By John Hagel III and John Seely Brown
June 16, 2011

Behind many of the labels on clothing we buy in stores throughout the world, there is a company few know about — Li & Fung. This company, based in China, runs a global supply network for the apparel industry that includes more than 10,000 business partners.

It is not just the scale and diversity of this network that is impressive. If you ask Li & Fung’s business partners why they are part of this network, the top reason they offer is that they learn faster as part of this network than they ever could on their own or as part of any other network. Li & Fung understands that helping their business partners improve is a key to building a sustainable advantage in an extremely competitive industry.

Two brothers — Victor and William Fung took over the family business in the mid-1970s and began to transform it into a sophisticated organizer of a vast, global network of companies. Li & Fung has enjoyed a sustained history of double-digit growth in a traditionally low growth business.

The company’s transformation largely stems from its decision to hire a cadre of former managers of apparel manufacturing plants. These folks could do a 15-minute walk-through of a manufacturer and tell you exactly what the plant could do, even if the manager was claiming otherwise.

With this move, Li & Fung built trust and launched the learning process with its potential partners for two critical reasons. The prospective Li & Fung partner realized that the person sitting on the other side of the table had a deep understanding of its operations, so they couldn’t pull a fast one on them and they needed to play it straight. The prospective partner also began to see that there was an opportunity to learn from someone who had seen a lot of different manufacturing operations and could probably provide interesting insight on how to up their own operations game.

Li & Fung’s network of business partners represents an ideal example of a dynamic business ecosystem, a gathering of companies where different players help each other get better faster by working together. These ecosystems take advantage of the strengths and capabilities of many companies to support the business initiatives of their organizers and other participants. Rather than treating the resources of these companies as fixed, the organizers of these ecosystems are dedicated to finding ways to help participants learn faster so that they can steadily improve their performance and increase the value of their resources.

While many executives understand that they can do more with less by connecting with other companies, our business partners often only see us through the lawyers and business development types that may know very little about the operational aspects of the businesses they are dealing with. That’s because we generally take a static view of the resources available from our partners. With a static view, the issue quickly becomes who gets what share of the existing pie, hence the need for skilled negotiators to make sure we get as much as we can.

Static vs. dynamic business ecosystems

Static ecosystems are the most common type of business collaboration, but they often do not take full advantage of the participant’s potential. Executives establish these ecosystems when they realize the value of connecting with third parties. That’s fine, but it assumes that the potential benefits of setting up a relationship are finite — they are what they are and the only task is to find them and take advantage of them. Of course, for even these limited ecosystems to work, all participants must find some value in participating, such as access to complementary products or services, or valuable information.

Static ecosystems are typically organized in a hub and spoke fashion, where participants maintain two-way communication with the organizer but have little contact with other participants in the same community. The organizer invests little time and effort in developing the capabilities of participants. As a result, any learning in such an ecosystem is largely an after-thought, driven by individual participants working in isolation.

Even the popular method of crowdsourcing operates as a static ecosystem. It benefits the organizer much more than the contributors. Netflix (NFLX) was, by far, the main beneficiary of its contest to gain a better recommendation algorithm for customers, for example.

With dynamic ecosystems, however, as more partners exchange information and learn from each other, the total value that can be delivered to the market grows at a much more rapid rate, creating a rapidly expanding economic pie that can be distributed among participants. In that kind of world, there are far fewer battles over who gets what split of the pie. The more participants learn from each other, the more they trust each other, spawning a virtuous circle.

Static ecosystems tend to foster a “zero-sum” view of the world — if you win, I will have to lose. This view doesn’t encourage trust and undermines any efforts to keep the collaboration alive.

How to build a dynamic business ecosystem

You can start with a conventional static ecosystem and take incremental steps to build trust and learning opportunities. Li & Fung started over 100 years ago as a conventional matchmaker ecosystem — Li &Fung would introduce one Western apparel designer to one Chinese manufacturer, take a commission and leave it to the two parties to find ways to collaborate.

Perhaps a first, modest step would be to introduce operating line managers from both sides to each other and urge them to come up performance improvement initiatives (not just cost reductions) that they could pursue together.

As you look to develop your own business ecosystems, think of yourself as the host of an exciting party. The initial guests, if they are smart and engaging, will make it easier to attract others. But don’t stop there — introduce guests to each other who might be able to learn from each other and pose an interesting question to get the conversation started. Dynamic ecosystems are like those kinds of parties — they require a lot more work but the rewards can be quite phenomenal.

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