Lecture 5

Extending the Organization

(Chapter 3)

2

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

3

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 (affliation and identity separate

from work)

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Table 3.1 Options for designing differentiated unit groupings

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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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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

9

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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Figure A3.1 Classifying Network Business Models

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Appendix Revenue, Cost, Asset models

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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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Table 3.2 Options for designing inter-firm governance

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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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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 Distributers

• eRetailers– Amazon.com– Control inventory, set prices– Revenue = sales of products/services– Cost = precurement, 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– Don’t 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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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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Digital Infrastructure Providers

• Hardware

• Software

• Components

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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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Summary tables from appendix

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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 – 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

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History and Evolution

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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