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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:

  • 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.

  • To achieve these benefits, extended enterprise members must be willing to relinquish total control.

  • 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.

  • 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.

  • 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.

01fig01.gifFigure 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

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:

  • reflect qualitative and quantitative measures

  • capture supply chainwide margins, return on investment (ROI), return on sales (ROS), and the like

  • reveal competitive metrics related to other extended enterprises

  • measure end-use customer satisfaction, repeat purchases, and loyalty

  • reflect both short-term and longer term goals

  • value learning as a viable outcome

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