Strategic Connectivity in Extended Enterprise Networks

Extended enterprises are networks of organizations interconnected to exchange critical resources, such as raw materials, labor, access to markets, specialized skills and knowledge. Information technology (IT) is a key component in managing these interorganizational dependencies. IT can be used to disintermediate supply chain partners or, conversely, tightly couple relations by binding operational functions, processes, strategic plans and knowledge. As IT strategies are developed and implemented, how can organizations visualize and manage interorganizational linkages to gain or maintain competitive advantage? To address this problem, this paper uses the Dependency Network Diagrams (DNDs) representation methodology to augment existing strategic frameworks. DNDs diagrammatically depict the exchange channels, governance controls, and roles within the extended enterprise. DNDs enable the essential elements governing interorganizational relations to be captured and communicated, compared with alternative arrangements, and evaluated in terms of performance and flexibility under changing conditions. With this new tool, organizational strategists can systematically analyze and compare alternative arrangements of electronic channels with an emphasis on deploying interorganizational processes and control systems that synchronize activities across the trans-organizational interface. This research was funded in part by a research grant from a University of California Academic Senate Research Grant. 1 The Extended Enterprise Recently there has been a shift from inward-looking strategies of using information technologies (IT) for functional efficiency and process optimization to an interest in using IT to manage the outward-looking strategies of extended enterprise relationships. Organizations are increasingly focused on improving supply-chain processes, customer relationship management, and value-adding processes within their organizational networks. Emphasis on supply-chain integration, horizontal connectivity, and “source-to-use” strategic planning has increased the importance of understanding, and managing, the extended enterprise. Existing tools developed in the post-industrial era, such as data flow diagrams and process flow diagrams, work well to design and develop information technologies internally within the organization. In extra-organizational relations, however, this inward manufacturing-process orientation abstracts away critical elements of extended relationships, such as influence and power relations, alternative governance controls, and indirect coordination. Tools are needed to represent the unique problems of coordination, influence asymmetry, and indirect governance inherent in extended enterprise systems. 1.1 The Extended Enterprise Organizational relationships are networks of resource interdependencies. The “extended enterprise” view includes suppliers, buyers, vendors, customers, government agencies, and other external organizations that are critical to the success of the organization. Organizations seek out relationships with external organizations that provide critical resources, such as raw materials, labor, access to markets, specialized skills and knowledge, and will structure their internal operations to insure access to these critical resources. Information is a key component in managing these interorganizational dependencies. IT can be used to disintermediate supply chain partners or, conversely, tightly couple relations by binding operational functions, processes, strategic plans and knowledge. IT can impose new processes, conditions, and direction onto dependency organizations, or modify the terms and conditions in the continued supply of a needed resource. This influence can compel dependent organizations to make changes in internal processes, organization and direction [Pfeffer, 1992]. Organizations can thusly use information technologies to redefine their network affiliations and the roles of dependent organizations, in effect restructuring the industrial space in which they occupy. This paper proposes the use of the Dependency Network Diagram (DND) representation methodology to examine, define, and develop extended enterprise systems. DNDs diagrammatically depict essential elements of the Tillquist: Strategic Connectivity in Extended Enterprise Networks Page 78 extended enterprise – the exchange channels, governance controls, and roles that constitute networked relations. Use of DNDs enables these essential elements of the extended enterprise to be captured and communicated, compared with alternative arrangements, and evaluated in terms of performance and flexibility under changing conditions. To understand the contribution of DNDs in modeling interorganizational IT, we begin by examining three strategic frameworks commonly used in conceiving the extended enterprise: Linkage Analysis Planning, Critical Success Factors Method, and Investment Strategy Analysis. We then briefly describe the DND methodology. The contribution of the DND methodology in representing the essential elements of the three strategic orientations is then discussed. Contributions of DND representations are presented at the end of the paper. 2 Three Strategies for The Extended Enterprise 2.1 Linkage Analysis Planning Linkage Analysis Planning [Primozic et al, 1991] concentrates specifically on networked relationships along the value chain and the role of electronic channels. Analysis starts by identifying linkages that are relationships the organization has with other entities. Analysis is focused on the control, management, and cooperation involved in each of the linkages identified. This analysis identifies potential under-commitment of management resources to critical linkages, exploitation of relationships, and a systemic view of the overall channel to achieve a “win-win” strategy for all inter-networked organizations. Primozic et al believe that successful organizations in the future will be those that control the electronic channels. Primozic et al suggest a shift from inward-looking strategies of functional efficiency and process optimization to an emergence of an outward-looking strategy of extended business/organizational relationships. Strategic boundaries expand to coordinate networks of suppliers and customers as the scope for planning, management, and control. These networks encompassing the focal organization are termed the Extended Enterprise. Electronic channels extend from the focal organization to include suppliers, buyers, vendors, customers, government agencies, and other external organizations that are critical to the success of the organization [Primozic et al, 1995]. Linkage analysis planning has five basic components: 1. to understand “waves of innovation,” focusing on revenue generation instead of cost reduction; 2. to exploit successively distinct experience curves, providing investment in the fundamentally different technologies that disrupt the continuous learning curve; 3. to define power relationships that exist among the various players in building electronic links among enterprises; 4. to map out the extended enterprise and manage the relationships within it, anticipating change and exploiting cross-organizational arrangements; 5. to plan the creation, distribution, and presentation of information across electronic channels to improve marketing, administration, distribution and customer service. Primozic et al contend that competitive advantage will depend increasingly on being able to exploit the collective resources of one’s extended enterprise. They propose that organizations that control the electronic channels will be more successful because of the ability to address new niche markets as these markets arise. Furthermore, as use of IT leads to a smaller, faster-paced world, organizations with the longest electronic reach into their extended organization will have an advantage. 2.2 Critical Success Factors Method The Critical Success Factors Method [Rockart, 1979] proposes that organizational strategy may best be based on identifying elements of the organizational environment that are critical to operation or exposed to significant threat. Sources for identifying these critical success factors include (1) the industry in which the business occupies, for competition over scarce resources, institutional arrangements that facilitate or inhibit strategies, and connectivity to other organizations; (2) the company itself and its situation within the industry, often dictated by a few dominant players; (3) the environment, such as trends, technological innovation, and governmental influences; and (4) temporal conditions or areas of company activity that normally do not warrant concern but which are currently unacceptable and need attention. The emphasis of the Critical Success Factors Method is to isolate key areas of exposure to the focal organization with regard to key resources, extra-organizational influences, and changing regulatory forces within the network in which the company operates. Journal of Electronic Commerce Research, VOL. 3, NO. 2, 2002 Page 79 2.3 Investment Strategy Analysis In contrast to the channel view of linkage analysis and the issues-based view of the critical success factors method, Norton and Gibson (1974) propose a strategic development method that focuses on the allocation of investments and the deployment of IT resources. In describing the four stages of organizational computing, Norton and Gibson suggest that organizational and technological deployment strategies move from internally oriented strategies of transaction automation and managerial support to a more progressive strategy of systems that serve to network the focal organization with key users outside the company such as customers and suppliers. In this view, organizations with greater outwardly connected networks of interaction will have greater sustainable strategic advantage. 2.4 Strategic Connectivity The common theme of these methods is the notion of electronic channels to capture the coordination element of electronic channels, specifically the alignment of operational processes and the establishment of exchange governance across inter-networked organizations. Electronic channels include processes and control systems that synchronize activities across the trans-organizational interface. The electronic channels that support the extended enterprise relationship enable organizations to create and distribute operational functionality and codified work processes. Governance controls mediate the coordinated exchange across electronic channels, specifying the terms and conditions, often contractual in form, under which networked organizations manage their interface boundaries and their relation with one another [Mintzberg, 1979][Malone & Crowston, 1994]. Each of the methods proposed above suggest that organizational success is being increasingly tied to the extended enterprise and the appropriate use of electronic channels that allow organizations to change in order to more closely integrate their business operations. Organizations need to incorporate strategic connectivity through these electronic channels to enable transfer information and knowledge between organizations and to coordinate operational functions and assets. “Industry restructuring,” assert Primozic et al (1995), “will take place throughout the entire Extended Enterprise and will cause entire industries to be transformed.” 2.5 Research Question The central question raised by these strategic methodologies is, as these strategies are developed and implemented, how can organizations visualize and manage interorganizational linkages to gain or maintain competitive advantage? As an organization's success will increasingly depend on its ability to ensure it is able to achieve strategic advantage by exploiting not only its own internal resources but the collective resources of the entire extended enterprise, an important component of any strategy is the identification and analysis of interorganizational relations. Because the competitive environment today is no longer a simple one where organizations are pitted against like organizations, management must ensure that they can identify the key components of the electronic channels and infrastructure required to do business in the future. The ability to maintain competitive advantage for many organizations will be greatly enhanced by developing a strategy to form alliances and partnerships and to utilize the functions being provided by new innovative industry and association entrants. This will be the most effective means to providing key elements of the electronic channels and infrastructure. [Primozic et al, 1995] This is the purpose of this paper. Here we use the Dependency Network Diagram representation methodology to depict exchange channels, governance controls, and roles within the extended enterprise. Dependency Network Diagrams (DND) target the key components of electronic channels for communication, analysis, and evaluation of strategies in the extended enterprise. 3 Dependency Modeling Dependencies are interface relations between organizations where the activities required by one to achieve a goal are supplied by another. The range of organizational activities defines the ability of an organization to pursue goals, and the inability to perform activities defines the dependencies the organization has on others [Dastmalchian, 1986]. When internal activities are insufficient to satisfy specific needs, organizations negotiate for exchange of the required capacity. The outcome of these negotiations is the dependency relationship. The dependency relationship consists of the activities necessary to support, manage, and execute the exchange relation, the definition of the roles each organization plays in the exchange relation, the goals each holds in entering into the exchange relation, and the terms and conditions governing the exchange relation. The combination of a specific set of behaviors and the goals to which the behaviors are oriented defines a role [Bormann, 1975][McGrath, 1984][Zigurs & Kozar, 1994], and so exchange relations can be viewed through the characterizations of the roles Tillquist: Strategic Connectivity in Extended Enterprise Networks played and the systems of control that govern the roles within a dependency network. Governance controls exist to assure that actions in the exchange comply with the demands of the exchange [Pfeffer & Salancik, 1978]. The design of organizational information technology is closely related to role definitions. Dansker et al suggest planning IT involves explicit definitions of roles and responsibilities [Dansker et al, 1987]. Roles have been identified as an important component of organizational memory and changes to roles as impacting the common knowledge shared in organizational processes [Wijnhoven, 1999]. Interorganizationally, firms develop new strategy options for differentiating products and services when information technologies integrate lines of role interaction [Kambil & Short, 1994]. Dependency Network Modeling [Tillquist et al, 2002] explicitly depicts the roles, goals, and activities within an interorganizational setting. Modeling dependencies is based on diagrammatic representations of activities, roles, goals, and governance controls. The representation of roles includes both a motivation and a capacity to perform goal-oriented activities, as well as the terms and conditions agreed upon by the exchange partners in regulating the dependency relationship. 3.1 Diagrammatic Constructs For The Dependency Network Diagram Construction of a representational syntax for dependency networks begins by defining roles to represent distinct sets of activities and goals. Roles are depicted graphically in the DND as rounded rectangles separated into three areas. The name of the role occupies the upper area of the rectangle, the activities associated with the role in the middle area, and the goals associated with the role in the lower area: For illustration purpo as illustrated in the DND Ar and As, for roles r and the provisioning of a reso Each activity set co depicted in Figure 1 as th role r has the functional c Each role also has d DND as Gr and Gs, respec only one goal in its goal s A A A