, PR spenders, and consulting and advertising spenders in the world. The others aren’t just hapless taxi drivers. And if you see that there is a dogged resistance from taxi drivers, you can imagine that vested interests [in fossil fuels] with a lot of cash…Because right now energy is also becoming scarce. And that means, as we saw with the Ukrainian war, that unfortunately those are now producing the oil and gas are perversely reaping the benefits. That essentially means that you have a great resistance to change to, in particular, anything that is going to alter the way in which your traditional business made money.
This means that we have reasons to expect that there isn’t going to be an enthusiastic uptake. But I think that the possibility of creating some ecosystems that will mobilize the actors who can both see, and potentially benefit from, these new developments is the only hope we have. We cannot hope that there’s going to be some centralized, enlightened government that will put political cost and pressures from business to the side and say, ‘I am now going to think only about the salvation of the world, and I will not look at an election cycle, I will look out for my children.’
What we can expect is the creation of something that will create upside for players who individually would not quite see it. But when you put them together, they start creating a compelling proposition and that this entices people who, even on the political side, might say, ‘particualrly with younger people, we see climate becoming an important worry. Let’s think about what we can offer constructively.’ That this is where my hope is, that we’re going to deal with problems in this slightly more innovative way.
Section 3: Building ecosystems I: poetry vs reality
Chris: As this conversation is developing, it seems to be framing the ecosystem as the broader climate change movement. So it’s the scientists, it’s the politicians, it’s Greta Thunberg, it’s all of the people who are all working together who are then creating the impetus for change?
Michael: I would say yes and no. Yes in the sense of the word as poetry. And you need all of that in order to have the impetus for creating change. No, if you go from ecosystem as poetry, to the sense of people who together can interact to drive an outcome which is more operational, i.e. the creation of a specific set of players with limited rules, roles, templates, ways of operating, ways of monetizing their innovations, ways of apportioning the upsides and the downsides, ways of funding it from the capital market. This is what I think will make the difference, because otherwise we’re going to have a heck of a lot of good will, but I’m not sure that goodwill will be able to aggregate and provide results. So I think that what we are in need of is finding ways of addressing systemic problems. I think that one of the challenges that we get is that we see that there are opportunities of combining technologies, but the fragmented approach that we have is getting in the way of offering solutions, and sometimes it’s thorny.
A few months ago, I wrote a white paper with the Chief Strategy Officer and Chief Innovation Officer of Philips, and we were looking at an equivalent issue in healthcare. And we said that one of the things that we could look at was how data is going to be enabling the creation of a better way of managing health care, focused much more on prevention and on quality of life; as opposed to doing what people usually do, which is they deal with the problem when the problem has quite literally burst. Hospital stays are expensive, and people become debilitated and they die.
And all these are the unfortunate results of not having taken advantage of the opportunities that exist beforehand. Now, the problem isn’t that we just lack the technology. You mentioned China, and China say, ‘we don’t really care about privacy anyway.’ People are much more open and happier to share information, which means that there have been advances in the creation of ecosystems that manage healthcare there. Information is flowing through in ways that can support wellbeing, even if it shares more information. The creation of data templates that would allow us to do that, that would allow public authorities to be able to support healthcare in more enlightened ways, are finding themselves being challenged here. The reason that they find themselves challenged is that there are no standards that allow them to be turned into reality.
What needs to happen is to think about how you can create these templates. Can you do that across other complex problems? You can. I can give you examples of other ecosystems that are trying to do that bottom-up, aligning different layers in order to see how they can add value. And that’s where I think that taking the poetry [of ecosystems] and turning it from an analogy to a tool that combines the energy of different players, is what should make the difference.
Chris: I think it’s a fantastic analogy, that hospital, because in climate terms we have got a sick patient here, a series of sick patients. But it also implies that we shouldn’t be look at it from the entire ecosystem movement point of view; we should be looking at it as a series of little problems. Each of those problems are very large themselves…
Michael: You can decompose it into manageable units, have people that are providing something that improves the environment, and that find solutions that are a little bit more joined up. Let me give you examples. How could you do that? Part of that could be that you think about the problem of motivating users, as well as the problem of motivating complementaries in terms of other industry participants.
There is a startup called Velocia that is working, for instance, with Miami Dade now and expanding into other cities, which is dealing with the problem of congestion and managing traffic. The problem of course, is there’s no evident way to do this. So how can you do it? Well, you try to find ways in which first of all, you incentivize working with Uber and Lyft. You say, let’s think about ride sharing in terms of there being many riders and rewarding them in different ways. Let’s find ways in which you give some extra rewards for people who participate in these programs that allow them to go in the special lanes that are also supported. There is a stablecoin – which is what these guys are producing – and then you can say, I will reward you with mass transit. I’m going to give you minutes on a bike or fares for a bus, that is also not used.
So you’re trying to do something that helps both motivate players to say: I could do that; It doesn’t really cost me that much, there is a potential benefit that I can see, and there’s also a nice goodwill benefit. I think that what is exciting here is that it might help you not only by finding new templates through which you can, for instance, build environmental or renewable energy projects, but also motivate players.
As we spoke about China, let me give you two examples there. Think about what Ant Financial has done with Forest – it is creating an ecosystem with itself and with its partners. That is something that changes the behaviour of users. I don’t. Let me explain briefly what Forest does, because it’s quite interesting. Forest has 500 million users and is responsible for planting 200 million trees. How does it do that? Well, basically, it helps people who have Ant, which is one of the biggest financial intermediaries (It was supposed to be the biggest IPO in the world) and it allows people that do environmentally responsible things to start having a virtual tree. They gamify the experience. As you grow your virtual tree, once it becomes big enough, then this virtual tree is, with some matching contributions, turned into a real tree. From your phone you can see the digital images of where your tree is being planted and how it grows.
That buys stickiness and goodwill for Ant Group and some of its partners. It also creates excitement because as you gamify the experience. It also changes the perceptions of the people who are involved in these ecosystems. So I think that what is interesting is that you can use these ecosystems not only to motivate different business partners, but also to start changing the perceptions and actions of people and firms. I think this combination of rewards and the possibility of identifying ways in which you can put them together can be useful.
Section four: Building ecosystems II: ingredients for success
Chris: Changing track slightly, if I can quote you back to yourself from your Harvard Business Review article of October 2019: today it is less and less likely that single firms can offer all the elements the customer needs, let alone afford to experiment with them. In fact, in a growing number of sectors, the firm and even the industry have ceased to be meaningful units of strategic analysis.
This to me portrays ecosystems as the essential constructs that allows for change in certain circumstances. Could you explain what those circumstances are?
Michael: There are a couple of things that make ecosystems more prominent. One of them is the possibility of combining different sectors, and this is where digital technology comes together. Who would have thought that your fridge could order milk! Right now, there’s an interesting fight between people who make appliances, like GM appliances and Samsung and LG, that are all betting on the kitchen hub and are trying to make the fridge the digital centre of your home. They say, ‘if you run out of milk, press here and I will order everything.’
If I’m going to do that, I’m clearly moving outside the narrow feature of the fridge. Why am I doing so? I’m doing it because I can connect the fridge to many different devices. Or if you are Nest, a firm owned by Google, you can say that in addition to having a thermostat, I can now start having deals with energy producers. I have the information around how people are managing their electricity; I can say I’m going to give you peace of mind. I will negotiate with electricity producers and I will offer suggestions to the people who use Nest, around when your machine will actually be turned on – because Nest can be also connected to the machine (if it is a smart washer-dryer for example) and you will benefit from a lower tariff. Which, by the way, will improve grid efficiency too.
Essentially what you see is that you need these different organizations to work together, when they can be connected in new ways. Digital technology and the possibility of linking previously disparate sectors is one thing that clearly provides a great opportunity, because the opportunities for value-add are not only within the sector, but in finding new ways that you can put them together; anywhere that you see digitization and the possibility of joint value creation, not only at the individual product level that but around how you put them together.
The second thing is when you see that there is the possibility of taking advantage of new opportunities because previously established regulatory limits are fading. Think about what has happened in financial services where the regulators, rather than saying only banks will be allowed access to this financial intermediation, are saying quite the opposite. We want a very aggressive and open playing field. You have seen that in payments, for instance. Then you see players saying: OK, so if we are able to compete here and if we’re able to design it, what will we do? We’ll focus on our strengths and we’ll find some other complements, so that together we can start bundling up and being a credible alternative to the existing producers. So I think that this is another circumstance where you see these ecosystems arising.
The final element is when you realize that there are unmet needs of customers, whether it’s because these customers were always poorly treated, primarily because the existing firms were a little bit lazy and did not do their homework and offered them the same thing forever and ever, or because customer needs have changed. I think that the realization that we have an issue with the sustainability of the planet, suggests that we may have some of that [changing customer need]. So these are the things that make ecosystems more germane, that make cross-cutting solutions important. That’s when it also becomes statistically unlikely that one firm that will be able to cover the entire spectrum.
Section five: who captures the value?
Chris: Well, there are certain firms are trying to cover the entire spectrum of everything. For example, you mentioned Google and the fridge and the smart thermostats and so on. I think a company like Google would very much like to be controlling all of that. And then the natural extension for Google of that thought is, if they’re tapping into the grid and saying, we’re going to be buying at this tariff, well, you could be buying from different people at a different tariff. You could be changing it as pricing comes in from different providers at different times. Google could be switching: we’re buying Chicago and Southern today, we’re buying from EDF 5 minutes later. So all of the power and all of the margin gets sucked away from the energy providers and gets brought into Google, which becomes ever stronger.
Michael: If you’ve looked at the evolution of market capitalization, I think that your analysis has a very nice correspondence to stock prices and to that evolution. Look, one of the reasons that we have seen changes in regulation is at least to try and mitigate that. I have spent a fair amount of time over the last couple of years thinking about the regulatory implications of how you want to combat that excessive power, because this type of power is one that the existing arsenal of antitrust was not well structured to respond to, because antitrust looks at dominant market and wants to define the market narrowly, and that’s missing the point. It used to focus on individual markets, and it was able to deal with one market at a time. It looked at what dominance was, and the abuse of dominance. Whereas what we’re really thinking about here is the possibility of some orchestrators that are extracting all of the value, and commoditizing others.
I think you see that in the world of energy, as you see it in many other areas: how are you going to be using information to get an advantage? By the way, this may mean there are some firms that say, hang on a minute, there may be juicy bits, but I would like to commoditize others and let them get stuck with the most risky assets and the least appetizing returns. I think that as we will see competition evolve in the field of energy, whether it is alternative energy or not, it has to do with defining these boundaries. So regulation will absolutely play a part in it. But on the other hand, I think business practices will also evolve with the creation of new ecosystems. The creation of templates that are addressing it one segment at a time are going to be important; but we do have a new set of requirements in terms of how we think about regulation, and hopefully we’ll start having a bit more of an open discussion around how these things work.
Chris: In the context of Big Tech, the person who owns the customer, who owns the relationship with the customer is best positioned to be extracting the value and to be playing the role of lead and coordinator. And is there an analogy then for the climate sector, where there is no natural leadership as things stand? Is the natural leader then the person who is closest to the customer relationship?
Michael: You’re starting to dig into the big, interesting strategic questions of our era. My sense of the answer is that the value of owning the customer relationship may be possibly overplayed. I don’t think that it always means that you have a unique advantage. You may be able to find other ways of adding value. It is true that it is statistically connected, but not always; it depends on the stickiness with other parts of the ecosystem. Let me give you one example in order to explain how subtle differences may be really important in terms of who keeps the value and who does not. Earlier I spoke about phones, right? In terms of phones you have two major players. You have Apple and you have Google, at least in Europe – Android and iOS. And in terms of the ecosystems of both, these are the ones that customers recognize and want to buy. So clearly the orchestrators of these ecosystems can do what they want. You can see it because they charge 30%. Everyone is trying to sue them. saying they are abusing power. And of course they are saying no, we’re being very friendly. We have our costs.
On the other hand, consider another two companies dominant in another ecosystem, which is ride hailing. In the US it is Uber and Lyft, and you can name your duo – there are usually two or three in different markets. You could say they have the relationship with the customer, they should be able to have wonderful margins. But if you look at the financials, they’re probably vastly overvalued because they’re not making any money. The question is, why? Well, it’s an interesting question that has to do with how tied up we are with them. We only have one phone. Very few people have both Google and Android phones; on the other hand, in the same phone, we can have two apps for ridesharing. You can have Lyft and you can have Uber. And in real time, you can see which ones are going to get me a cab first. Similarly, if you think about drivers, drivers can go to either one. They can choose only the one that they like, but they are not going to be suffering if they only use one.
On the other hand, consider Match.com, the creators of Tinder. They might say, OK, I don’t like Apple, I’m going to go with Google. In that case, I’m going to tell all my market that they can’t date people that own iPhones. That’s not nice. Lots of attractive people are going to be out of the market. So you see these two apparently similar structures have got orchestrators, Apple and Google, that really can dominate because of the nature of stickiness. Whereas Uber and Lyft can’t. They may be close to the customer, but there are some other structural features that we can go into that define who has power and who does not. As we’re starting to understand the digital economy better, we’re developing the tools that help us understand which are the really juicy positions that define gatekeepers and which are not.
There are gate keepers in B2B, and not only B2C, segments. So I would say that sure, owning the customer tends to be associated with success, but it the be all and end all. It requires a bit more work to understand what’s driving it. I think that that’s going to be part of the battlefield in terms of saving the planet, but also getting some business benefit out of it in the next few years.
Chris: I think that the tech infrastructure we’re talking about is a very good example of how Apple or Google wants to encourage its partners to be innovating. It wants to be encouraging apps like Uber and Lyft and Match.com or whatever else to be developing their own platform of data to use on their phones. Where do you see similar opportunities for the encouragement of other members of your ecosystem to be competing?
Michael: Let me start by giving you just a small snippet in terms of history, because people may be most familiar with the Apple II story as the first such example. And to a large extent, you can think that Android was the one that followed suit. Now, that, on the other hand, was not really a strategic plan initially. At least folklore has it that Steve Jobs, when he saw that people were developing for his cherished iPhone, started suing them. But I think soon enough, he realized he was making the same mistake that he had made when he was running Apple the first time around, before he got kicked out. Trying to be too vertically integrated was the same mistake that he was about to make the second time around. So he made a 180-degree turn. Rather than trying to fight these people, why don’t you find ways of leveraging what they do and turning it into an advantage – while, by the way, keeping the majority of the profits that they can generate? Everyone is going to be a winner.
I think that is interesting parable for what may be potentially happening in the energy sector. It is a little hard to move beyond, ‘I’m going to do it all, I’m going to be vertically integrated.’ When you have lived in a sector that has got very long cycles of capital investment and where dominance is measured in decades and sometimes centuries, it is difficult to change your ways. That, I think, is one of the fundamental, even organizational issues. The stability was there partly because regulation technology did not change – the requirement did not change. Right now we have a requirement, perhaps an imperative for change that is driven by this exogenous factor of climate change. This is something that is now putting an onus to organizations and have a very different mentality.
One of the challenges that exists in the sector is how we would be able to start being more accommodating towards something that we didn’t grow up with; something that even technology firms didn’t grow up to do. They wised up; they understood that that’s how money can be made, or indeed lost. But I would not expect that this is going to happen overnight. I do think that it comes with organizational issues of its own, and I think that it mostly comes from creating proofs of concept in the context of vested interests which are still quite strong. And given the price of high growth, companies still have plenty of cash to say, ‘I would very much like to continue printing money. I don’t see why I would be changing my ways.’
Chris: But there is the argument that the guys who are extracting the hydrocarbons are quite well positioned to be assisting in the energy transition.
Michael: That’s absolutely right. And actually many of them have, at least on the surface, done exactly that: Beyond Petroleum, not British Petroleum. I think that there has been a significant change in terms of the stated intent. I think that what has really been important, though, has been the fact that investors have changed their tune. And my sense of at least the environmental goals is that they became real when investors started creating criteria and everyone said, I’m going to stop having capital!
So my hope is to start seeing things that are a little bit more joined up. Especially now as we’re trying to trial new technologies that can perhaps combine together in effective ways, we need new ways of organizing beyond goodwill.
My hope is that we will see some proof of concept. I think that policymakers can make a difference because they would be setting the parameters around which this development happens. It also changes the role of both entrepreneurs and people in existing firms, because they need to reach beyond their narrow remits and create coalitions of collaborating organizations in order to bring about systemic change.
We’re speaking about probably the most important systemic change that the world has seen. Never have we seen the need for something that is so far reaching, economically speaking. Usually if you did something wrong, it wouldn’t work, it would collapse and something else would emerge. We do not have another planet. So if we destroy this planet, unfortunately, we won’t have much other choice. That is why this is such an interesting and unique opportunity and challenge. We need to engineer things that would otherwise have taken much longer in time, and would have worked through trial and error.
Section six: incubation, Big Tech and the importance of failure
Chris: In this global emergency is there a way of pressuring an ecosystem into existence, or do you just need to be waiting for it to slowly evolve over time?
Michael: I think that the answer is a (fairly strong) qualified yes, but let me explain why. Ecosystems need to get acceptance from partners and complementaries. You’ve got the orchestrator. The orchestrator needs to work usually with some partners and complementaries. The reason that we have seen them as effective is that inasmuch as they need to evolve, there are pressures for them to change. That has to do with the orchestrator being able to listen and being able to not be overly focused on their own interests. If you look at recent business history, you’re going to see that there are some ecosystems where, because the orchestrator was simply too focussed on themselves rather than on the success of the collective endeavour, they lost of the game. Microsoft lost the game in the mobile operating system at BlackBerry because they were not open enough.
Perhaps more visibly you saw Nokia had 67% of the market, which tells us that having a large market share doesn’t necessarily drive success. It lost it almost entirely because Android was able to mount an effective counter-offensive. So ecosystems essentially can compete, and the ones that are worse will lose out if they are not attractive to the complementaries and to the partners.
Unfortunately, the firms that sponsor them sometimes are too narrow minded. Now, what has saved us in the technology world is that where one fails, another one emerges. Where Nokia is being too focused on its own interest, Google came from a totally different place. So ecosystems require acceptance to work, which means that a number of them can be expected to fail.
But ecosystems can also be more generative in the sense that they create the variety that makes them more effective. If you provide enough frameworks and incentives for these to come up, then you’re able to create the conditions that they may be able to flourish. I think that the joint responsibility of both some hopefully enlightened players in the sector, as well as regulators, is to create these conditions that not only support one ecosystem, but support potentially competing ecosystems. We’re doing that in a really rudimentary way as we’re thinking about the abuse of dominance in ecosystems with a digital market, and so on and so forth. But I think that this is the beginning of us saying that what we really need to do is to facilitate a world whereby different constellation of players will work.
The challenge is being able to break the mould because again, I think that the industry has not seen it. So it will take a few efforts and it may take some failures, but we need to accept that these failures are things that we can turn into an advantage. This is where I think that among the bluster, Elon Musk has got a point to make. I remember I was working with EADS, the European consortium, making the Orion Rockets and so and so forth, and they were really aghast that there was a new competitor. When their rockets blew up, rather than saying that’s it – no more funding, we will simply relegate you to a footnote –he said, terrific, we exploded in stage two and that’s much better than the previous one! I think that this is the mentality that we need to take in developing some of these new systems, and we need to create a policy environment that’s a little bit more permissive.
Chris: We’ve been talking a lot about the tech giants developing their own ecosystems, but clearly they’ve got a very important parts role to play for the planet. One thing that they’re currently doing without exception is saying, we want to go to net zero carbon. That does put pressure down their supply chains and in their own datacentres or whatever else. Aside from their own energy consumption needs, what role do you think these big tech players will have in the energy transition, if any?
Michael: Given their massive reach, their possible role is to create things that sensitize both businesses and individuals, by creating the metrics that allow them to share real time information. In terms of energy efficiency, the possibility of having something that tells me how a particular firm affects the environment may affect my shopping behaviour. I think that the possibility of incorporating environmental responsibility and measuring it in a way that drives customer choice is going to be quite important.
I also think that there is another possibility by creating and supporting programs that can shift users’ choices, and then allowing small startups to take advantage of them. I mean, you want to sensitize people to their own environment and you want to allow the programs that can lead that, even if it is at the very local level.
I can give you another example, one that is as small as it gets: a company that is essentially creating a scavenger hunt with geolocation, that allows people to interact with old historic town centers. As they do, they both discover things and connect to the local environment and it rewards them when they shop local. As with Ant Financial, Imagine similar templates and games that help people integrate their environmental sensitivity, either by increasing it or embedding it in daily purchasing decisions, or providing the templates that allow business partners to both measure it and be accountable. So I do think that there is leadership role for reminding them that they are the orchestrators, taking that responsibility seriously and then seeing how energy firms can work with them, proposing ideas that might be novel.
Chris: So you see them mainly as nudgers of behaviour?
Micahel: Not just behavior. The possibility of creating something that identifies the environmental output and starts including it in information when you’re engaged, for instance, in shopping behavior or supporting it with gamification. That is another trend that is currently going on that can certainly help. Given that they have this role in touching customers, I think that being able to include it (not impose it but include it) I think would make a difference.
Section seven: reasons to be cheerful
Chris: Do you have any major causes for optimism that we’re going to get this solved?
Micahel; I think that we have seen a lot of innovation come from the constellation of different players. The excitement that I see in terms of solving the environmental challenges is genuine. And as much as I think that we do have the difficulty, in a business sense, of established players not necessarily embracing it, once one or two start to do so and see that there is a benefit, I think that could lead to a snowball effect. That may help transform the sector because if it doesn’t, we’re all going to be in very real trouble.
Chris: The unfortunate reality is that you do need regulatory support. You do need the politicians behind this; and politicians, at least in the Western world, change their views with the winds.
Michael: That is true. The problem I think can be summarized with the example [in British politics] that audit reform is boring. Although the business community in the UK was clamoring for it, who cares about audit reform? Welcome to the Enron – that’ll happen sooner rather than later!
I think that the answer there is trying to make things more visible. You have heard me speak about the need to create the power of these ecosystems to raise awareness, rather than rely on politicians and policymakers to simply do the right thing and to make incentives compatible. I think that to me would be a more hopeful way out of it. Will it work, Will it not? we’ll find out.
Chris: I just have one more question which I’d like to try and ask to everybody: why should people, viewers or listeners, care about what you care about? Why do you think academia is a good place to be if you’re passionate about about the climate change agenda?
Michael: I think academia gives you the opportunity to set your own agenda, to decide what is important and doggedly pursue it without much regard to the other considerations. I think that we’ve got an amazing deal. I mean, we are given the possibility to have a well-funded, in relative terms, existence setting up our agenda. We don’t need to think about the clients who are going to be using what you’re saying. You don’t need to think about who you’re going to be upsetting.
You have different criteria in terms of doing some research that passes the test of rigor. It can be a nuisance because sometimes you being rigorous also means being pedantic. But this is the way that we move forward. The world I think is beleaguered because of populism and because people are simply trying to do things that are popular. So sticking to something which is the best that we can find in terms of criteria of truth – and the academic community is working on a system to validate what makes sense and what doesn’t – feels much more gratifying because you can rely on something which to the best of our knowledge is how we push our understanding forward. It’s hopefully how we start spreading the word and turning it into action if we’re lucky.
Chris: But aren’t we living in a post-truth world?
Michael: We are, which is exactly why I think that people who are involved in the truth world need to have a louder voice, and need to explain that popularity is not a criterion of truth. The fact that science gives you the best guess doesn’t mean that any other guess is as good as that. I think that we are right now fighting against a new type of medievalism. Well, the medieval period was a little bit more enlightened than we originally thought, but we are living through new types of dark age where we are risking undoing what has been built through the best bet that we had to understand the world.
Our understanding of the world has principles that underpin how knowledge develops and builds. All of this around us has built the phone, has built the camera, has built up the ability that we have to live an unprecedented quality of life. It also has allowed us to be much better at tackling problems that we have been. We risk forgetting it. I guess that the need for some academics is to keep pushing it.
Chris: That’s a really nice, optimistic notes to be leaving on. Thank you very much for your time, Professor.
Michael: It’s been a pleasure. Thank you.
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