Extending the Organization

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Lecture 5

• Extending the Organization
• (Chapter 3)

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Announcements

• Job/Internship fair
• Tuesday April 24, 10am(!) 130pm
• University Center
• Lecture tomorrow (Friday)
• 9am
• Engineering 2, room 506
• Case study Wyndham

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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

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Todays lecture Extending the firm

• Three main themes
• Managing communication and relationships within a
  firm
• Developing communities with shared goals
• Different business models for different roles in
  that community

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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

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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)

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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)

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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

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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

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Table 3.1 Options for designing differentiated
unit groupings
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Relationship Structure

• Last lecture talked about managing relationships
  within organization
• Today Relationships between organizations
• Competing
• Partnering
• Mutual dependence

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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

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Table 3.2 Options for Designing Inter-Firm
Governance
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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

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Figure 3.1 Emerging IT-Enabled Extended
Enterprise Models
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Different Sources of Revenue and Cost

• Todays business environment allows companies to
  make and spend money through multiple channels,
  summarized in the following tables

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Sample Revenue Options
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Sample Cost Categories
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Sample Asset Categories
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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

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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

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Questions, Break, Presentation
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Business Opportunities from New Market

• Several new roles have emerged due to
  communication and market changes
• Each presents business opportunity with unique
  characteristics

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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

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Figure A3.1 Classifying Network Business Models
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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?

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Focused Distributor Models
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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

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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

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Focused Distributors

• eAggregators
• insWeb
• Provide information on products or services for
  sale by another channel
• Catalogs, comparisons, reviews
• Dont complete final sale transaction
• Pass customer to supplier obtaining referral
  fee and advertising revenue

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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

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Focused Distributors

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

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Portals

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

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Portal Business Models
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Producers

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

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Producer Business Models
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Digital Infrastructure Providers

• Hardware
• Software
• Components

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Infrastructure Distributor Business Models
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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

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Infrastructure Portal Business Models
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Infrastructure Producer Business Models
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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

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Figure 3.2 NASDAQ Extended Enterprise
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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

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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

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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

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Global Healthcare Exchange

• Founded in 2000 by big names in healthcare
  JohnsonJohnson, 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

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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

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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

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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

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Project Teams and Topics

• Due tomorrow
• If you dont have a team, stick around after class

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Presentation 2