Governing the City: Unleashing Value from the Business Ecosystem
In the industrial era, companies were the main engines behind wealth creation, generating value for shareholders, creating jobs, and providing benefits for consumers and the community at large. Thus, management studies focused on the management of companies. We know a great deal about how to set the strategy, develop a marketing plan, and design and develop manufacturing facilities. We also know a lot about how an individual company builds relationships with other companies, what makes supply chains work well, and how alliances and other collaborative forms best deliver new products.
While we have learned a great deal about individual companies and how they form one-to-one relationships with other companies and stakeholders, our understanding becomes weaker when it comes to more complex forms of organizing and relationship building. This represents a notable knowledge gap in the twenty-first-century economy where advances in information and communication technology have led to the creation of complex relational structures among different actors (companies, public organizations) who loosely connect to create added value or tackle more complex societal problems. While the economy is marching ahead with the formation of these “complex ecosystems” at an ever-increasing pace, our understanding continues to lag further behind.
At the same time, the opportunities to study complex ecosystems are within reach. Cities, for instance, represent excellent examples; yet management scholars have not studied them in any great depth. Not only do they provide good study material, but they represent an increasingly important economic unit in their own right. As a case in point, consider the city of Tokyo. With more than 35 million people in the metropolitan area and nearly $1.2 trillion in economic output, Tokyo ranks among the world’s top 15 economies, larger than India and Mexico.1 More generally, more than half of the world’s population lives in cities, generating more than 80% of global gross domestic product (GDP).2
Indeed, cities are not just physical areas where firms and individuals agglomerate and conduct economic activities; cities are business ecosystems formed through a complex set of overlapping relationships between companies that may represent residents, service providers to citizens, suppliers or customers to other companies based in the city, or citizens who represent the customers or employees of these companies. Therefore, city governments can be seen as ecosystem managers that, directly or indirectly, become involved in organizing activities and delivering services to satisfy citizens’ needs (e.g., transportation, education, and health services) as well as coordinating and facilitating the functioning of economic activities of companies operating within the city area (e.g., tax benefits, permits and regulation, dedicated infrastructures, and financing).
Thus, from an organizational and innovation standpoint, cities (and city governments, specifically) are interested and relevant actors. Because of the heterogeneity of their constituents/stakeholders, cities face challenges in addressing demands that often impose multiple, conflicting objectives or imply trade-offs in resources and/or activities. By investing in infrastructure and offering a wide range of services targeted at companies, they can foster industrial settlements by manufacturing firms, which can also benefit from the availability of labor and customers living in the city’s area. However, business-oriented activities may come at the expense of other objectives such as preserving the environment or building infrastructure and extending the range of current services for a growing population.
In a nutshell, the rising importance of cities further accentuates the challenge of managing a complex business ecosystem and delivering the objectives of different stakeholders—most notably, citizens and companies. Mayors, in their roles as city leaders, bear the burden of balancing the dual task of enhancing the quality of life for citizens and providing a welcoming economic climate for companies. This task is even harder in an increasingly resource-constrained environment, pushing mayors to devise innovative strategies and govern the city more as entrepreneurs than as public administrators. Indeed, some cities and their leaders offer outstanding examples of how innovative and entrepreneurial ecosystem management practices can deliver stellar performance for the city as a whole, as well as its stakeholders.
While the press often reports outstanding examples of city management that have led to success, it is difficult to generalize from sporadic examples alone and to apply the lessons to other cities and other ecosystems. It remains unclear how cities are actually governed, or more specifically, what the transferable governance mechanisms are that allow outstanding city governments to create thriving ecosystems. Systematically studying outstanding cities and their ecosystem management strategies is needed to provide answers to this question and, thus, help other cities and other complex ecosystems, such as technology or research and development (R&D) consortia, public-private alliance networks, and innovation communities.
To answer this question, we studied three exemplar cities that top various life quality and/or business climate rankings: Chicago, London, and Vienna. To examine these city ecosystems and management practices used by the city leaders and their teams/organizations, we adopted an ecosystem governance theoretical lens.3 City management is an emerging field, and many theories have been used to explain distinct aspects of economic or social activities within a city/region, including network theory, cluster and agglomeration theory, and population ecology, to mention but a few. While each of these theoretical perspectives helps us understand specific issues, such as complexity of operations, entrepreneurial activity, clustering and spillovers, and organizational inertia, none offers an all-encompassing framework to capture, at one time, the collaborative, value co-creation and governance aspects tying distinct public and private organizations and individual actors. We build on ecosystem theory4 and the growing literature on ecosystem governance5 because it takes at its core the interdependencies of organizations’ activities. We further elaborate on the key elements characterizing distinct typologies of ecosystem governance and extend and contextualize it to the case of city organization and governance.
As a result, we uncover two main ecosystem structures and corresponding governance models that differ profoundly in terms of organizational structure design and, in particular, the role that the city has in providing services and organizing economic activities. On one hand, city government can represent a direct provider of service (e.g., water or transportation provision). More specifically, the city authority acts as a solution integrator, responsible for selecting the suppliers, contracting the inputs and services from them, integrating them into the service, and delivering the service to citizens (be they individuals or companies). This “integrator approach” is effective when the ecosystem is structured as an extended enterprise where products and services from suppliers and other providers are integrated into the final service provided to the customer. On the other hand, the city authority can be involved in the provision of services in a more indirect way. Positioning itself as a “platform hub,” the city authority structures the ecosystem as a platform market and facilitates the interaction of third-party service providers with customers, citizens, and companies. In this model, platform-based ecosystem governance implies that the city authority takes charge of the infrastructure to match service providers to citizens’ needs and coordinate economic transactions.
Our research suggests that neither model is superior. While the integrator approach is effective in some contexts, the platform hub approach works well in others. Knowing which context requires which approach may be the most important differentiator of success and failure in complex ecosystems such as cities, where different sub-ecosystems may need different structures. In fact, our study reveals that the process of choosing the right structures and governance approaches for different sub-ecosystems and then adapting them when conditions change provides the basis for successful cities—we term this the “orchestration approach.” Here, we outline the main steps in this orchestration approach, starting from an understanding of this “ecosystem of ecosystems.” This involves a definition of the long-term vision and strategy for the city encompassing diverse objectives and projects and integrating them into a coherent whole; careful selection and implementation of the appropriate ecosystem structures and approaches; and fine-tuning and reconfiguring systems in line with changing conditions and contexts.
Our study provides lessons on ecosystem structures and governance approaches for city leaders. City leaders can use examples of best practice from top-performing cities to make direct improvements in their practices. Cities offer valuable lessons for other ecosystem leaders as well. While research on ecosystem governance is growing, the focus has been mostly on simpler ecosystems where companies organize their ecosystems either as an extended enterprise or as a platform market. As ecosystems become multilayered and eventually develop into a chain of nested sub-ecosystems (“ecosystem of ecosystems”), it becomes increasingly important to recognize the crucial role of the “ecosystem orchestrator” approach and, in particular, the choice of the right management model. The city story is highly instructive in this respect.
Theory: How Do Ecosystems Function?
Firms are increasingly under pressure to respond to ever-expanding customer expectations by delivering integrated solutions that consist of sophisticated products and services.6 Furthermore, firms are encouraged to tackle more complex problems, since resolving intricacy results in higher value creation.7 Delivery of complex solutions by a single company would require the company to take on high levels of uncertainty and perform well in a number of different, and often unrelated, product markets. Obtaining the necessary resources and capabilities for a variety of services and products is problematic, leading firms to create value through greater specialization and focus on distinct capabilities and resources.8 To resolve this tension between complex solution delivery and the dispersal of necessary knowledge and competencies over different players, companies have increasingly looked for ways to acquire these competencies by collaborating with other companies. Research on open innovation,9 innovation networks,10 and platform markets11 all support the idea that greater value can be generated through more open, integrated, and collaborative inter-firm relationships as opposed to either single-firm approaches or collaborative efforts with a handful of suppliers and partners on a one-to-one basis.
Thus, firms become embedded in a web of interdependent relationships with other organizations, usually referred to as an ecosystem. The construct of “ecosystem” is generally used to refer to the interconnectedness of organizations that are mutually dependent on each other’s inputs and outputs.12 Moore defines business ecosystems as an economic community supported by a foundation of interacting organizations and individuals—including suppliers, competitors, users/buyers, and complementors.13 Subsequent work has built on this idea and refined its definition. Gulati et al. refer to ecosystems as meta-organizations that “resemble biological super-organisms, a multitude of individual organisms that coexist, collaborate, and coevolve via a complex set of symbiotic and reciprocal relationships, which together form a larger organism.”14Iansiti and Levien also emphasize the collective behavior and shared fate of the set of related firms forming the ecosystem.15 Adner highlights the interdependence of firms’ activities via collaborative arrangements through which firms combine their individual offerings into a coherent, customer-facing solution.16
Ecosystems are more complex and work differently from a set of bilateral alliances that companies customarily operate. Complexity stems from the diversity of relationships, the number of diverse relationships, and the resultant interdependencies. Furthermore, many of these relationships are informal, with companies having to influence each other indirectly. At the same time, ecosystems are heterogeneous, as reflected in the research showing different approaches and definitions. This complexity in relationships inside the ecosystem leads to the formation of diverse structures and constellations that determine the functioning of the system as a whole and the role of the individual firm within the system. According to the literature, the ecosystem structure is determined by the position and the role that the “ecosystem hub”—or the individual organization that directs the ecosystem—plays.17 Ecosystems can be categorized into two main types, which lead to distinct governance modes: “extended enterprises” that are structured around an integrator and “platform markets” based upon a platform hub.18
The Integrator Governance Mode
In an extended enterprise, the “integrator” encourages specialist firms in other parts of the value chain to develop components that can be integrated into the final core product or service, which the integrator delivers directly to its customers. Thus, the main interaction is linear and based on a direct connection between the many stakeholders and the integrator, and then between the integrator and the final customer. Since it holds the key position in the ecosystem, the leading firm can continuously extract and bundle the various complementary products and innovative strategies contributed by ecosystem members to (re)configure its product service offerings. In this resource and product “combiner” role, the leading firm directs linkages between ecosystem members by nurturing informal authority, which is “exercised via choices about boundary permeability and stratification.”19 Coordination of the activities of the various firms is a delicate and complex task since the lead firm cannot directly dictate the conditions and requirements for the activities to be carried out, but can only do so indirectly through “smart power.”20 This implies, for instance, retaining control over some core decisions (e.g., set of system goals, decisions about the meta-organization boundaries) while empowering other organizations to take autonomous decisions and actions in the pursuit of the system goal.
The Platform Hub Governance Mode
In a platform market, the “platform hub” defines and supplies the basic architecture, which then becomes the platform or foundation for other network members to build on through their own complementary efforts.21 Thus, a primary objective of the platform hub is to facilitate the innovation of complementary products from third-party complementors that will expand the reach, range, and value of the platform to final customers. Accordingly, these customers will be motivated to access the platform to use its complementary products or services. In other words, the platform market represents a two-sided market22 in which the platform plays the leadership role as market maker, enabling direct interactions between complementors and customers. This implies ceding control to complementors over core decisions at the level of the complementary products/services (such as price and quality of the complementary product/service) while retaining control over the “bottleneck asset”23 that enables its production and delivery—that is, the platform architecture.
One of the central tasks of the leading firm in a platform market is to stimulate innovation at the level of complementary products.24 However, since they are developed (and owned) by external independent firms—complementors—it is imperative to design the ecosystem to enhance participation and innovation by complementors. To this end, platforms typically build system interfaces to structure their ecosystems as marketplaces.25 At the ecosystem interface, the leading firm creates a supportive infrastructure that facilitates contribution of complementary products/services and generation of innovation, allowing co-specialization among the different organizations operating in the ecosystem.
To summarize, the two ecosystem types differ with respect to the structure and the role that the ecosystem hub plays. In the extended enterprise, the individual complementors, suppliers, and partners interact directly with the lead company—the integrator—and do not interact with customers. The integrator’s role is to assemble the solution and deliver that solution to the customer. In the platform market, the lead company—the platform hub—is responsible for the development of the platform infrastructure and the rules of access, use, and interaction on the platform. The complementors use this platform infrastructure to interact directly with the customers.
While the differences between the two ecosystem archetypes are clear, several aspects remain unclear. First, the specificities of how the two ecosystems function are still not well understood, making it hard to give recommendations regarding the role that the ecosystem hub should play in either structure. Second, it is not clear whether one archetype is innately better than the other or whether one works better under certain conditions. Furthermore, we know little about whether and how the two types can be combined and/or adapted from one to the other. Finally, it is unclear whether these archetypes work well in highly complex ecosystems such as cities.
A city is a geographic area characterized by a concentration of economic actors (see Figure 1).26The overarching objective of the city, as with most other ecosystems, is survival and prosperity.27As the population consists of two main entities—citizens and companies—this objective is more directly reflected in the quality of life for citizens and the business climate for companies. Simple in concept, these two objectives are nevertheless characterized by nontrivial tension in which both synergies and conflicts between the two goals are present.28 For example, the synergy between quality of life and business climate is reflected in the ability of a city with a high quality of life score to attract talent, which in turn is instrumental in attracting companies.29 Equally, a good business climate will produce a strong base of employers that generate job opportunities, which in turn improves the quality of life of citizens.30 Nevertheless, instances of conflict are equally strong. For example, city governments are under pressure to invest in both goals but with fewer resources to do so. The trade-offs—whether, for example, to invest in business zone infrastructure or social housing—present themselves on a regular basis. Similarly, stringent immigration policies that are designed to protect local citizens from increasing competition from abroad may harm companies that are seeking internationally competitive talent.31 As the city ecosystem and its actors work toward achieving each or both of these goals, they lead through a city of constant change and adaptation, making the city a lively social and economic space.
Researchers usually study highly similar units that only vary with respect to the phenomenon of interest and the outcomes that this phenomenon produces (e.g., success and failure). Theoretical replication approach in its pure form is problematic when it comes to the study of city ecosystem governance, because the differences among cities are numerous (e.g., unique history and socioeconomic makeup), and it is hard to argue that there are similar cities that vary only with respect to the topic of interest. To overcome this challenge, we combined theoretical replication with an alternative research strategy suggested by Yin,32 a direct replication approach. Direct replication is the process of identifying similar patterns across the observation units.
To start with, we decided to optimize comparability of the cities with the generalizability of findings. We restricted ourselves to the cities that have a longstanding history and are based in developed countries for comparability purposes. In this way, we could focus on the “mature” city ecosystems that had a developed ecosystem governance apparatus. Furthermore, we focused on cities with more than one million inhabitants and $20 billion GDP (2010). The size criteria ensured that we are comparing large ecosystems that were sufficiently complex to require formal approaches to ecosystem governance. Smaller cities may be able to function effectively through informal ties. However, to increase generalizability, we selected not just capitals that may benefit from the fact that they act as political centers for the country, we included cities of different sizes to be sure we are not capturing economies of scale. These sampling criteria helped us to study and then generalize ecosystem governance approaches for the complex and mature ecosystems that we were interested in.
As we were interested in the “best practices” of the city governance, we decided to perform comparative case studies of three cities that exhibited exemplar performance on various measures of business climate and quality of life.33 With this aim in mind, we consulted a number of renowned city rankings. As a measure of business climate, we used The Economist Intelligence Unit (EIU) Competitiveness Index34 that emphasizes present business climate and the Startup Ecosystem Report35 that focuses specifically on the climate for entrepreneurial companies. For the quality of life measure, we used EIU Liveability36 rankings and the Fast Company Smart City rankings37 as a forward-looking measure specifically focusing on the innovativeness of cities in improving the quality of life. Sampling the best performing cities, we were able to isolate ecosystem governance practices that appeared consistent across the cities. For example, we noted that all three cities have governments that are actively involved in shaping economic life of the city.
While successful overall, out of the three chosen cities, one excelled in quality of life measures and the other two in the business climate measures. This allowed us to conduct some theoretical replication by looking at the relative difference between the performance of the cities in the quality of life versus business climate measures. Stated differently, we could study ecosystem governance approaches that were “optimizing on the quality of life” versus “optimizing on the business climate.”
After considering these factors, we selected Chicago, London, and Vienna. Vienna was chosen because it was seen to be particularly effective in increasing the quality of life for its citizens. In the EIU Liveability Index,38 it ranked second; and in Fast Company’s “Top Ten Smart Cities on the Planet” list,39 it ranked first. London and Chicago, however, excelled in economic performance and were chosen as good case studies of business climate development. London was ranked particularly highly on the EIU competitiveness index,40 in second position, and in seventh position in the Smart Ecosystem Report.41 Chicago followed closely behind, ranked number nine on the EIU City Competitiveness Index and number ten on the Startup Ecosystem Report.
Once we had shortlisted the cities, we contacted the relevant city representatives with a two-page summary of our research. In Vienna, where we had no prior contacts, we identified the best suitable official from the organigram of the city government website. In London and Chicago, where we had prior contacts, we asked our contacts to introduce us to the most important city officials. All of the initial contacts accepted our research proposal and helped us to identify subsequent interviewees in the organization.42
A related challenge with studying ecosystem governance is to choose a reasonable and representative subset from a variety of activities that the ecosystem leadership is involved in. To rationalize our inquiry, we adopted a nested case study approach43 and began by identifying and studying successful ecosystems that emerge around selected city programs, projects, or functions in the area of business development, infrastructure (e.g., utility, urban, and transportation), and digitalization. We selected these areas of interest as they all had direct implications on both of the city goals, forcing ecosystem leaders to make more difficult choices in optimizing for one or the other. By contrast, focusing on topics such as gender equality or culture would have stronger impact on quality of life and would be beneficial, but less so to the business climate. For example, we focused on the governance of the transportation infrastructure in Vienna and structure of the ecosystem that underpins it, having found evidence that Vienna has an outstanding quality of transportation. We took a number of these “successful” projects across the cities and analyzed the conditions in which they emerge, the structure of the ecosystem that underpins them, and the governance approach of the city authority. Furthermore, business development, infrastructure, and digitalization were sufficiently distinct among themselves with respect to criteria such as upfront investment required, type of stakeholders, and time frame so as to generalize across different types of projects that an ecosystem leader is involved in.
Our first source of data was the archival data available from the city websites. We obtained and analyzed numerous website documents to come to an initial understanding of each city, its functions, projects, and manner of operating. We specifically investigated the functions of the cities of our interest, inspecting their websites, annual reports, and other documents used to inform the public about their projects and activities. Using this archival data, we were able to acquire a detailed appreciation of the roles, functions, and planning and decision-making processes for the aforementioned functions.
The first wave of archival data analysis was followed by interviews that were used to gain a deeper understanding of the informal practices that were less well documented in the archival data. We performed 46 interviews of average length between 60 and 90 minutes. We interviewed 24 city representatives in Vienna, ten in London, and eight in Chicago, covering leadership of the aforementioned functions, such as the city chief technology officers (CTOs), heads of the business development agencies, and deputy mayors for transportation. We, in addition, interviewed citizens, city entrepreneurs, and corporate management of large enterprises to cross-validate the insights obtained from the city officials. Interviews were semi-structured. We began with open questions concerning city performance, and then progressed to questions that helped our understanding of the structure, functioning, and performance of particular projects.
We started the data analysis by mapping out the city ecosystem according to the major ecosystem participants. We grouped ecosystem participants according to the role they played in attaining the principal objectives of the city. Our grouping differentiated between the city government, businesses, academia, entrepreneurs, utilities, and various intermediaries between these groups. Once we had a clear understanding of how cities functioned on a general level, we began to focus more closely on the functioning of the city authority, consisting of the mayoral team, the public institutions under the direct authority of the mayor, and private companies commissioned by the mayoral team, which collectively represented the ecosystem hub that governed the city ecosystem. We then identified all of the functions that the city authority performed (e.g., transportation system development, support of the economic development), focusing on the aforementioned functions because they had a direct impact on both business and citizen goals and were, therefore, more prone to tensions.
Once we have identified the functions, we focused on understanding how the overarching goals (business climate and quality of life) translate into the goal of each function (e.g., design and support transportation system that maximizes the quality of life and the business climate over a certain time horizon). We then focused on mapping out the particular projects that deliver these goals (e.g., new metro line development), and, finally, we focused on the ecosystems that underpin the delivery of these projects—their structure, the governance approach adopted by the ecosystem hub (city authority), and the advantages and disadvantages associated with this structure/governance. In the process of analyzing the structure/governance of the individual projects, we iterated between the constructs and archetypes that we received from ecosystem governance literature and the data. We then performed the cross-case analysis, comparing the structure/governance of the different cities and their performance.
Once we were satisfied with our understanding of the ecosystem structure and governance on the level of particular projects and the attainment of specific objectives, we aggregated our notes to make inferences about the structure and governance of the city as a whole and the attainment of overarching city objectives. Stated differently, we looked across the individual ecosystems/project/goals and how they were chosen, developed, and changed. We then again performed the cross-case analysis, looking for differences and similarity in patterns of overarching governance and corresponding performance.