B2Books: Learning to Compete as Value Chains

Building High Performance Supply Chains of the Future - An Excerpt From Supply Chain Cybermastery

[From iSource Business, January 2002] One of the standout features of the New Economy is that a critical mass of outsourcing options has been achieved. This implies that vertical integration as a business model no longer makes the most sense. Instead, the winning structure that is beginning to take shape is a horizontal and networked one. Instead of two-way trading relationships between a supplier and a customer, business is increasingly revolving around Keiretsu-like chain networks made up of portfolios of partnerships, both natural and unnatural, between companies both within and across industries.

 

The eKeiretsu groups, based on the industrial structure of post-war Japan, involve horizontally and vertically linked groupings of companies working together. Competition among these groups will be as value chains involving similar groupings of competitor companies. Such competition is not new; the defense, construction and aerospace industries have had such group relationships for many years. 

 

The difference today is the speed of decision-making and execution enabled by new business models and Web-based technologies. Companies will need to operate faster, with more partners, and in more complex areas than ever before - and then continuously accelerate their new capabilities. To get to that point, companies need to build upon the business fundamentals and capabilities they practice today.

 

The Traditional Competitive Landscape

 

Three business models define the traditional approaches to gaining competitive advantage, depending on whether companies and/or entire industries compete. These are not discrete models; they are all part of the evolutionary path to leadership in competitive capability.

 

The Best and the Rest. For most businesses, one company competes against another within an individual industry: Coca-Cola vs. Pepsi, American Airlines vs. United Airlines, Visa vs. MasterCard. The winner generally is the company with the strongest brand name and the ability to get finished products to customers at the most competitive prices.

 

These market leaders create competitive advantage by developing new ways of adding alue and avoiding head-to-head price competition. Not surprisingly, competitors soon replicate those capabilities and erode the differentiating value of those capabilities. To stay ahead, the leaders have to generate new competitive advantage even while the latest capability is being built.

 

The Best Partnerships and Alliances. The next evolutionary phase in the competitive landscape is one in which organizations join forces. Here, companies in the same industry - and sometimes even direct competitors - cooperate while still competing with each other. These collaborations are often driven by the need to scale and secure new levels of cost advantages. In such alliances, organizations try to bridge the gap between themselves and the best in their industries by working with - and learning from - the best in other industries.

 

The Best with the Best. Eventually, companies begin focusing on working with the best partners. The best partners are the ones that are easy to do business with and are strongly focused on operational excellence. Together, the partners compete supply chain vs. supply chain. Such competition requires technology that spans the extended supply chain and facilitates end-to-end synchronization. It also requires alliances with the best-in-class for all capability requirements, operational excellence and cross-functional integration at the individual company level. And, inevitably, the winning partnerships are based upon the quality of the weakest links.

 

Thriving in a World of Value Chain Competition

 

Several challenges arise in this evolution of value chain competition. First, organizations must determine where in the value chain they can excel and dominate (for example, UPS or FedEx in fulfillment, or American Express in billing and collection). Second, organizations must consider which partnerships within the network of synchronized organizations will maintain a high level of agility in how the network conducts business. Third, as with the conventional Keiretsu system, the network of organizations must emphasize mutual cooperation and help protect its members from mergers and acquisitions.

 

The ultimate challenge then becomes one of managing the complex portfolio of relationships within an effective eKeiretsu. Ideally, assembling such a network of best-of-breed allies will yield rapid growth and new levels of quality, flexibility and cost savings. 

 

To ally and compete in these eKeiretsu environments, companies will have to work better, faster and more consistently. They will also need to coordinate multiple activities just as speedily and consistently. Thankfully, the new capabilities required of these companies are generally extensions of capabilities they already possess:

 

A solid logic based on operational excellence. While swift founding of alliances is critical, companies must not abandon the fundamental principles of partnering. Alliances must have solid, logical foundations and be operationally excellent; all partners must contribute something of enduring value, not just, for example, an exciting new application that may be obsolete tomorrow.

 

A true understanding of end-customer needs. Customer equity is a new measure of success and is determined by taking the aggregate value of the share of market, the share of customer spend, and the customer lifetime value. Value chain network competition requires identifying the range of buying behaviors in the extended marketplace and the most profitable segments. The smartest networks will address issues such as dynamic pricing and will monitor the effects of pricing on volume.

 

Ability to create and manage a portfolio of valuable relationships. Successful value chain networks will consist of partners who not only understand the end use of their products and the behaviors and segmentation of their customers, but also understand each other and the joint and independent agendas of all participants. The partners understand what they must do to respond in the marketplace and the role that each participant in the network plays in that response. Moreover, the partners must trust each other so that data, information and knowledge can move in real time throughout the network with efficiency, openness and accuracy among all players in the network.

 

Ability to manage complexity. e-Commerce not only allows multiple companies to interconnect, but it also provides the flexibility for companies to join or leave a network on short notice, and for the products and services to change and develop quickly. Success, however, requires that all partners in the value chain network can manage high levels of complexity and change. Plus, they all must be able and willing to collaborate on decisions that affect the entire network.  Ironically, the capability of a value chain network to compete will be determined by the participant with the least capability, not the best.

 

Common shared standards. Successfully managing the relationships and complexities of value chain network competition requires a high degree of connectivity, trust and cross-organizational support. Speed and accuracy of information transfer is increasingly critical and is achieved through the establishment of shared language, standards and protocols. Every member of the value chain must be committed to achieving the same levels of operational excellence and continuous improvement. Creating buffers, or value chain redundancies, around the weakest links is an approach best adopted only for a short  period of time - during which the strong players help lift the weaker ones to the capability level of the rest.

 

Performance monitoring and flexibility. Last, value chain competition requires that participants be willing to acquire or drop partners on the basis of performance. This necessitates an effective performance measurement and monitoring system. The system should not only report outcomes, but should also guide improvements.

 

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John Gattorna, partner, is responsible for Accenture's Supply Chain Management Service Line in Australia and New Zealand. John's interests have long focused on channel strategy, logistics and supply chain alignment.

 

Andrew Berger is CEO of Contenture Ltd., an integrated product content management solution provider that is using innovative 3D solutions. Prior to joining Contenture, Andrew was a partner in the Accenture Supply Chain Management Service Line, and he led the development of new supply chain business models.