Notes from the Field: Planning the Extended Enterprise

In my current engagement, there has been a lot of talk lately about “future-proofing” the overall organization. I find this puzzling, because the basic definition of that term has not been identified. As the economy becomes increasingly connected, this customer stands at the threshold where the fundamental processes of value exchange are being transformed. The sheer abundance of information has led to a surfeit of alternatives for consumers and has reversed the signaling mechanisms that influence the very nature of supply and demand.

At the same time, transaction and coordination costs are close to vanishing, forever reshaping the boundaries of the modern organization. What this customer is finding is that familiar economic entities, such as its large corporate hierarchies, are becoming increasingly irrelevant as our connected economy, not the organization, becomes the most efficient means by which to conceive, create, and exchange value.

As this customer struggles to identify itself in this new era, the challenges facing it are to anticipate how all of the changes will affect it and how to use those changes to achieve a lasting competitive advantage in the new connected economy. I introduced the “adaptive enterprise” concept a long time ago, with its design rules and architectural principles. We have evolved that into what we are now calling the “extended enterprise.” This offers a way to describe the characteristics of a future-proof organization, whereby this company can anticipate changes and collaborate with its partners and customers by utilizing the technologies possible. The great part of this corporate self-examination is that the company is understanding that its business has to be reinvented. Increasing complexity leads to entropy in which too much energy is focused on internal issues. New competencies and roles have to be invented, and innovative applications need to be created.

The way this customer has been transforming itself, and its discussion of the new economy and how the fundamental processes of value exchange are being transformed, bring me back to my college days, when I majored in economics. There are three fundamental structures that govern the nature of all economic activity: supply, demand, and the way in which value is exchanged between them. At its most rudimentary level, the entire economy can be viewed as a universe made up of just three elements: value producing, value consuming, and value exchanging entities.

The constitution of each of these elements and the ways in which each relates to the others are not fixed. In fact, these entities change their boundaries and behaviors based on a number of different circumstances.

This customer, like most, has subscribed to the idea that supply influences demand. However, it is not nearly as comfortable with the idea that the way in which value is exchanged influences supply, or that the way in which transactions occur can influence demand. The connected economy, as a signaling, coordination, and value-exchange mechanism, is reshaping the fundamental organization of economic activity along those very lines.

Economists have long debated the underlying principles that have given rise to the overall structure of the economy. While there are many different models that attempt to explain the natural organization of economic activity, the Internet has brought three dominant economic organizational forms into prominent and stark relief: hierarchies, networks, and collaborative value webs. It’s well understood that each of these forms becomes a preferred economic structure under certain circumstances.

Given the evolving economics that businesses—not just this customer—are facing today, the concept of the extended enterprise benefits from more latitude than organizations that have trouble coping with changing conditions tend to be willing to give. This latitude stems from focus, flexibility, and speed. From its technology-enhanced capabilities for “matching the environment,” the enterprise gains extraordinary focus in a microcontext. This permits extreme attention to detail and subtle nuances in customer preference and behavior, leading to larger profits. From its plug-and-play operating model, the enterprise derives flexibility that permits the organization to morph to fit the circumstances, thus reducing both decision time and costs. Further, from its reserve of information and constant option specification, the enterprise can accelerate toward a conclusion or a change with decisive speed, when appropriate and not before, thus preserving the maximum set of options until it becomes necessary to commit.

I’ve mentioned before that adaptive enterprises or extended enterprises are built, not bought. It is a transformational process. Every enterprise arrives at the task of transforming itself with a different history, differing goals and priorities, and different transformational needs. Accordingly, for every enterprise, there lies a unique path with a unique set of steps.


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