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Extending the Enterprise

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					      Lecture 5

Extending the Organization
       (Chapter 3)
              Announcements
• Job/Internship fair
  – Tuesday April 24, 10am(!) – 1:30pm
  – University Center
• Lecture tomorrow (Friday)
  – 9am
  – Engineering 2, room 506
  – Case study: Wyndham



                                         2
     Lessons from Leapfrog Case
• Example of growth from startup to market
  leader
• Strategy of targeting two distinct (but
  complimentary) markets
• High standards, very targeted workforce
• Outsourced from beginning, but not in critical
  strength areas
• Different market patterns
• Still struggled to make money consistent
                                                   3
 Today’s lecture: Extending the firm
Three main themes:

1. Managing communication and relationships
   within a firm
2. Developing communities with shared goals
3. Different business models for different roles in
   that community


                                                  4
     Communication (r)evolution
• Open communication between firms is new!
• Compare with advent of telephone
• This chapter extends chapter 2 discussion to
  include how decisions are made in a networked
  organization




                                              5
            Business networks

• “Companies need not trade off flexibility for
  integration in critical cross-company processes. By
  managing the activities of and relationships with
  suppliers as networks rather than production lines,
  companies can swap their tightly coupled
  processes for loosely coupled ones, thereby gaining
  much needed flexibility and improving their
  performance in the bargain”
                                          (page 80)

                                                        6
                Some key ideas
• Differentiation how organizations are
  subdivided into specialized work units (nodes)
  – Horizontal (operating units)
  – Vertical (power/authority levels)
• Integration relationships and links between
  nodes required to unite specialized units and
  enable shared value
  – Task-based (groups work together on processes)
  – Information/expertise based (groups provide
    information or expertise)
  – Social relationships (affiliation and identity separate
    from work)                                              7
       Sociology of relationships
• Stronger relationships needed in presence of
  – Increased complexity, uncertainty
  – Task interdependence eg. Shared services
  – Innovation
  – Large real-time information sharing
  – Diverse subcultures
  – Leader preferences




                                                 8
Framing decisions of differentiation
• What capabilities and resources are required to
  achieve goals?
• What activities must be performed to get there?
• How should these activities be grouped within
  specialized units?
• See table 3.1




                                                9
Table 3.1 Options for designing
 differentiated unit groupings




                                  10
         Relationship Structure
• Last lecture talked about managing
  relationships within organization
• Today: Relationships between organizations
  – Competing
  – Partnering
  – Mutual dependence




                                               11
Framing Decisions of Interdependence
• What key tasks must be managed between
  specialized groups?
• What organizational solutions are needed to
  coordinate and control interdependence?
• What configuration of organizational solutions
  should be used to ensure alignment and fit with
  the business environment and strategy?
• See table 3.2

                                                12
Table 3.2 Options for Designing Inter-
          Firm Governance




                                         13
           Network Ownership
• Corporation = legally defined organization
• Alliance = between a small number of players
• Community/Ecosystem = players working
  together to achieve shared goals
• See figure 3.1




                                                 14
Figure 3.1 Emerging IT-Enabled
  Extended Enterprise Models




                                 15
Different Sources of Revenue and Cost
• Today’s business environment allows
  companies to make and spend money through
  multiple channels, summarized in the following
  tables




                                                   16
Sample Revenue Options




                         17
Sample Cost Categories




                         18
Sample Asset Categories




                          19
                  Hybrid Governance
• Is market or hierarchy better?
   – Transaction cost theory says markets give greater efficiency and
     effectiveness unless cost and risk of using market mechanisms to
     coordinate and control interdependencies are higher than the cost and
     risk of hierarchy
• Cost and risk increases with
   –   Duplication of costly assets that cannot be shared
   –   Setting frequent disputes
   –   Cost related to information access
   –   Need to join others to increase market power
• Hierarchy used when high risk of market failure
   – Executives given authority to determine shared purpose and goals
   – Unified leadership gives focus
• Hierarchy optimizes vertical information processing
• Markets optimize horizontal information processing
                                                                             20
   IT enables governance models
• Information sharing, processing, creating
  – Shared purpose of multiple firms
  – Enable configurations and solutions between firms
    but do not preclude market-based transactions as
    well
  – Shared projects/values encourages increased
    activity over time




                                                        21
Questions, Break, Presentation




                                 22
   Business Opportunities from New
              Market
• Several new roles have emerged due to
  communication and market changes
• Each presents business opportunity with unique
  characteristics




                                               23
       Internet Business Classes
• Producers
  – Package work of creators into products, services
    and solutions to meet market need
• Distributors
  – Enable buyers and sellers to connect, communicate
    and transact business
• Portals
  – Aggregate products, services and/or information for
    use by members of community

                                                       24
Figure A3.1 Classifying Network
       Business Models




                                  25
           Focused Distributors
• Provide products/services for specific industry
• Differentiating business models
  – Does business assume control of inventory?
  – Does business sell online?
  – Is price set outside the market or is online price
    negotiation and bidding permitted?
  – Is there a physical product or service that must be
    distributed?


                                                          26
Focused Distributor Models




                             27
          Focused Distributors
• eRetailers
  – Amazon.com
  – Control inventory, set prices
  – Revenue = sales of products/services
  – Cost = procurement, inventory management, order
    fulfillment, customer service
  – Started as bookstore
  – In 2000, changed business model to eLogistics


                                                      28
           Focused Distributors
• eMarkets
  – Global Healthcare exchange
  – Links buyers and sellers
  – Take cut from transactions – no direct control of
    physical inventory
  – Often also provide system integration and custom
    software development




                                                        29
           Focused Distributors
• eAggregators
  – insWeb
  – Provide information on products or services for sale
    by another channel
  – Catalogs, comparisons, reviews
  – Don’t complete final sale transaction
  – Pass customer to supplier – obtaining referral fee
    and advertising revenue



                                                       30
           Focused Distributors
• Infomediaries
  – Internet securities
  – Unites sellers and buyers of information
  – No physical product
  – Often subscription fees, advertising fees
  – Barriers to entry are low (information is freely
    available)
  – Companies evolve to allow transactions


                                                       31
           Focused Distributors
• Exchanges
  – NASDAQ, eBay
  – Sometimes control inventory
  – Price is negotiated by buyer and seller
  – Various fee structures used




                                              32
                    Portals
• AOL
• Provide access to internet and tools
• Subscription fee




                                         33
Portal Business Models




                         34
                 Producers
• Business models have evolved
• Manufacturers use internet to design, produce,
  distribute products
• Service providers deliver widerange of online
  services
• Educators
• Advisors
• News services

                                                   35
Producer Business Models




                           36
   Digital Infrastructure Providers
• Hardware
• Software
• Components




                                      37
Infrastructure Distributor Business
              Models




                                      38
           Infrastructure Portals
• Combine access to range of hosting services
• Horizontal Portals
  – ISPs, gateway access
  – Access and maintenance fees, subscription,
    advertising, transaction fees
• Vertical Portals
  – Application service providers (ASPs)
  – IBM business outsourcing


                                                 39
Infrastructure Portal Business Models




                                        40
Infrastructure Producer Business
              Models




                                   41
   Community Example: NASDAQ
• Collaborative community started in 1971
• National Association of Securities Dealers
  (NASD)
  – Enabled network of members to trade securities on
    behalf of individual and institutional investors
  – 22.5 billion shares of stock listed (2005)
  – Operates over network rather than physical trading
    floor
  – Multiple members: see fig 3.2

                                                     42
Figure 3.2 NASDAQ Extended
          Enterprise




                             43
       Foundation of NASDAQ
• Automation of end-to-end securities trading,
  clearance and settlement process
• Streamlined activities lead to efficiency,
  consistency and reliability
• Members make decisions to control processes
• Broker-dealers become network orchestrators,
  bringing buyers and sellers together
• Creates an extended enterprise of on demand
  business
                                                 44
         Role of IT in NASDAQ
• Standards and rules are embedded
  automatically
• Information created as byproduct of automated
  systems
  – Enables reporting
  – Enables monitoring
  – Transparency leads to trust




                                                  45
         Partnerships and Trust
• Process-based trust
  – Parties manage interdependencies over recurrent
    transactions
• Affiliation-based trust
  – Identity between groups/within group
• Institution-based trust
  – Tied to formal organizational and social structures



                                                          46
     Global Healthcare Exchange
• Founded in 2000 by big names in healthcare –
  Johnson&Johnson, GE Medical Systems, Baxter
  Healthcare, Abbott Laboratories, Medtronic
• Designed to provide a “worldwide online, open and
  independent electronic trading exchange to facilitate
  the real-time transfer of information, money , goods,
  and or services in the worldwide medical equipment,
  products and services industry”
• Drive down costs in supply chain
• Internet-based company using experienced players
• Several strategic acquisitions, alliances and mergers
                                                          47
                 GHX vision
• Avoid “middle-man” between suppliers and
  providers
• Control fees
• Standardize data in industry
• Improve efficiency of supply chain for all players
• Challenges:
  – Competing companies had to work together
  – Who had how much control?
• Creative LLC agreement
                                                  48
                  GHX Strategy
• “Borrow” employees from founding companies
• Outsource supply-chain software development
• Mergers and acquisitions such as HealthNexis
    – Led to acceptance in market
•   Strategic Mergers such as Medibuy
•   Evolving product offerings
•   Blend of technology, service, logistics
•   Startup built by established firms
•   Small company with large network of partners
                                                   49
      Key Insights from examples
• Hybrid forms of government are emerging that
  unite hierarchy, market and partnership
• A network orchestrator role is emerging to
  coordinate inter-firm interdependencies within
  business ecosystems, like NASDAQ and GHX
• Network orchestrators design organizational
  solutions that reflect the interests of all parties
• Collaborative community and trust co-evolve
  over time
                                                        50
       Project Teams and Topics
• Due tomorrow
• If you don’t have a team, stick around after
  class




                                                 51
Presentation 2




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posted:7/31/2011
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