- The New Competition: The Extended Enterprise
- Defining the Extended Enterprise
- Summary
This chapter is from the book
This chapter is from the book
This chapter is from the book
Defining the Extended Enterprise
Thus far, the discussion of the extended enterprise has not included a formal definition. The extended enterprise is the entire set of collaborating companies, both upstream and downstream, from raw material to end-use consumption, that work together to bring value to the marketplace. The advantages of the extended enterprise derive from a firm’s ability to quickly utilize the entire network of suppliers, vendors, buyers, and customers. The flows of information that lie at the core of the coordination and collaboration among network members not only link disparate information sources, they also provide an opportunity to build knowledge-based tools. Companies engage in longer term partnering relationships built around mutual goals and accompanied by a very rich and deep exchange of information. Members’ view that their destinies are interdependent. This serves to separate the extended enterprise from other loose confederations of buyers and suppliers. The fact that success is now a function of the collective performance of the enterprise and not individual firm actions signals a significant change: The important words implied by the above are seamless and transparent.
Extending the notion of an integrated supply chain, members are bound by a shared set of norms and social contracts that emphasizes a win-win philosophy such that each shares equitably in the gains and the risks inherent in any form of competitive arena. Through their collaborative efforts, partners recognize:
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The importance of maximizing value for the marketplace and the entire network of suppliers. The gains, benefits, and costs savings should be felt system-wide throughout the extended enterprise. The advantages should be equitable, not necessarily equal. Advantage should be realized in proportion to individual contribution made.
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To achieve these benefits, extended enterprise members must be willing to relinquish total control.
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The need to gain system-wide synergies such that 1 + 1 = 3 and not something less than 2, as is often the case. The challenge here is one of integration and combining the complementary skills of each member of the extended enterprise.
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Members develop a laser-like focus on achieving end-use customer satisfaction so that competitive advantage results. A litmus test is whether the extended enterprise is able to operate with greater effectiveness and efficiency than is the single firm.
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Development of product and process is enhanced because companies can strategically link their core competencies with the competencies of their partners. The level of analysis is now the extended enterprise, and the entire network benefits from this leverage. Speed to market is accelerated, costs are lowered, and new market opportunities are more easily accessed.
It is natural to draw similarities to the definition of value chains and supply chains when describing the extended enterprise. However, the differences are more profound. At one level, the link and node supply chain models of production are not adequate to capture the way information and materials flows are managed. This approach is best suited for the sequential production schedule where interaction is viewed more as handing off from one point of production to another. The differences bring the extended enterprise to a higher level of integration and collaboration. Rather than moving linearly, it would not be uncommon to find a complex web of interchange and not a straight-line flow, as is depicted in Figure 1.1.
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Figure 1.1. A typical supply chain.
One popular text[13] defines the extended supply chain as the integrated set of activities completed by full supply chain participants upstream and downstream. It is clear that in this text an underlying emphasis is given to managing the logistics of the process. The observation that a small number of firms have comprehensive channel integration capability is compelling but downplays the gains achieved beyond cost saving and customer service.
Value chain analysis is a method for decomposing the firm into strategically important activities to understand their impact on costs and value. The framework argues that competitive advantage is understood by disaggregating the value-creation process into its discrete parts that contribute to a firm’s costs and create a basis for differential advantage.[14] In fact, one might argue that too much attention is directed to finding costs, and less energy is devoted to value creation and creation of competitive advantage. Conversations about the extended enterprise require a different perspective—a different world view.
At the extreme, we are sympathetic to the notions of a virtual corporation, where it is difficult to know where one firm ends and the other begins, by virtue of the permeable boundaries, the flows of information, and the level at which members jointly plan. Table 1.4 reflects the level of transformation needed to move from more traditional supply chain or value chain thinking to the extended enterprise mindset. In many value chain discussions, firms ask questions regarding where they should be to reap the greater value-added position. Despite an element of joint action, value chain partners still retain some vestiges of self-serving behavior. In the extended enterprise, such behavior violates basic norms and rules of engagement.
Supply chain management tends to focus on supply or demand issues but rarely incorporates the two. In addition, the intent is often to maximize flows and assets based on manufacturing resource planning (MRP) systems or other inventory-/production-based systems. These are all-important and are part of extended enterprise thinking, but although these considerations are necessary, they are not sufficient for the full impact to be realized. Shared product development, providing a complete business solution, and integrated long-term planning are also part of the extended enterprise.
Another differentiating factor is the role of learning and knowledge sharing/creating. Extended enterprises are learning organizations where knowledge is viewed as a quasi-public good to be shared across the member firms. Not only must managers now share insights and knowledge, they must also develop mental models that espouse a systems view. Enterprise members search for system-wide leverage points that bestow competitive advantage throughout the network.
Table 1.4. Comparison of Supply Chains, Value Chains, and the Extended Enterprise[15]
|
BUSINESS FACTOR |
SUPPLY CHAINS/VALUE CHAINS |
EXTENDED ENTERPRISE |
|---|---|---|
|
Environment |
More stable and static |
Dynamic and changing |
|
Focus |
Tends to be industry-centric |
Finds partners who bring part of the business solution |
|
Value-creation approach |
Leverages own competencies, more self-sustaining |
Leverages the competencies of all members |
|
Relationship type |
A teaming approach with some aspects of partnerlike behavior |
Strong collaborative behavior with very solid partnering behavior |
|
Infrastructure thrust |
Cost-driven |
Value-driven |
|
Profit focus |
Increasing own profit is the default |
Increasing profits system-wide |
|
Knowledge |
Shared carefully but tends to look internally |
Shared widely over the system |
|
Orientation |
Tends to emphasize workflows, etc. |
Emphasizes also knowledge and learning |
The extended enterprise recognizes that people are one of the most valued assets a firm can bring to the relationship. People are empowered to act, are trusted to use information as intended (i.e., for the good of the extended enterprise), and are trained to work well in teams and to support the notions of cooperative behavior. Learning is valued, and opportunities to learn are provided. Neither value chain nor supply chain analysis explicitly speaks of people as a valued resource. These competencies are the essential ingredient of the relationship that unleashes the value-creating ability of the extended enterprise. Many of these value-adding activities are less visible in the immediate term and can be related to measures such as return on assets, growth in market share and sales, and higher returns to stockholders.[16][17][18]
Table 1.5 further illustrates some of the unique characteristics of the extended enterprise by making comparisons with more traditional procurement thinking. By emphasizing a small set of criteria, we show that extended enterprise thinking is not business as usual and certainly is different from both a purchasing department perspective and a single firm perspective.
First, the focus of information technology is on cross-firm solutions and enables the free and honest flow of information to all partners in the supply chain.
Second, processes and structures emphasize decentralization and participation throughout the supply chain, with each partner given a say in how value is created and delivered to end-use customers. It is not possible to deliver a supply chain-wide solution if enabling mechanisms do not foster participation across all extended enterprise players. System-wide thinking replaces both a procurement function and a single firm orientation.
Third, people lie at the core of the extended enterprise. People trust, people share information, and people must be equipped to address the changes in perspective that are required. It is essential that we recognize that most managers do not currently possess the skills or mindset needed to operate in an extended enterprise environment.
Fourth, having enabling technology does not ensure that the right information is shared across companies. Workflow-related information is necessary to make the process work. However, the ability and willingness to share company-specific knowledge and expertise grant a competitive advantage to the extended enterprise.
The outcomes derived from the above do, in fact, differentiate winners from losers. Leverage is not seen as one firm’s ability to gain concessions at another’s expense; rather, it is the harnessing of complementary resources for the benefit of all members and especially for the end-use customer for whom the value proposition must be relevant.
Table 1.5. Comparisons across More Traditional Approaches to Procurement and the Extended Enterprise Framework
|
BUSINESS FACTOR |
TRADITIONAL PROCUREMENT FOCUS |
FIRM-LEVEL PERSPECTIVE |
EXTENDED ENTERPRISE PERSPECTIVE |
|---|---|---|---|
|
INFORMATION TECHNOLOGY |
Decision support is transaction-based Decision support and transactions internally focused Heavily transaction-oriented |
Sourcing plus logistics, cross-disciplinary Decision support tools and transaction internally focus Some attempt to seek external opportunities |
Seek cross-firm linkages to gain a competitive advantage Use of enterprise software and e-hubs Enterprise-wide is encouraged and includes partners |
|
FOCUS OF PROCESSES AND RE-DESIGN |
Cost reduction and transaction-focused Risk avoidance to total cost of ownership Make vs. buy Operational silo-centric |
Risk mitigation to reduce total cost of ownership EVA Outsource to lower costs Some cross-function/processes Enterprise-centric |
Total cost of ownership and revenue enhancement EVA and seek profits system-wide Core skills drive strategy to bundle product/service Encourage sharing risk-taking system-wide Learning system-wide to leverage skills of others Customer-centric |
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ORGANIZATIONAL STRUCTURE |
Bureaucratic and hierarchical Hybrid centralized/decentralized Internally focused Encourages command and control |
Bureaucratic but flatter Some empowerment Virtual under-utilization Multiple interactions upstream and downstream Shared services internally Mostly transaction efficiencies Some effectiveness measures |
Our supply chain Unnatural alliances Non-bureaucratic and hierarchical Virtual ownership Complex networks Look to fill skills Does not seek only to reduce fixed costs by shifting to variable costs |
|
PEOPLE |
Focus on own company What do you do for me? Some shift from price variance to some strategic thinking |
Less command and control, although it remains the default option Broader skills, more analytical with strong logistics to lower the cost for me |
Win-win Relationship management Business/general management thinkers Enlightened self-interest Manage for good of the supply chain |
|
INFORMATION CONTENT |
Cross-organizationally focused but still internal Multiple sets of data Tries to find supply chain opportunities for firm |
Some two-way exchanges and information sharing Linkages for just in time and electronic data interchange Mostly emphasizes workflow with some planning information |
Widely shared and transparent Closed-loop system Share plans that are jointly developed Information and knowledge are key Value relationships and information |
|
OUTCOMES |
Rationalize supply base to leverage cost Gain efficiencies Turnover high because skill sets begin to change Transform role |
Expand supply to gain efficient use of working capital and assets Increased opportunity/challenges for human capital Some chain-wide thinking and information sharing |
Expand market access Leverage financial assets Operational excellence Velocity Look to customers to build networks Differentiated value chains Unleash human capital from the entire extended enterprise |
Although there is still no consensus as to the correct set of metrics to use to measure the performance of the extended enterprise, it should:
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reflect qualitative and quantitative measures
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capture supply chainwide margins, return on investment (ROI), return on sales (ROS), and the like
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reveal competitive metrics related to other extended enterprises
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measure end-use customer satisfaction, repeat purchases, and loyalty
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reflect both short-term and longer term goals
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value learning as a viable outcome