Value-Chain Report -- The Connected Economy

Dec. 21, 2004
Leaders with these attributes are succeeding.

The emerging connected economy, enabled by the Internet and ever-increasingly sophisticated value-chain application software, is becoming a powerful business force. In order to leverage these new technologies, companies and their trading partners are creating entirely new business environments and moving their industries in new directions. Almost overnight, new companies -- particularly the "dot.coms" -- are exploiting new opportunities, driving intensified competition and enormous market strength. Traditional "brick and mortar" companies are scrambling to build connectivity and maintain their place in the new order. The pace and complexity of change that define the transition to the connected economy are creating unprecedented pressures on value chains. Global connectivity removes geographic, time, economic, and organizational barriers, dramatically altering the way in which producers, suppliers, customers, and other trading partners collaborate and interact. In addition, the distinction between products and services is continually being blurred, as combinations of products and services are tailored for specific customers, channels, or markets. The end result is that the connected economy is irrevocably changing how products are made, stored, and delivered, as well as how companies buy, sell, and promote their products and services. What is likely to differentiate those companies that will succeed in the connected economy? Although each company, industry, and market will have its own critical success factors, research on the attributes of leading companies that have been successful in the connected economy indicates that the following characteristics are likely to apply across all industries: 1. Leaders view the value chain as an extended enterprise. Leaders in the connected economy view the entire value chain as an extension of their own enterprise. Value chains are seen as integrated networks -- a web encompassing all trading partners -- focused on profitably meeting customer needs. Competition has evolved from company vs company to value chain vs value chain. Internal capabilities, whether physical or financial, no longer constrain the ability to satisfy customer requirements. The resources of the entire web provide the "muscle" to execute. Emerging value-chain solutions, such as webPlan and i2 Technologies' TradeMatrix, are the technology enablers that support the extended enterprise, linking trading partners through Internet connectivity. 2. Leaders collaborate. Leading companies in the connected economy seek to collaborate with trading partners in their extended network. These companies involve customers, suppliers, processors, service providers, and other key partners in design and development, sourcing, production, logistics, demand and supply planning, replenishment, merchandising, and other processes. Profit models are defined, and profitability for the entire value chain is considered. Collaboration enables the extended enterprise, linking key members of the value chain both physically and "informationally." Collaboration leverages the focus and specialized capabilities of the trading partners through virtual integration. This virtual integration eliminates time and distance-related delays, providing the responsiveness and agility of a tightly coordinated value chain that traditionally was the result of vertical integration. Procter & Gamble collaborates on both ends of its value chain, with impressive results. Warehouse inventory turns were doubled, and factory utilization increased by more than 25%. To achieve these successes, P&G created multi-functional teams with key customers to increase effectiveness in key areas such as logistics, merchandising, and information technology, while simultaneously partnering with suppliers to reduce cycle times and costs. 3. Leaders compete with speed. Successful companies articulate visions that mobilize their organizations, quickly define the strategies to achieve those visions, and drive to execution rapidly. These companies learn from their mistakes and continually adjust as they proceed. These companies avoid the paralysis of rigid strategic-planning processes and tightly controlled budgets, preferring to leverage limited statistical evidence with extensive knowledge and experience. Executives in these companies do not micromanage. They are champions, promoting their vision and supporting their teams, focusing on speed in decision-making and execution. Dell Computer uses its extended value chain as a competitive weapon. Dell links its suppliers to its customer orders, so that suppliers can quickly respond to specific needs and changing demand patterns. Dell's system is so effective that it can ship custom-configured PCs within two to three days. 4. Leaders emphasize core competencies: Leaders in the connected economy focus on operational activities that are central and essential to their business model, leaving to others the nonessential processes that do not contribute to growth and profitability. In their value chains, these companies continually monitor performance of key logistics activities, emphasizing real-time capabilities for order tracking and inventory locations. Recognizing that a high degree of visibility of these core operational activities is essential to flexibility, this visibility provides the ability to quickly respond to changing conditions. The growing importance of third-party logistics providers on the physical distribution side, along with Application Service Providers on the information technology side, reflects the accelerating trend toward aligning assets and investments with core competencies, while simultaneously gaining access to leading edge capabilities in noncore processes. Conclusion: The future offers great opportunity for some and great risk for others. The connected economy is the new order, creating new business models, new channels, and new competitive imperatives. Traditional linear value chains are being transformed into integrated supply webs. The basis of competition is evolving from company vs company to value chain vs value chain. Winners in the connected economy will be those companies with an extended enterprise view of the value chain, a commitment to collaboration with trading partners, an emphasis on speed of execution, and a focus on core competencies. Success will be enabled by the vision and initiative to leverage internal capabilities, the capabilities of the extended trading network, and the connectivity of new technologies to achieve speed and reliability of execution, flexibility, and responsiveness to rapidly changing markets.

Kevin P. O'Brien is a Cap Gemini Ernst & Young practice leader for supply-chain consulting with high-growth and middle-market companies.

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