Extended enterprises are often confused with business ecosystems. This is a problem, for strategic choices for your extended enterprise are different from strategic choices for your business ecosystem. Let me briefly state the difference and then give some examples.
I define an extended enterprise is a system of partnerships designed to create value for customers. It is a static structure that exists for a number of years. Members of the extended enterprise are listed in contracts that are drawn up before the extended enterprise starts.
A business ecosystem, by contrast, is a system of economic actors that depend on each other for their survival and well-being. Entering and leaving a business ecosystem is an actor’s own decision. There is no elaborate system of agreements that defines the role of each actor in the ecosystem. Within some general constraints on their behavior, actors are free to do what they want.
In this blog I clarify the concept of extended enterprises by means of a few examples and explain the difference with ecosystems. I close with a description of the strategic choices you must make for your extended enterprise.
In the 1980s,the US-based company McKesson evolved from a distributor of drugs and health care products to independent drugstores into a coordinator of an extended enterprise that includes drugstores, drug manufacturers, insurance companies, and consumers. McKesson’s software helps drugstores to set prices, perform accounting services, and design optimal shop layouts. It gives up-to-date sales information from drugstores to manufacturers so they can optimize their production schedules. It processes insurance claims for consumers for prescription reimbursement.
Following the privatization of European state-owned railway companies in the 1990s, the German company Knorr-Bremse, manufacturer of braking systems for commercial and rail vehicles, started adding service packages to its integrated braking systems. State-owned companies were interested in buying as many vehicles per available budget, but the new privately owned companies are interested in reducing total cost of ownership. So Knorr-Bremse started selling analysis and consultancy services to reduce maintenance costs and extend the life of their braking systems from 25-30 years to 40-45 years. They offered to put an expert on-site. They created a Rail Services business unit that offered modernization of mature systems.
Both companies created an extended enterprise consisting of their suppliers, customers, customers of their customers and possibly other partners. The responsibilities of each partner are specified in a contract that specifies coordination processes, rules for data sharing, interfaces, and performance indicators. The aim in these and other extended enterprises is to create more value for the customer, and this typically involves a communication infrastructure that closely integrates the value-adding activities of the partners in the extended enterprise.
It is not difficult to find more examples of extended enterprises. Xerox performs document management and business process management for its customers. Rolls Royce does not sell jet engines but thrust. Atlas Copco, manufacturer of compressors, has started to sell air per cubic meter. Philips does not sell MRI scanners but MRI scanning services.
Extended enterprises are win-win constructions. They are designed so that profitability of any of the partners is to the benefit of all partners.
Extended enterprises have ecosystems
Just like any other enterprise, an extended enterprise lives in a business ecosystem. It must deal with competitors. It assumes a public infrastructure that may help or hinder its business. Regulators at the national and international level create conditions that affect the way they can do business. Customers may stay or walk out, noncustomers may be hard or easy to reach. Trade unions, professional organizations, and interest groups may facilitate or force the enterprise to change its behavior. The media may put the spotlight on the extended enterprise when they wish. Cybercriminals may attack its infrastructure. Government-sponsored agents may steal its intellectual property.
The actors in a business ecosystem have not signed contracts with each other that specify how they will cooperate to create customer value. Rather, they participate because it contributes to their survival and well-being. They make their decisions according to some set of norms and values that may not be agreed by everyone and have not been specified in contracts drawn up in the past.
Business ecosystems are not designed as extended enterprises are. Instead, they evolve as a result of the actions of their participants.
Strategic decisions for extended enterprises
A business model for an extended enterprise must specify four kinds of strategic decisions.
Extended enterprises increase the scope of their value proposition by adding complements to a core offering. What is the core of your offering? Which complements can you or your partners offer? Important current trends are servitization (selling the functionality of a product rather than the product itself) and condition-based maintenance (monitoring conditions of use and performing preventive maintenance based on that).
Extended enterprises include suppliers, distributers, customers and, if necessary, their suppliers and customers. Governance of this network is not market-based (with low switching costs) but relational (with high switching costs). How well do you know the partners in the extended enterprise? Are they trustworthy? What is the cooperation relationship – reselling, revenue sharing, co-creation, OEM supplier? How are prices determined, who has which IP, who controls the customer, who does quality assurance, and who does customer support?
Where a single enterprise makes profit by selling a product, companies in an extended enterprise may choose from a range of profit models. Products or services may be sold by subscription. Payment can be per use, per transaction, or per users. Payment may be based on performance, with a threshold below which the customer does not have to pay.
Extended enterprises are of all ages, but today’s extended enterprises are facilitated by the Internet and by broadband communication. Sensor technology, cloud computing, and 3D printing enable new forms of cooperation across enterprises. IoT frameworks like Siemens’ MindSphere and GE’s Predix facilitate extended enterprises in manufacturing.
In addition to hardware, coordination processes and rules for data sharing must be defined for an extended enterprise to work.
You may want compare this list of strategic questions with those for ecosystems, which I discussed in my previous blog on Netflix.
From my above account it is clear that decisions about hardware and software are necessary but not sufficient to set up a successful extended enterprise. Just as important are decisions about what value is created by the extended enterprise, what network of partners is needed, and according to what profit model they will operate. Strategic decisions along these four dimensions must be aligned. A change in any of the four strategic dimensions listed above requires a reassessment of the decisions in the other dimensions.