Building Open or Closed Ecosystems: A Question of Organizational Strategy and Leadership

Jonathan H. Westover, PhD
Jul 30
8 min read

Listen to this article:

Abstract: This article explores the strategic decision between open and closed ecosystem approaches for businesses, drawing on 15 years of management consulting experience. The article argues that neither approach offers a universal solution, with each presenting distinct advantages and tradeoffs that must be evaluated against a company's specific context. Open ecosystems foster innovation through collaboration, diverse thinking, and network effects, while closed systems provide greater control over user experience, intellectual property protection, and profit margins. The article presents practical considerations for organizational decision-making, including industry norms, organizational capabilities, customer needs, and governance structures, supplemented by industry examples that demonstrate successful hybrid approaches. Rather than advocating for either extreme, the author recommends a nuanced, context-driven strategy that may evolve over time, emphasizing that the most effective ecosystem design aligns with a company's unique vision, capabilities, and industry circumstances.

As a management consultant with over 15 years of experience advising a wide range of organizations on strategic initiatives, I have frequently found myself wrestling with the question of whether companies should build open or closed ecosystems. There is no simple, one-size-fits-all answer; rather, the optimal approach depends greatly on a company's vision, mission, industry context, and leadership priorities.

Today we will explore the core advantages and disadvantages of open versus closed ecosystems and discuss practical considerations and provide industry examples to help leaders thoughtfully navigate this important strategic decision.

The Case for Open Ecosystems

While closed ecosystems allow for tighter control and larger profit margins in the short-run, research has shown that open ecosystems fare better in creating long-term value and stimulating innovation. As scholar Henry Chesbrough posited in his seminal work on open innovation, "not all the smart people work for [any single company], and internal ideas are not the only ones that can generate value" (Chesbrough, 2003). When organizations embrace openness by inviting external partnership and collaboration, they gain access to a much broader pool of ideas, technologies, talent and markets.

This open exchange of ideas also fosters a spillover effect that mutually benefits all participants. As an open ecosystem grows, the collective talent and resources within that ecosystem multiply exponentially - a classic win-win scenario (Enkel, Gassmann, & Chesbrough, 2009). Real-world examples like Linux, Android, and HTML/web standards have demonstrated how open platforms can scale to become globally transformative technologies through the network effects of widespread adoption and contributions.

Some key advantages of open ecosystems include:

Faster innovation through greater diversity of thought and accelerated learning effects. When a wide range of participants are encouraged to experiment freely, new solutions emerge organically from the emergent behavior of that highly complex system (Surowiecki, 2004).
Lower barriers to entry. By making core platform technologies openly accessible, new entrants face fewer obstacles to participation - attracting more developers, startups and complementary solutions that further expand the ecosystem (Boudreau, 2010).
Greater resilience through decentralization. When power and responsibilities are distributed more widely across an ecosystem rather than concentrated within a single entity, the entire system gains redundancy and adapts more dynamically to changes (Page, 2007; Farrell & Saloner, 1985).
Network effects that supercharge adoption rates. As more people and organizations participate in and mutually benefit from an open ecosystem, its overall value grows exponentially - creating a positive feedback loop (Katz & Shapiro, 1994).

While control may feel safer in the short-run, the strategic benefits of openness in spurring greater innovation, scale, resilience and profitability make a compelling case - if effectively governed - for leaders considering their ecosystem approach.

The Appeal of Closed Ecosystems

That said, the closed ecosystem model also has certain strategic advantages that should not be dismissed:

Total control over the user experience. Companies like Apple tightly curate every aspect of their closed ecosystems to ensure optimal user experiences and brand consistency (Ofra, 2011).
Capture of fuller profit margins. By integrating hardware, software and services within a walled garden, closed ecosystems allow companies to vertically integrate profits at each touchpoint rather than sharing margins with external partners (Hagel & Singer, 1999).
Protection of core intellectual property. Closing ecosystems prevents outside parties from freely copying, modifying or reselling a company's most innovative and differentiated technologies (West, 2003).
Easier monetization of proprietary assets. It's simpler for companies to charge hardware subsidies, app store fees, software licenses or service subscriptions within their own closed world (Armstrong, 2006).

While the long-term rewards of openness cannot be denied, closed models continue appealing to companies seeking immediate control and profit optimization. For nascent ventures especially, the risk aversion of a closed system could make strategic sense initially.

Both open and closed ecosystem approaches carry clear tradeoffs for organizational leaders to weigh based on their unique strategic context and priorities. Rather than advocating one approach over another, a more balanced perspective acknowledges merits in both models. The right choice ultimately depends on aligning ecosystem philosophies with a company's distinct vision, capabilities, and industry circumstances.

Practical Considerations for Organizations

With an understanding of these core strategic factors in mind, what practical guidance can be offered to help companies determine their optimal ecosystem approach? Here are a few key questions for leadership teams to carefully consider:

Industry Norms and Competitive Dynamics: What ecosystem models predominate within your industry currently? While first-mover advantages exist, going against prevailing norms may prove too disruptive. However, shifts in customer needs or competitor strategies could present opportunities to differentiate through an alternative approach. Continuously scan the ecosystem and competitive landscape.
Capabilities, Resources and Risk Threshold: What are your organizational strengths and weaknesses? Consider technical skills, partnerships, funding levels and risk appetite. A closed ecosystem may leverage incumbent advantages better initially, while open strategies demand broader capabilities and appetite for experimentation. Start small and scale gradually based on demonstrable progress.
Customer Needs, Values and Behaviors: Why do customers engage within your industry? Do they prioritize open participation, closed experiences, or a mix of both? Different customer segments will favor varying degrees of openness - so understand motivations across personas. Iterate based on measuring what resonates most through mixed methods like surveys, interviews and analytics.
Intellectual Property Protection Needs: What are your most innovative and differentiated assets? For companies dependent on proprietary innovations, closed systems protect commercial interests better initially until alternative monetization models emerge. But over-relying on secrecy limits wider learning and progress. Find balanced approaches like selective open-sourcing or patent pools when possible.
Profitability and Pricing Strategies: How will you charge customers and retain margins? Open source collaborations require sustainable, non-proprietary business models. Closed platforms offer more direct monetization but risk backlash. Hybrid strategies combine proprietary and open components quite effectively when thoughtfully designed. Continuously test alternatives.
Governance, Participation and Contribution Structures: How will input from outside partners be coordinated and prioritized? Even open systems require light-handed processes to align efforts, resolve conflicts, incent participation and protect community health. Governance must balance open participation with coordination needed for viable roadmaps and releases. Iterate based on learnings.

There are rarely simple answers to questions as strategic as open versus closed ecosystems. But through a careful analysis of industry, customers, capabilities and priorities - ideally informed by experimentation and pilot programs - leadership teams can discern wisely. Remember, circumstances also evolve over time. Continue reassessing as strategic context shifts.

Industry Examples

Let's explore a few practical examples:

The Automotive Industry: Traditionally closed for commercial competitiveness and safety reasons, some auto manufacturers are now piloting more open strategies for technological innovation through industry consortiums focused on common challenges like battery standards, autonomous driving, in-vehicle experiences. This enables competitive collaboration at the ecosystem-level while still allowing differentiation.
Cloud Computing: Initially each major cloud provider favored restrictive proprietary lock-in within their ecosystems. However, as organizational needs for multi-cloud flexibility grew, open standards for interoperability, portability and hybrid deployment models gained favor. Vendors now offer both open and closed options.
Healthcare/Pharmaceuticals: Strict regulations demand privacy within clinical systems. Yet life sciences companies piloting more open pre-competitive R&D collaborations report accelerated progress in tackling pressing global health issues like sepsis, cancer and gene therapies. Open science, when thoughtfully governed and partnered with private sector rigor, bears fruit.
Social Media/Networks: Dominated by large, consumer-oriented closed platforms. But grassroots social impact organizations demonstrate promising early pilots using open-source decentralized protocols and federated architectures to empower marginalized groups with greater autonomy, ownership and protection of their online participation and data sovereignty.

In all industries, the most progressive companies continuously experiment, pilot at the edges, and learn by implementing hybrid models combining both open and closed strategic advantages - dynamically shifting postures over time based on contextual factors. There is wisdom to be found in nuanced, balanced approaches.

Conclusion

Whether building open or closed ecosystems, there are merits in both models depending on a company's unique circumstances, priorities and stage of development. While control appears safer in the short term, research shows that open participation and distributed innovation bear the greatest rewards over the long run in spurring economic and societal progress.

The keys for leadership teams lie in considering their industry context and competitive dynamics, capabilities and risk tolerance, customer needs and profitability strategies, and intellectual property grounds. Hybrid strategies that pilot open and closed approaches in iterative fashion informed by measurement and learning will likely yield the richest strategic insights.

Rather than dogmatic stances, an agile posture open to evolution serves companies best. The future may bring unforeseen shifts necessitating new ecosystem philosophies. Progressive organizations will continue scanning contexts dynamically and pilot novel combinations constantly informed by research yet attentive to pragmatism. Overall balance, nuance and ongoing re-evaluation appear wisest guides for navigating this evolving debate.

While there are no single right answers, I hope this discussion has illuminated both sides of the open-versus-closed ecosystem question for practitioner audiences. Most importantly, leaders must ground their choices in thorough contextual analysis and strategic fitness rather than ideological preferences alone. An open yet prudent mindset will best serve organizational aspirations for long-term growth and impact.

References

Armstrong, M. (2006). Competition in two‐sided markets. RAND Journal of Economics, 37(3), 668-691.
Boudreau, K. J. (2010). Open platform strategies and innovation: Granting access vs. devolving control. Management Science, 56(10), 1849-1872.
Chesbrough, H. (2003). Open innovation: The new imperative for creating and profiting from technology. Harvard Business School Press.
Enkel, E., Gassmann, O., & Chesbrough, H. (2009). Open R&D and open innovation: Exploring the phenomenon. R&D Management, 39(4), 311-316.
Farrell, J., & Saloner, G. (1985). Standardization, compatibility, and innovation. RAND Journal of Economics, 16(1), 70-83.
Hagel, J., III, & Singer, M. (1999). Unbundling the corporation. Harvard Business Review, 77(2), 133-141.
Katz, M. L., & Shapiro, C. (1994). Systems competition and network effects. Journal of Economic Perspectives, 8(2), 93-115.
Ofra, A. (2011). Open standards, closed systems and intellectual property. Info, 13(3), 10-23.
Page, S. E. (2007). The difference: How the power of diversity creates better groups, firms, schools, and societies. Princeton University Press.
Surowiecki, J. (2004). The wisdom of crowds. Anchor Books.
West, J. (2003). How open is open enough? Melding proprietary and open source platform strategies. Research Policy, 32(7), 1259-1285.

Jonathan H. Westover, PhD is Chief Academic & Learning Officer (HCI Academy); Associate Dean and Director of HR Programs (WGU); Professor, Organizational Leadership (UVU); OD/HR/Leadership Consultant (Human Capital Innovations). Read Jonathan Westover's executive profile here.

Suggested Citation: Westover, J. H. (2025). Building Open or Closed Ecosystems: A Question of Organizational Strategy and Leadership. Human Capital Leadership Review, 23(4). doi.org/10.70175/hclreview.2020.23.4.5