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Rethinking manufacturing in Scotland: dealing with three dynamics

By Steve Paton - Posted on 5 August 2021

Harry Sminia and Steve Paton take a look at manufacturing and the concept of ecosystem as an alternative in this, their second blog about manufacturing.

In an earlier blog, we argued that Scottish manufacturing needs to think differently and must ditch the idea that manufacturing is about being part of a supply chain. We claimed that supply chain thinking is problematic because it is stuck in the past, ignores complementors, and is essentially static. We offered the concept of ecosystem as an alternative. Why would this be better? We propose three reasons. 

The first reason is that the concept of ecosystem recognizes the importance of complementarity. 

In fact, an ecosystem is nothing new. Back in the early days of radio at the beginning of the 20th century, if you wanted a radio you had to buy all the components and put it together yourself. It did not take long for somebody to realize that there is value in assembly and radio set manufacturers appeared like, for instance, RCA. But radio sets by themselves were of little use as there needs to be something to listen too. This in turn means someone must produce radio content. What eventually emerged was an ecosystem by which radio content is produced and broadcast by radio stations, received by radio sets and, in most cases, paid for with advertising revenue. At some point, music became the prevalent content, and this helped to bring about the phenomenon of pop music and the mutually beneficial relationship between radio stations and record companies which entertained listeners and boosted advertising revenue and record sales. 

What this tells us is that products and services on their own tend to represent little value. Things make more sense if we recognize individual offerings as a product/service bundle that generates complex functionality for a range of different users existing within a system of use. For radio, this system of use consists of listeners, advertisers, and pop musicians who all got some value out of the ecosystem. But this value only appeared because of the way in which various elements, such as radio parts, radio sets, records, music and advertising all combined. Each element on its own represents some value. 

However, in combination, there is more value than just the sum of these separate elements. That is complementarity. 

The second reason is that the concept of ecosystem recognizes a wide array of participants who all need to be considered. With radio, this includes radio stations, record companies, radio equipment manufacturers, electronic component makers, advertisers, ratings agencies, investors, a government agency that polices the airwaves and allocates frequencies, and many others. They are co-dependant and therefore must engage in various forms of cooperation. They also compete in some shape or form and to some extent have a range of conflicting interests. This situation of simultaneous competition and cooperation is captured within the concept of co-opetition. 

Co-opetition means that an ecosystem is inherently dynamic and constantly evolving as ecosystem participants seek to get the most out of it. This is the third reason why it is useful for manufacturing firms to think of themselves as operating in an ecosystem. We have found that there are three different but interacting dynamics that are present in an ecosystem.

First, there is the appropriation dynamic which is about where the money goes. The users that make up the system of use pay money to enjoy the product/service bundle. This is when value is realized. This money finds its way to various participants/ members of the ecosystem. But who gets the biggest prize? How much of the overall margin ends up with whom? That is what appropriation is about, and there will be continuous movements, ploys and negotiations carried out to shape the flow of money. 

Second, there is the capability dynamic which is about who is allowed to contribute what. To produce this complex functionality, many different contributions are needed. Yet various firms are capable of doing the same things. Hence there is competition about who will do what, and about who is allowed to decide this. This is another aspect about which there will be continuous movement, ploys, and negotiations as firms jockey for position. 

Both dynamics, of course, are interlinked. Whether and what you are allowed to contribute will affect how much you can appropriate, while the amount of money you are able to appropriate will allow you to maintain and develop capability. Or a lack of appropriation would indicate what capability needs to be developed. These two dynamics are mostly associated with competition. 

The third dynamic centres on cooperation, and as such affects and is affected by the other two. This is the governance dynamic and it deals with how the ecosystem is coordinated and organized. There is a range of coordination mechanisms that will appear in some shape or form. On the one extreme, there is the market mechanism with coordination happening by way of market exchange. On the other end of the scale, there is the hierarchy, with coordination happening by way of organisation and management. There are many coordination mechanisms that exist somewhere in between pure market and pure hierarchy, these include strategic alliances, preferred supplier relationships, technological platforms, modularity, clearing houses, agreed standards, and informal understandings. Although such coordination mechanisms tend to have some longevity, again movement can be expected. 

What we can anticipate is that each ecosystem has a particular arrangement in place that contains an appropriation regime, a capability configuration, and a suite of governance mechanisms. What we can also anticipate is that such an arrangement is unstable. There will be participants who are not happy with the arrangement. There will be participants who take initiatives, develop technology and products and services and by doing this they aim to change the existing arrangement to one that is more favourable to them. 

Consequently, strategy is then about whether to embark upon such initiatives and about how to deal with the initiatives that others are taking. Overall, how a manufacturing firm deals with the inherent and continuous dynamics in an ecosystem determines its survival and success. 

More generally for Scottish manufacturing, it is not about getting supply chains into Scotland, it is about getting Scottish manufacturing firms into ecosystems. The question to answer then is, how do you do that? 

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