Planning
for the Extended Enterprise
Strategic
Overview
By
Jaap Schekkerman, B.Sc.
Thought Leader
Business Technology Strategy & Enterprise
Architecture
President
of IFEAD
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the pdf version of this article (462 Kb)
Introduction
Today, with the advent of the connected economy, we stand on
the threshold of an economy where the fundamental
processes of value exchange are being transformed.
The sheer abundance of information has led to a
surfeit of alternatives for consumers and reversed
the signaling mechanisms that influence the very
nature of supply and demand.
At the same time, transaction and coordination
costs are about to vanish, forever reshaping the
boundaries of the modern organization. Familiar
economic entities such as large corporate hierarchies
are becoming increasingly irrelevant as the connected
economy, not the organization, becomes the most
efficient means to conceive, create and exchange
value.
The form and structure of economic entities is
about to undergo rapid evolution. While not every
segment of the economy will be pulled into this
maelstrom immediately, we can now begin to see where
the changes will occur. The challenge for each organization
is to anticipate how those changes will affect our
organizations, and how to use them to create lasting
competitive advantage in the dawn of the connected
economy.
The
Extended Enterprise
Extended Enterprise
is the term for the set of windows that describes
the characteristics of a future proof organization
anticipating to its environment and collaborating
with its partners and customers by utilizing the
technology possibilities.
Business has to be
re-invented. Increasing complexity leads to entropy
where too much energy is focused on internal issues.
New competencies and roles have to be invented and
innovative applications will be created. Partnership
management has since more than a decade been on
the agenda of the CEO. After a decade of growing
awareness how the new technologies like PC, Internet,
mobile communication and broadband communication
can be used, organizations undergo rapid evolution.
The challenge is to anticipate how those changes
will affect our organizations, and how to use them
to create lasting competitive advantage in the dawn
of the connected economy. In other words “How can
they transform effectively towards those new rules
of the game?” How can they manage the ‘Extended
Enterprise’ that matches these challenges?
The
windows of opportunity
Each window represents
a set of characteristics related to a specific theme.
Extended Strategy
& Planning is one of the key themes of the Extended
Enterprise Model. Other key themes are Extended
IT, Extended Organization and Extended Lifestyle.
All these themes together deliver the necessary
adaptive behaviour for the Extended Enterprise.
The developing Extended
Enterprise is dynamic and evolving rapidly. It demands parallel flexibility in all who take part, and therefore
all extended windows has to allow for this extreme
flexibility, with changes accommodated in hours
and days, to respond to the new electronic network
based society rather than months and years as has
been traditional.
Three
basic structures for Connected Economy Succes
There are three fundamental structures that govern
the nature of all economic activity: supply; demand
and the way in which value is exchanged between
them. At its most rudimentary level, the entire
economy can be viewed as a universe made up of just
these three elements: value producing; value
consuming: and value exchanging entities.
However, the ways in which each of these elements
is constituted, and how each relates to the others,
are not fixed. In fact, these entities change their
boundaries and behaviors based on a number of different
circumstances.
While most organizations would readily subscribe
to the idea that supply influences demand, we’re
not nearly as comfortable with the idea that the
way in which value is exchanged influences supply,
or that the way in which transactions occur can
influence demand. The connected economy, as a signaling,
coordination and value-exchange mechanism, is reshaping
the fundamental organization of economic activity
along those very lines.
Economists have long debated the underlying principles
that give rise to the overall structure of the economy.
While there are many different models that attempt
to explain the natural organization of economic
activity, the Internet has brought three dominant
economic organizational forms into prominent and
stark relief: hierarchies, networks and collaborative
value webs.
It’s well understood that each of these forms becomes
a preferred economic structure under certain conditions.
Here are some rules of thumb:
- Hierarchies (Industrial
Enterprises) form when a concentration of specialized
knowledge or assets is required to produce and
market a product - for example how to locate,
extract and refine oil.
- Networks (Rebuilding
Enterprises) of suppliers predominate when demand
for a given product or service becomes highly
specific and highly uncertain.
- Collaborative
Markets, (Extended Enterprises) emerge based on the numbers
of buyers and suppliers, the cost to exchange
value, and the needs of participants to obtain
and exploit information.
Since most economies have lengthy histories, most
have also built up legacy structures. For most of
the industrialized world, hierarchies make up the
dominant economic pattern. However, the adoption
of the Internet, with its ubiquity, transparency
and speed, has begun to influence the circumstances
that determine how and where each of these forms
will be successful in future.
In the pending evolution of economic activity,
the Internet is no less than an extinction-level
event, positioning hierarchies, networks and collaborative
markets against each other.
Understanding
the Opportunities
The challenge then becomes one of understanding
what opportunities will emerge due to the changes
in organizational structure of economic activity.
In 2000, venture capitalists have put their money
on the Internet as a first-6 rate mechanism for market
signaling, customer acquisition and value exchange.
Clearly, the technology has already demonstrated
that it can have a dramatic influence on market-facing
activities such as generating awareness, and promoting
loyalty, and encouraging transactions.
However, the questions remains one of how the Internet
will ultimately reshape the rest of economic activity
– and whether these initial changes are just the
beginning of a much larger and more profound transition
to fundamentally new forms of economic structures,
like the collaborative Markets.
How
Business Models are Morphing:
The
Value Creating Collaborative Business Model
The evolution of the organization of economic activity
is being driven by a change in environmental circumstances:
the rapid adoption of the Internet and new technologies.
Its speed, ubiquity and transparency are propelling
the natural selection of organization forms into
specialized value-producing and value-exchanging
entities.
We
are going from a period marked by large hierarchies
that were self-contained value-producing and value-exchanging
entities, whose economies of scope lowered transaction
and coordination costs, to a period marked by narrowly
focused value-creating entities networked together
based on well understood boundaries of complementary
skills sets, to a community of hyper-competitive
value-creating entities collaborated together by
specialized value-exchanging entities in markets,
serving highly informed and empowered customers
and organizations.
Plan
for Permanent Volatility
It is certainly understandable
to lament the condition that we find ourselves in
across the globe, but market fluctuations are not
new – nor is the threat of recession.
What is different, however, is the degree
of volatility that we are witnessing. It seems permanent, if that is possible. In other words, it seems that we are in an
era of rapid evolution of our economic entities,
much like the evolution, which many other species
have endured – except for the ones that we will
never know. In situations where volatility is so marked,
we instinctively reach for something to believe
and to trust. If we do not find such a signal, we quickly
lose our coordinates and our orientation.
Dynamics
is a Constant, So is Adaptation
In searching for more
stability, we might ask ourselves, “What is constant?” The answer is obviously Dynamics. Dynamics and related to dynamics, Change is
indeed a constant.
Less often acknowledged, however, is the
companion of Change – Adaptation. It is also a constant in that it takes place
repeatedly and, in some situations, continuously. In Nature, we see all forms of adaptation taking place, not only
biological but also behavioral learning, copying,
and deploying are essential techniques for offsetting
threatening circumstances. Interestingly, the most impressive characteristic is not adaptation
itself but the trait of adaptive ness, which seems
to be a trait that can be cultivated and leveraged
into flexible-but-strong strategies for survival.
Evolution
of Complex Systems – Self Organization
Evolution has progressed from simple elements up
to human societies and systems. Simple elements
have become more complex systems with autonomous
internal elements. Cells have formed animal and
plant bodies. Animals have formed societies. Ecological
structures have emerged.
There are simple steps leading into cooperation
and hierarchy formation.
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Stage I. Independent units compete for maximum fitness. Without
regard to their elaboration, this is what
state of the art genetic programs and algorithms
seem to do.
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Stage II. Some competitors begin to cooperate. This is never
accomplished in genetic algorithms
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Stage III. Cooperation continues inside a border to protect
resources from aggressive outside.
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Stage IV. The higher hierarchical units continue to evolve.
We are back to a usual genetic algorithm with
self-organization.
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This process repeats
itself into higher hierarchies whenever it as enough
resources. Real life indicates that whenever resources
are scarce, competition is beneficial. What is striking
in life is the evolution of reusable and modular
lower level units with self-organizing capabilities.
Life uses the same components again and again in
different designs.
Business
Concept Innovation:
Today,
the connected economy raises the stakes to unheard-of
levels. When it combines global reach with decreasing
transaction costs and increasing returns to scale,
it makes business-model disruption
much more pervasive. Networked like never before,
tiny start-ups now suddenly deliver the clout of
long-established corporations
A
recent study commissioned by Forbes ASAP magazine
found that innovation was the dominant factor in
boosting market valuations. In most cases, it proved
far more influential than customer satisfaction.
However,
today’s innovations are tomorrow’s utility products
and processes. Just look at the Web browser. Once
the innovation has diffused throughout its natural
market, it becomes incumbent. Will today’s disruptors be tomorrow’s dinosaurs?
Will disruptors such as fuel cells spell extinction
for old-economy industries such as Oil and Gas?
So
if we classify organizations related to their complexity
and the dynamics in their environment, we can identify
four groups named ‘Disruptors’, ‘Active Adaptive
Innovators‘, ‘Industrials’ and ‘Rebuilders’.
Placing
these four groups in a matrix can be very useful
by identifying the type of organizations that will
have the best fit for addressing the Extended Enterprise
concept.
Companies who excel at
creating opportunities, for example, often recombine
elements of their businesses to reveal new capability
and derive new impact. Like entities in nature, they also routinely
“destroy in order to create.”
Connecting, by extension, is a way to multiply
value through information sharing and cross-linking
of capabilities.
Extended enterprises constantly test boundaries
to prevent silo-type thinking and behavior. They also establish feedback from connection
channels with customers, suppliers, employees, and
competitors that guide the enterprise toward a more
precise fit with the market. Evolving successfully
connotes selection and cultivation, and the most
adaptive companies seem to possess an uncanny ability
to speed up natural selection and promote investment
in adaptive techniques and underlying technologies.
Business Concept Innovation is de process to innovate
business activities in a short time cycle.
Strategic
Options multiply in an Extended Enterprise
Not surprisingly, the
extended enterprise benefits from more latitude
than organizations that cannot cope with changing
conditions. This
latitude stems from focus, flexibility, and speed. From its technology-enhanced capabilities for “matching the environment,”
the enterprise gains extraordinary focus in a micro-context. This permits extreme attention to detail and
subtle nuances in customer preference and behavior,
leading to larger profits. From its plug-and-play operating model, the
enterprise derives flexibility that permits the
organization to “morph” to fit the circumstances,
thus reducing decision time and reducing costs. And finally, from its reserve of information
and constant option specification, the enterprise
can accelerate toward a conclusion or a change with
decisive speed, when appropriate and not before,
thus preserving the maximum set of options until
it becomes necessary to commit.
The
Factors that will force Change Fastest
Not every business model will be instantly altered
by the changes wrought by the Internet. The longevity
of today’s business models is an indication of how
well they’ve adapted to their economic environments.
However, the attributes that makes one business
model successful for a given set of circumstances
can jeopardize its future when those circumstances
begin to change. The challenge for many organizations
will be determining the sensitivity of existing
business models to the rapidly evolving set of economic
circumstances brought about by the adoption of the
Internet.
The
Rate of Change
The rate of change will often be dictated by how
rapidly an industry’s value-exchange mechanisms
can evolve over networked environments. In some
instances, the nature of how value is exchanged
or how business is transacted will change very little.
For instance, the sale of goods and services which
require a high degree of customization will likely
continue to be concluded on a case-by- case basis
between a limited set of well known trading partners.
While the network might facilitate the exchange
of information between each of the parties involved,
those kinds of bilateral transactions will remain
unique and relatively complex in how they are negotiated
and completed. In others cases, collaborative markets
will become the dominant means of conveying value.
Other environmental factors will have an equally
significant influence on the future of successful
business models. Not least will be the issues noted
above, including the certainty of demand, the degree
of asset specialization, or the costs related to
complete transactions. Changes in any one of these
factors can influence how successful incumbent business
models will be in a rapidly changing network environment.
One way to determine which existing business models
will most likely be affected by changes to environmental
factors would be to assess the degree of sensitivity
of the current organization of economic activity
for any given industry.
For instance, where asset specificity and transaction
costs are relatively high, the chances are good
that hierarchies will remain the preferred business
model.
However, where goods and services are subject to
high rates of demand uncertainty and consistently
lower transaction costs, networks and collaborative
value webs will emerge as the dominant business
model. If your current business model isn’t properly
positioned against key environmental factors, chances
are things are ripe for change.
Industry
Overview
A quick scan of industries against these factors
reveals some interesting results (see matrix). By
evaluating how each industry rates against a few
key environmental factors, a picture begins to emerge
of which ones are about to change.
Where oil & gas and pharmaceuticals exhibit
low demand uncertainty and high degrees of asset
and knowledge specialization, the probability is
that traditional hierarchical business models will
be slow to change. That’s not to suggest that the
ways in which consumers engage these organizations
might not be influenced by the Internet, but rather
to say their internal business models will not come
under undue pressure to change very quickly due
to the effects brought about by the Internet.
Insurance, financial services and high tech all
of which have moderate to high rates of demand uncertainty
and low asset specificity -- are likely to experience
significant pressure to evolve. In industries where
large hierarchies currently exist, they are likely
to split apart and become specialized value creating
and value exchanging entities employing both network
and collaborative value web based forms of organizational
behavior. Healthcare, which has moderate demand
uncertainty and higher transaction costs, is likely
to begin a longer evolution to newer forms of business
models.
Technology
Enables Us to Reach a Higher Level of Extendability
If we want to attain
a higher level of adaptiveness, how do we go about
it? Technology and creativity in its application together provide the
answer as well as the behavior of the people.
The culture and mindset
of the people working in an Extended Enterprise
must be open to new ideas, reacting fast on changing
circumstances, creating new opportunities. So the
people them selves have to be adaptive to react
on events.
Today we can obviously
measure events more precisely than ever, making
it possible to act on such information more rapidly,
completely, and automatically. This new granularity provided by technology
- what we might call “micro-observation” - is a
major enabler for enhanced pattern recognition and
the generation of decision alternatives. With the cost of repeated or even continuous
observation by “agent-based software” decreasing
daily, we are entering a period when constant reading
of variables will provide nearly on-line observe-react
capability in customer relationship activities,
supply chain management, and product development.
Even more critical, however, is the power
to act, to adjust, and to customize at low cost,
creating a system that is so instantaneously reactive
that it appears to shape its environment.
The net result is an order of magnitude improvement
in fit and far less “wasted profit” from missed
opportunities or tardy corrections of problems.
Extended
Technology
No one questions the fact that the Internet has revolutionized the
computing experience for users, as well as for extended
enterprises, the world over. But experts now see
that the Internet has also triggered a revolution
in the ways people use computing devices, and in
the devices themselves.
In the past few years, a multitude of new application-specific and
general-purpose devices has appeared, and many more
are on the way. Also, thanks to continuing improvements
in processing, memory and networking capabilities,
this trend is likely to accelerate in the future.
Many enterprises are now facing a challenge that
may be orders of magnitude greater than the PC revolution
in the 80’s. Back then; IT management disregarded
the fact that many line-of-business users were ordering
personal computers for their offices. The result:
near-chaos, as enterprise data, content and applications
suddenly proliferate across thousands of user desktops.
Today, user devices are again proliferating. But today’s challenges
are even greater. Today’s devices come in a wide
range of shapes, sizes and capabilities, and they
feature widely varying bandwidth-capacities, screen
formats, browsers and other attributes. Many are
wireless, but many are wired. For the extended enterprise,
the challenge is to accommodate these devices within
an infrastructure that can both maintain order and
still put each device to its best use.
Many enterprises have moved to create an e-business infrastructure
that enables a wide array of users, whether they
are customers, partners, or employees, and devices
to access various enterprise application services
and information. But now, the challenge becomes
the increasing volumes of content and applications,
as well as the diversity of user devices that are
requesting access to the increasing amounts of content.
Extended Enterprises that can anticipate and leverage
these new Internet access device technologies and
form factors, as well as the massive proliferation
of content and applications, will stand to gain
substantial and lasting competitive advantages.
Device differences in performance, footprint, screen format, bandwidth
capacity and other factors must be accounted for
by all relevant applications. A one-size fit all
approach won’t do the extended enterprise any good:
user experiences will be disastrous. Also, if the
enterprise attempts to serve content to all devices
at maximum speed, intranet bandwidth will be wasted
and compromised. Many devices have limited bandwidth
capabilities, so by allocating extra cycles to them,
the enterprise takes usable bandwidth away from
other, higher-capacity resources.
Another challenge involves avoiding administrative complexity. By
adding niche or one-time adaptive capabilities only,
enterprises run the risk of adding a new layer of
complexity to already overburdened software architectures,
as well as adding new responsibilities to already
overwhelmed in-house developers.
The best answer is to build an adaptive infrastructure, based on
an extended architecture, one that can handle the
device formats and bandwidth demands of today and
tomorrow’s personalized wireless and wired devices.
Extended
Technology: Criteria to Evaluate
Once you understand the extended IT concept, management or architects
can begin the IT planning process.
Key to building an extended architecture & infrastructure that
can scale to handle wide-ranging applications, device
requirements and customization are these specific
evaluation criteria:
- Per-device and per-bandwidth personalization
- The extended enterprise should be able to serve
content in the form and by the performance mode
that best suits the device.
- Content customization - Likewise,
content should be customizable for each device
or application. For instance, content-adaptation
rules might be present that would add intelligence
to the adaptation process, lowering the quality
of content served to bandwidth-limited devices,
and serving higher-quality content to higher-capacity
devices.
- Functionality customization -
Functionality to support users and customers should
be customizable for each function, task or activity.
Adaptable workflow functionality has to be present
to serve the users in all their activities.
- Bandwidth detection - Additional
intelligence should be present that can detect
the requesting device’s bandwidth capabilities:
a PDA communicating via a 128Kbps ADSL link would
be served at a lower speed than, say, a laptop
with a 10 Mbps wireless LAN link.
- Image transformation - This would
add the capability of adjusting graphic resolution
according to the resolution capabilities, and
the pre-set rules, of a given application and
device.
- Run-time, adaptive performance
engine -The basic adaptation process involves
converting one format, HTML, for instance, to
another, say WML, by means of an intermediate
step, that step involves moving the content through
pre-written XSL (eXtensible Style sheet Language)
templates. To avoid wasted, redundant conversions,
the conversion should take place only as the content
is requested, and it should happen at ultra-high
speed, so that the conversion will be transparent
to the requesting user.
- Transparency – A uniform way the user is facilitated
by the intelligent extended infrastructure in
a logical and understandable manner, based on
the functional personal workflow of the user,
supported by a uniform user interface.
- Distributed adaptation - This is an additional
level of sophistication that permits content adaptation
to take place at the network node closest to the
content server. Since adaptation typically produces
a slimmed-down version of the original content,
the resulting file is smaller, and can travel
more quickly to its destination.
- Modularity - A modular architecture pays dividends
in scalability, but it also means enterprises
can start with a modest infrastructure installation,
and then grow according to their ideal extended
business model.
- Scalability - An extended infrastructure must be
capable of scaling quickly to take on more content,
more applications, or more users. Often, these
may happen at the same time, because the pervasive
Internet, along with the many devices that populate
it, forms a highly dynamic environment.
- Extended Enterprise architecture - An extended
enterprise architecture delivers flexibility and
adaptability in technology and business changes,
but it also means business innovation can be facilitated
very fast by technological possibilities.
- Integration with industry-standard
technologies - Finally, the infrastructure should
fit within the existing enterprise infrastructure
as cleanly as possible, tying into web servers
and back-office applications easily. This way,
the new infrastructure will maximize existing
technology investments.
These evaluation criteria are very useful in the
discussion with customers and others, to help to
understand the real needs of the customer and to
focus on quick wins in the context of extended IT.
Toward
The Extended Enterprise:
How
Tomorrow's Organizations Will Succeed
In industrialized economies, the evolution of economic
activity into mass markets and large hierarchical
organizations was neither a capitalist plot nor
a cosmic accident. It was the natural evolution
of an economic system seeking to lower costs and
increase participation by the most expedient means
then available. The changes brought about by the
Internet are no different; only the consequences
have changed. The transparency of information over
the Internet creates an environment where value
can be easily discovered, conveyed and exchanged.
Since demand will become increasingly specific and
personalized, the networked economy will be one
inhabited by tightly focused value- creating and
value-exchanging entities.
In this environment, the successful firms will
be those, which can quickly and inexpensively become
part of a fluid extended enterprise. They will have
to concisely establish their core competencies and
value propositions. In many cases, that means they
will have to choose whether they will be a value
creating or a value-exchanging entity. The days
where full service means higher prices are over;
in the connected economy, the consummate value proposition
will always be only a mouse click away.
Finally, those successful networked firms will
have to be trusted suppliers and practitioners of
their trades. If competence is what gets you into
the network, trust is what will keep you there.
Lose that and you’ll lose everything.
Extended
Enterprises Will Dominate Competition
Within the decade, we
will see highly intelligent enterprises come to
dominate their space. As noted, they will capitalize on the technology
to withstand shocks and to maximize fit with the
environment. They will utilize their adaptiveness to shape
and execute real-time strategic options.
Make no mistake - these will not be simply
“learning organizations” - but instead action-based
entities that attack open space, defend instinctively,
and anticipate possibilities.
For companies who do not upgrade their capabilities
to competitively adaptive levels, difficulties will
multiply rapidly.
Costs will appear out of control vis-à-vis
the best-evolving players and historical knowledge
of customers will quickly decay in value. In defense, the smarter of these players will
elect to outsource large pieces of their core businesses
to superior firms and then recombine the pieces
imaginatively to suit specific opportunities - thus
creating a modular or plug-and-play capability that
is both strong and flexible.
Conclusion
Ultimately,
successful Connected Economy organizations will
be those that can effectively determine how and
where they will realize increasing rates of return
on the capital they employ. Many companies believe
that the best opportunity to realize scale is by
using the Internet as a customer acquisition mechanism.
That may be true for some organizations, but it
won’t be prevalent because value webs are likely
to become the dominant value-exchange mechanism.
So the question will turn to one of whether the
value-creating properties of the firm can realize
scale.
In a world populated by value creating and value
exchanging entities, often the decision will come
down to owning one of three fundamental value propositions.
You will either be able to own the customer, own
the content that the customer seeks to acquire,
or own the infrastructure that allows the content
to be produced or the value to be exchanged. Each
has a different business model. Each exploits a
unique core competence. Each employs a different
means of generating economic returns. However, in
the Connected
Economy, attempting to own all of them simultaneously
will increasingly become a game of diminishing returns.
When the network allows competitors to fill the
gaps in their offerings at no additional cost, owning
all of these competencies only increases risk without
necessarily increasing returns.
As the factors that make up the economic environment
change under the influence of the Internet, we can
begin to anticipate how and where they will alter
the cohesion and boundaries of the entities that
make up the connected economy.
We can estimate which industries and business models
will likely become threatened and which will likely
survive. In the process, we can redefine the way
in which our organizations will participate and
continue to create value for customers and shareholders
alike.
Five
Questions You need to Address when discussing the
Extended Enterprise concept
Management
needs to ensure that their organizations executives
are thinking about the implications of the Extended
Enterprise. Here are five questions you can use
to spur your management:
- Does
the management team have a shared vision of the long-term (five to
ten years out) business implications of the collaborative
market architecture?
- Do we
have a transition plan that balances the state of the architectures development
with a clear understanding of the areas of highest
business impact?
- Are
we moving fast enough today to build our expertise and exploit immediate
opportunities for streamlining collaborative core
tasks, outsourcing activities in which we don’t
have distinctive capabilities?
- Does
the management have a clear understanding of
the obstacles within their organization that may
hinder them from exploiting the full value of
the new technological possibilities, and do we
have initiatives under way to overcome these obstacles?
- Are we exerting sufficient leadership in shaping both the functionality offered
by providers of Internet services (defining, for
example, the performance levels required for mission-critical
applications) and the standards needed to collaborate
with partners?
