November 12, 2001

Fast, Focused, and Flexible

Focusing on core competencies and leveraging partner abilities can drive business success

By Frank Diana

Traditionally, organizations focused on differentiating themselves and improving operational efficiencies by owning their entire supply chain. Ownership was the only way to achieve the seamless flow of information that would allow an organization to truly optimize internal operations. Ownership also allowed organizations to be in complete control of their businesses - which was very appealing to many large enterprises. Although this approach may have been successful in the past, it had several drawbacks. First, it was extremely capital-intensive. Organizations had to invest significantly in purchasing, building, and operating various pieces of the supply chain. Second, and perhaps more important, this model forced organizations to focus efforts on business functions that were not their core competencies.

This approach began to change quickly with the advent of the Internet. The global access provided by the Internet and the resulting market transparency caused businesses to revamp their corporate strategies. The Internet offers organizations the ability to realize a seamless information flow at a relatively low cost. Organizations no longer need to own their entire supply chain and can instead leverage the core competencies of the partners within its value chain.

Although the Internet provides access to previously unreachable markets, it can also, often painfully, expose the weaknesses of organizations. Although the Internet represents a vast opportunity to organizations previously limited by geographic boundaries, it creates a struggle within the enterprise to differentiate itself in the midst of stiff competition. Organizations face a diminishing ability to sustain competitive differentiation through traditional mechanisms such as product features and price value. They must now leverage B2B solutions to address the pressures of increased competition and the demand for faster "time to value."

MOVING TOWARD VERTICAL DIS-INTEGRATION

In response, the enterprise becomes "core competency centric," directing its resources only to the activities and efforts that directly affect the quality of the product or service it provides. For example, an organization that has traditionally manufactured widgets may realize that it does not excel at the physical construction of those widgets, but that its true core competency lies in R&D. This enterprise should look to outsource the manufacturing of these products so it can focus efforts only on its strengths. The differentiation, therefore, lies in the bundling of services that offer the customer a compelling value proposition. The enterprise will not own all the services that make up the bundle, and therefore must create strategic partnerships and alliances to complete the bundle. This extended network of business partners, also known as a value chain, includes suppliers, partners, customers, and other entities that have a stake in satisfying the value chain's customers.

As companies automate their growing webs of trading partner interaction, entire value chains begin to compete with other value chains. Companies face increased pressure to be a pivotal member of their chain. To attain their goals, these companies will look to become functional specialists by shedding roles that are not relevant to their core strengths, and as a result "vertical dis-integration" begins to occur. (See Figure 1.)

The associated increase in dependence on trading partners could turn a solid strategy into an unprofitable initiative. Therefore, unencumbered communication and interaction with trading partners is a critical success factor. The relationships between internal and external entities may exist today, but they need to become more collaborative and better able to maximize the power of the Internet to enable a new set of value-added interactions.

Over the past decade, enterprise initiatives were internally focused around process excellence, and the major software packages introduced during this period were inward-facing. Future initiatives will be holistic, cross-partner, collaborative approaches resulting in the ability to leverage new distribution channels, create new product and service bundles with other members of the value chain, and tap into new market segments with an enhanced value proposition. The ultimate goal is an intelligent value chain focused on planning and executing and is based on a much wider information base. Decision makers are the key beneficiaries of this intelligent value chain, as better information lets them more accurately forecast demand or determine the success or failure of a product or service before it affects the bottom line. The ultimate value lies in automatically dealing with volatility in the market.

SIGNS OF MATURITY

The first phase of e-commerce has given way to a second, more complex phase. This second phase addresses a disconnected information flow that exists because of incomplete integration both within and between enterprises. This phase will be enhanced by considerable advancements in integration technology and dominated by component-based and service-oriented architectures. As the second phase progresses, two key trends will have significant effects:

• Organizations will aggressively adopt industry-specific data and process standards. These standards will serve as the foundation for integration across enterprises.
• Applications, software, and storage will become services. As applications become more Web-centric, the underlying business functions they support will start to look more like services than applications. This dynamic is taking several forms. The first, more visible, form is the current application service provider market. This market has leveraged the application as a service paradigm for the last two to three years. The second form is referred to as "Web services," or in some cases "business services." This form will change the IT landscape forever.

Industry leaders with world-class technology capabilities and vertical domain expertise will emerge to exploit these trends. By 2005, I believe the virtual enterprise that leverages the core competencies of many specialists within its value chain will be a reality. These virtual enterprises will view the world through a business process lens and will leverage business services that are provided by the members of the value chain, as well as third-party intermediaries. Core business processes and IT support must be designed and redesigned in line with this overall extended enterprise strategy.

EXTENDED ENTERPRISE STRATEGY

The idea behind vertical dis-integration is that to compete effectively and react to various market forces, companies must look beyond their traditional four walls. This vision is captured in the extended enterprise business model, which integrates an organization's internal information systems and business processes with those of customers, employees, and business partners (see Figure 2). The ultimate outcome is truly integrated value chains, enabled by shared applications and business processes, that form the foundation of extended enterprises.

This model depicts the entire environment in which organizations may now conduct business. In this complex business environment, organizations must look at the "big picture" of their operations - both internally and externally - in order to remain competitive and achieve success. This model sets the context for understanding and planning strategic business initiatives throughout the extended enterprise.

The model focuses on extending out the business functions from the back- and front-office to include customers and trading partners. This inclusion creates a more efficient and effective set of business processes.

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