Governing an Extended Enterprise

By Faisal Hoque  |  Posted 2008-08-18

The concept of the “extended enterprise” is hardly new. The notion certainly picked up steam in the 1990s as global markets took on structure, and outsourcing and partnerships became an acceptable response. Today, however, the nature of “extended” has evolved into something heretofore unimaginable.

Toyota and Honda have developed a competitive edge over the Big Three U.S. automakers in part by building long-term relationships with their suppliers. This involves Toyota’s and Honda’s executives understanding everything about the supplier and the supplier understanding exactly what Toyota and Honda need. It also involves visits to each other’s sites at the executive level; no detail is too small for the brass. The Japanese firms are tough on their suppliers, but also see to it that the suppliers get more and more business—and greater profits—if they do well.

Cisco has created the “I Prize,” a competition for new business ideas, and it has drawn more than 1,600 entrants from nearly 90 countries. Suggestions came in the fields of wireless, automotive, health care and energy. The winner will get a chance to join Cisco in developing a business around the idea—collecting a $250,000 signing bonus and up to $10 million in funding. Cisco does this despite spending $4.5 billion annually on R&D and acquiring a new idea-rich company every three weeks. Cisco is looking for its next billion-dollar business.

Seven-Eleven, Japan’s supply chain isn’t built on fast or cheap deliveries, but rather on responding to changes in demand. It tracks sales in real time, as well as the gender and age of customers. Its systems alert suppliers to changes in demand among stores. Deliveries are scheduled within a 10-minute window, and employees reconfigure shelves at least three times a day. Suppliers consolidate shipments into the same trucks, and the company has used motorcycles, boats and even helicopters to deliver the goods.

What distinguishes the extended enterprise today, of course, is knowledge: of the customer, the supplier and new business ideas in the minds of anyone, anywhere.

And the challenge for leaders today is governing this new-fangled approach, which breaks most of the management rules we grew up with. Even the term “governance” seems arcane—too harsh and proscriptive for a fluid and ever-evolving enterprise. Just look at the words we use for it: value web, network and ecosystem.

I’ve observed the evolution first hand, starting in the early 1990s at GE, where we were creating new and exciting business models and their enabling technology—too new, too exciting, it turned out, for the customers we had in mind at the time. And then in my own company, where the focus is on innovative management applications, research and best practices on which agile and adaptive organizations would run.

Technology, of course, makes the extended enterprise possible. And technology makes it necessary: the new markets, the globalization of business, the lower thresholds to entry for competitors, the speed of everything, the novelties in business models and products—all of these are the devilish work of technology. And managing technology wisely, within your four walls and outside across the extended enterprise—using available, proven management standards—is the answer.

A few general observations will move us toward a working governance plan.

Stop, look and listen. We cannot avert our eyes from the marketplace, both current and potential, nor from the details of our customers’ and their customers’ activities, nor from our suppliers and their suppliers. Sticking with our current knitting may be comfortable, but it is also deadly. Assuming anything about our supplier or customers is highly risky. We must also cast a light into the far corners of our own organizations to learn whether every employee and every operation is looking outward according to plan or merely pondering its navel.

The hierarchy is dead. Get over it. When the CEO can e-mail every employee and each can respond directly, we know the old order of managing is history. When partners outside the range of our command and control are critical to our success, we know that governance has undergone a seismic shift. When employees at the edges become our biggest asset and our biggest risk, we know that guidance has moved beyond dictatorial memos. And yet all our instincts push us to retreat to the corner office and communicate through our direct reports. Today, however, the organization that moves at the speed of a memo is already behind in the game.

Technology isn’t an afterthought. It’s the centerpiece of nearly every new endeavor, from a new product launch to streamlining a process to connecting with partners, suppliers and customers. It is strategic. It is our eyes and ears on the marketplace, and it is the connective tissue with people and organizations outside our four walls that are critical to success. It must be managed in one mind with the business, or at best it will cost us dearly and at worst it will fail us. The chasm between business and technology is perhaps the most serious obstacle we must overcome in creating an extended enterprise.

Silos are for grain. They don’t work inside or outside the enterprise for storing information or creating value. Sure, we know this, but do our divisions still operate with an “it’s them or us” mindset? Do we unconsciously treat our suppliers or customers as silos? Is the game to get as much out of them as we can?

To be effective, two general principles should guide the governing strategy that wraps around an extended enterprise:

Everyone is invited to the party. This is an enterprise-wide endeavor, a rethinking and revival of the organization as a whole. It is not a project for customer service, procurement or the IT department. As my co-authors and I stressed in Winning the 3-Legged Race, not only must the C-suite be engaged, but boards of directors must be engaged in technology beyond the CIO’s annual PowerPoint show. The board must relate its knowledge of the wider world to the internal doings of the organization. A seemingly random event somewhere in the world may in fact be the next big thing or the next big threat.

This is not your father’s outsourcing. This is not about transactions. It is about relationships. Locking in service-level agreements is not the answer. The strategic plans of your suppliers and the aspirations of your customers are the new playing field. Your communications, decision-making processes and technology must tie in. Your people will need new skills, marching orders and incentives to make it work.

Transformation, personal relationships, common vision, collaboration and trust: not radical ideas, simply the face of governance in the age of the extended enterprise.

Faisal Hoque is chairman and CEO of BTM Corporation.  BTM innovates business models and enhances financial performance by converging business and technology with its unique products and intellectual property. © 2008 Faisal Hoque