Research Summary: The recent surge of interest in “ecosystems” in strategy research and practice has mainly focused on what ecosystems are and how they operate. We complement this literature by considering when and why ecosystems emerge, and what makes them distinct from other governance forms. We argue that modularity enables ecosystem emergence as it allows a set of distinct yet interdependent organizations to coordinate without full hierarchical fiat. We show how ecosystems address multilateral dependences based on various types of complementarities—supermodular or unique, unidirectional or bidirectional—which determine the ecosystem's value‐add. We argue that at the core of ecosystems lie nongeneric complementarities, and the creation of sets of roles that face similar rules. We conclude with implications for mainstream strategy and suggestions for future research. Managerial Summary: We consider what makes ecosystems different from other business constellations, including markets, alliances, or hierarchically managed supply chains. Ecosystems, we posit, are interacting organizations, enabled by modularity, not hierarchically managed, bound together by the nonredeployability of their collective investment elsewhere. Ecosystems add value as they allow managers to coordinate their multilateral dependence through sets of roles that face similar rules, thus obviating the need to enter into customized contractual agreements with each partner. We explain how different types of complementarities (unique or supermodular, generic or specific, uni‐ or bi‐directional) shape ecosystems and offer a “theory of ecosystems” that can explain what they are, when they emerge, and why alignment occurs. Finally, we outline the critical factors affecting ecosystem emergence, evolution, and success—or failure.

Research Summary: The recent surge of interest in "ecosystems" in strategy research and practice has mainly focused on what ecosystems are and how they operate. We complement this literature by considering when and why ecosystems emerge, and what makes them distinct from other governance forms. We argue that modularity enables ecosystem emergence as it allows a set of distinct yet interdependent organizations to coordinate without full hierarchical fiat. We show how ecosystems address multilateral dependences based on various types of complementarities-supermodular or unique, unidirectional or bidirectional-which determine the ecosystem's value-add. We argue that at the core of ecosystems lie nongeneric complementarities, and the creation of sets of roles that face similar rules. We conclude with implications for mainstream strategy and suggestions for future research. Managerial Summary: We consider what makes ecosystems different from other business constellations, including markets, alliances, or hierarchically managed supply chains. Ecosystems, we posit, are interacting organizations, enabled by modularity, not hierarchically managed, bound together by the nonredeployability of their collective investment elsewhere. Ecosystems add value as they allow managers to coordinate their multilateral dependence through sets of roles that face similar rules, thus obviating the need to enter into customized contractual agreements with each partner. We explain how different types of complementarities (unique or supermodular, generic or specific, uni-or bi-directional) shape ecosystems and offer a "theory of ecosystems" that can explain what they are, when they emerge, and why alignment occurs. Finally, we outline the critical factors affecting ecosystem emergence, evolution, and success-or failure.

This paper proposes that transaction costs and capabilities are fundamentally intertwined in the determination of vertical scope, and identifies the key mechanisms of their co-evolution. Specifically, we argue that capability differences are a necessary condition for vertical specialization; and that transaction cost reductions only lead to specialization when capabilities along the value chain are heterogeneous. Furthermore, we argue that there are four evolutionary mechanisms that shape vertical scope over time. First, the selection process, itself driven by capability differences, dynamically shapes vertical scope; second, transaction costs are endogenously changed by firms that try to reshape the transactional environment to increase their profit and market share; third, changes in vertical scope affect the nature of the capability development process, i.e., the way in which firms improve their operations over time; and finally, the changes in the capability development process reshape the capability pool in the industry, changing the roster of qualified participants. These dynamics of capability and transaction cost co-evolution are illustrated through two contrasting examples: the mortgage banking industry in the United States, which shows the shift from integrated to disintegrated production; and the Swiss watch-manufacturing industry, which went from disintegration to integration.

This paper provides an inductive theoretical framework that explains how and why vertical disintegration happens, showing that transaction costs are an incidental feature of industry evolution. I find that gains from intrafirm specialization set off a process of intraorganizational partitioning, which simplifies coordination along parts of the value chain. Likewise, latent gains from trade foster interfirm cospecialization, which leads to information standardization. Given standardized information and simplified coordination, new intermediate markets emerge, breaking up the value chain, allowing new types of vertically specialized firms to participate in an industry, and changing the industry's competitive landscape. 2005 469 Jacobides

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