Venkatraman

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Venkatraman

  1. 1. Real Strategies for Virtual Organizing 33 ll. Venkatraman - John C. Henderson Harmony among three vectors — customer interac- tion, asset sourc- ing, and knowl- edge lei'erage — and a strong IT platform form the strategy and structure of a business model for the knowl- edge economy. N.VenkatramBn is the David J.McGrath,Jr.Prolesior of Management and John Henderson is professor ol maoagement, botfi at Dostoo University School of IVIanagemenl. In addition, N. Venkatramao is principal and John Henderson is Ihe direc- tor at the Boston University Systems Research Center. As the pos-sihilities of the information rev- olution chalienKe tr.iditional business logic, conipanie.s :ire experimenting^ with a wide :irr;iy tif strategic aUernati es and organizational forms. The appropriateness of tlie current business model rooted in the industrial ectmomy is c]iiestionable. Drucker lias outlined liis views of a knowledge-based organization. Quinn has documented the shift toward a ser'ice- iiased econotny with a focus on intellect, llamel and I'rahalad argue for a critical PcK'us on core competencies and an orga- nizational design tliat best leverages them. Womack and Jones advocate a lean orga- niz:uion. anci Mandy painis a shamrock structure.' We could cite many more opin- ions, but the message is cleiir: the current models of strategy and stnicture are woe- fully inadequate to meet the imminent challenges of the information age. During the pa.st Xo years, we imdertook a systematic study to conceptualize the architecture of 'irtual organizing. Here, we present our views on the architecture of the twenty-first century business model. W'e choose the term architecture rather pLiiposefully and define it as "providing a framework for the conduct of life, not a spec ification of what life should be. Architecture shouki facilitate, guide, and provide a context; it should not provide a rigid blueprint for conduct."- Moreover, Sloan Management Review Fall I9SB Venkatraman • Henderson
  2. 2. the "building sluuikl preferably be ahead of its time when planned so that it will l5e in keeping with tlie times as Iong as it stands."' We reject a virtual organization as a distinct structure (like functional, divisional, or matri.). Instead, we treat virtualness as a strategic characteristic applicable to every organization; our discussion then is applica- ble to centur)'-old companies tliLit manufacture cement, chemicals, and auios as well as to new 34 entrants in the fa.st-changing high-technology market- place. We view virtualne.ss as a strategy that reflects three distinct yet interdependent vectors: • The customer interaction vector (virtual encounter) deals with the new challenges and opportunities for company-to-customer interactions. IT now allows cus- tomers to remotely experience products and serx'ices. actively participate in dynamic customization, and create mutually reinforcing customer communities. • The assel coufigttratiou vector (virtual sourcing) focuses on firms' rec|uirements to be virtually inte- gnited in a business network, in sharp contrast to the vertically integrated model of the industrial economy. I'irms using the Internet for busine.ss-to-business transactions can structure and manage a dynamic portfolio of relationships to assemble and coordinate the required assets for delivering 'a!ue to customers. • The kiioivk'cl^c k>ix'ra}>i' ector (virtual expertise) is concerned with the opportunities for leveraging diverse s<)urce.s of expertise within and across organi- zational boundaries, IT now enables knowledge and expertise to become dri ers of 'alue t reation and organizational effectiveness. No one vector adec|uately captures the potential opportunities of virtual organizing; their iiik'rde/K'ii- dence creates the new business model. We view vir- tual organizing as a strategic approach that is singu- larly focused on creating, nurturing, and deploying key intellectual and knowledge assets while sourc- ing tangible, physical a.ssets in a complex network of relationships. We depart from the ciuTent litera- ture on irtual organizing that proposes incremental improvements to the biisiness logic rooted in the industrial age. We develop our logic of virtual orga- nizing by placing IT at the center. The powerful convergence of compLiters and communication tecli- nology and the emergence of the Internet are enablers of this new business niodel. Nadler and his colleagues indicated that the creation of effecti'e architecture hinges on the use of structural materials capable of implementing the architecture and dis- cussed IT'S power in creating future organizational Figure 1 Virtual Organizing: Three Vectors and Three Stages Vectors and Characteristics Stage 1 Stage 2 Stage 3 Customer Interaction (Virtual Encounter) Remote experience of products and services Dynamic customization Customer communities Asset Configuration (Virtual Sourcing) Sourcing modules Process interdependence Resource coalitions Knowledge Leverage (Virtual Expertise) Work-unit expertise Corporate asset Professional community expertise Target Locus Task units Organization Inter-organization Performance Ohjectives Improved operating efficiency (ROD Enhanced economic value added (EVA) Sustained innovation and growth (MVA) Venkatraman • Henderton Sloan Management Review
  3. 3. arcliilectuiv.' In n siiiiikir :iy. we helieve that the emerging; urcliitcctiirc of virtual organizing i.s not po.s.sihle, or constructed elTecUvely, without the .sig- nificant power of IT. The emerging global, digital economy allows for establishing and leveraging a two-way information link between a com- pany and its customers — albeit through remote and asynchronous mechanisms. Each vector of our model ha.s three distinct stages (see /'i,i>itrc' I). Stage one focuses on the task units (such as customer ser'ice, purcliasing. or new prod- uct developnieni). Stage two ibcLi.ses at the organiza- tional level on how to coordinate activities to create superior economic value. The third stage focu.ses on the interoigunizational network to design and leer- uge multiple interdependent commiuiiiies for innova- tion and growth. Tlie.se ihree vectors ha'e tratlitionally heen indepen- dent: they focused on isolated functions — market- ing, purchasing, and human re.sources, respectively, with their idiosyncratic processes and information .systems. For instance, marketing acti ities in the cus- tomer interaction vector were supported hy telepho- ny, call centers, and product simulations. Sourcing or purchasing acti ities were siipporred l)y electronic data intercliange (F.DI) and CAD/CAM integration hetween suppliers and manufacturing processes. Decision .support .systems and groupware supported managerial work. There was historicalh' no common Linilying platform to pull ihese ditlerem activities together. Hoeer, the increased adoption of enter- prise systems like SAP. Oracle, Baan. anti Peoplesoft. comhined with the rapid acceptance of the Internet protocols, offers the po.ssihilit)- of a common teclinol- ogy platform. Our view of virtual organizing integrates these three hitherto separate threads into an interoperable IT platform that supports and shapes the new husiness model. The cliallenge is to ensure internal consisten- cy across tlie three vectors and benchmark a profile of viitualnc'ss relative to competitors and referent companies in the marketplace. External benchmark- ing hecomes critical as companies experiment with differenl approaches to design. Customer Interaction (Virtual Encounter) The interactions of a company with its customers (and end consumers) in ihe industrial age occiured through a multistage distribuiion network involving wliolesalers. retailers, customer sef'ice agents, and franchisees. The predominant focus was on efficiently distributing products in a linear fashion IVom manii- factiuers to con.sumers. The emerging global, digital economy allows for eslahlishing and leveraging a two-way information link hetween a company and its customers — albeit through remote and asynchro- nous mechanisms.^ This link is possible not only for constimer products and ser'ices hut also for htisi- ne.s,s-to-husiness products and sen'ice.s. Some customers are interacting with companies in new, inntnative ways. They are testing procUicts al early concept stages (for example, software and advertising), while others are receiving e-mail replies to prohlems not coered in product manuals (com- puters, electronic equipment, and industrial prod- ucts). Technologically savvy customers are constaict- ing customized news feeds (www.snap.com), review- ing and monitoring financial accounts (American Express, Schwab, or Fidelity), exploring real-estate properties (w^vw.centuiy21.com). or reviewing video news clips (www.cnn.com). Moreover. 'irtual con- sumer communities — which alter the traditional con- sumer role — are emerging.'' Corporations face new strategic c]uestions: What are the tenets of marketing for the information age? How can we leverage the fiinctionalily of customer inlerac- tions in crafting sLiccessfLil marketing strategy? What is advertising s role under conditions of greater cus- lomer pull and fine-grained segmentation? Should we actively create customer communities or participate in them unc)htrusi'ely? To address these and related c|Liestions. we delineate three stages of customer interaction: remote experience of products and scr- ices, dynamic customization, and cListomer commu- nities." Remote Experience of Products and Services To imdersiand this stage, let us examine Sears, Roehuck's introduction of product catalogs, the first successful attempt at creating a virtual product expe- rience. It simulated key product features from a phys- 35 Sloan Management Review Fall 1998 Venliatraman • HendeisDn
  4. 4. ic-al space (storefront) to another physical space (paper), separated by time and distance. Custoniers experienced the different products through the pages of a catalog and made their purchase without actually .seeing or touching the product. Over the years, the catalogs Ixjcame glossier, mail-order sales increased, and direct marketing became a major force. The infor- mation age has created the home shopping television network: consumers virtually experience product fea- tures — signaling a shift from atoms to bits, in 36 Negroponte's words." 'W has allowed a more complex, intricate demoastration of features and functionality. Remote and continuous links witb cus- tomers become critical as the concept of brand identity and brand equity are rede- fined. Similarly, the concept of remotely experiencing cus- tomer service is also not new hut is heing redefined. Since the early 1980s, building supervisors have had superior customer service from Otis Elevators' remote elevator monitoring. Schliimherger remotely reads utility meters; Sony provides PC owners with diag- nostics and repair over ordinary telephone lines. GE Medical Systems remotely supports lah technicians in hospitals dealing with medical images, and GE Aircraft Engines remotely tracks the performance of aircraft engines during flight. More recently, the Internet has accelerated and redefined the possihilities of the remote product or service experience, for example, the real-time mon- itoring of shipments (www.fedex.com; www.ups.com) or stock portfolios (www.yahoo.com). Airlines are po.sting fares only for their freciuent flyer memhers through their Weh links (see, for instance www.usair- ways.com.) and hypa.ssing traditional travel agency channels. Retail Iianks are creating high-tech links with customers (www.weIlsfargo,com/home; www. citihank.com); their challenge is to ensure that the sites complement the .service delivery at their hanks. The possibility of remotely experiencing products or services ha.s major implications for developing the required business Infrastmcture. Charles Schwah redefined the brokerage husiness with a diiferent price-point than full-service hrokers and offered a portfolio of channels for customer service (1-800 numhers, hranch offices, lelehrokers, and e-Schwah). Now, new entrants like E'Trade (www.etrade.com) and Ameritrade (www.ameritrade.com), which do not have a physical presence, further threaten Schvvah's pricing staicturc. The challenge for companies in infor- mation-intensive markets is to manage the velocity of the shift from physical to electronic infrast mettires anci compete effectively against those entrants that don't Iiave llie constraints of a physical infrastmcture. The same challenge is driving software distrihiitors, such as Egghead, to reassess their di.stribution strate- gy: during the past year. Egghead has closed more than seventy traditional software outlets and has opened its first store on the Net. Its on-line storefront (vvwvv.egghead.com) features three main rooms — Internet products, busine.ss products, and games — with on-line product support. It is entirely reiinqiiish- ing its pre.sence in the physical marketplace to focus on the electronic marketspace. The passive distrihution of standardized news throLigh traditional channels is also being redefined. Leading newspapers and magazines routinely allow readers to hrowse their late.st issues on the Web: Fi)iciucicil Times (www.ft.com), Comfntlenvorld (vvww.compiitervvorld.com), /''oilnite (www.pathfind- er.com), Vl//rc'f/(www.wired.com), and 'Ihe h'conontist (www.economist.com). Nearly all are facilitating interactions hetween editors or writers and readers. Traditional selling of textbooks at the heginning of a .semester is now relegated to an educational consul- tant or a value-adding partner throughout the .semes- ter. Leading textbook publishers are creating sup- plementary Weh site links to connect students and profe.ssors throughout a course (www.mhh.coni; www.wiley.com; www.uol.com). Product Companies. Clearly, consumer product com- panies like Procter & Gamhle, Colgate, Kraft Foods, and consumer durables and husiness-to-busincss companies like General Motors, General Electric, Allied Signal, and Caterpillar have crafted their husi- ness strategies by leveraging physical assets and developing powerful global hrands supported hy ma.ss advertising and mass distrihution. But remote links with customers apply equally well to these companies. Remote and continuous links witli cus- tomers hecome critical as the concepts of lirand iden- tity and hrand equity are redefined. Hen(tersan Sloan Management Review Fall 1998
  5. 5. Kraft Intemclive Kitchen (www.kraftfoods.com) i.s an example of :i consumer products company keeping in touch with its consumers liy providing information- based sen'ices like meal planners, recipes, lips, anc! cooking tecliniques. Kraft's intent is to have remote con- nection.s and interactions with consunicrs in new ways. General Motors and its OnStar service use.s global positioning system satellite technology and a hands- free, voice-activated cellular phone to link the driver and the vehicle with the OnStar Center. Advisers pro- vide real-ti[ue, person-to-person services such as emergency help linked througli automatic detection of air-liag deployment, stolen vehicle tracking, route support, remote diagnostics, remote door unlocking, and a variety of travel and personal services. GM can provide information-based services to the driver and even remotely diagnose tlie car continuously for a fixed service fee (www.onsuir.com). Kvery company should assess how its products and services can be experienced virtually in the new mar- keting infrastmcture. A Wel) site is essential. The question is liow best to use the Web's power to cre- ate superior linkages with custoniers. Dynamic Customization of Product and Services The second stage ofthe customer interaction vector f(K'uses on the opportunities and challenges in dynam- ically customizing products anci services. Competitive markets are rapidly eroding margins due to price- based competition, and companies are seeking to enhance margins through customized ofTerings." Our view of dynamic customization is Ixised on three prin- ciples: modularity, intelligence, and organization. Modularity is an approach for organizing complex products and processes efficiently.'" Intelligence througli continuous information exchange with con- sumers allows companies to create products and processes using the lx.'st possible modules. More importantly, dynamic customization of products and .services requires an organization that is fundamentally committed to operating in this new way. Modularity. Product or service modularity reciuires the partitioning of a task into independent modules that function as a whole within an overall architec- ture." The cla.ssic example of a modular product is IBM's System/3f)0. The concept has heen extended to other industries, l-or instance, in a.s.semhl!ng cars, Toyota, BMW, Mercedes-Benz, GM, Porcl, and Chrysler create product platforms that allow modular Intelligent sites learn their visitors' tastes and deliver dynamic personalized information about products and services. reuse. The benefits are not only lower unit costs but al.so greater customer satisfaction; companies can configure automobiles to customer requirements. Modularity also works for services, especially infor- mation-intensive services. Take, for instance, personal news feeds (www.cnn.com; www.cnet.com) and cu.s- tomized stock ciuote.s and tracking (www.schwab.com). It is possible to reuse various modules of news and inforiuation Eo construct a customized news service at CNN Interactive anci a customized, interactive edition of I'he Wall Street Jottntcii. In place of .standard textbooks, instructors now assem- ble textlxx)ks that suit their pedagogical style and objectives liy .selecting modules from different source.*;. McGraw-Hill's College Division pioneered this concept through its I'rimis offering. Primis users can create a custom textbook from modules within the Primis data- ba.se and a.s.sociated tiataba.ses. Many other textbook companies offer similar configurations. Intelligence. Dynamic customiz^ation is rooted In the deployment of intelligent agent .software, such as Firefiy (www.firefly .com). Firefly Passport is available to end users who rank Web sites as they surf the Internet. Firelly uses the data lo create consumer pro- files. Based on an automated collabonitive filtering process, Wei") site operators can match users with simi- lar profiles and make recommendations based on their shared interests. The automated collabonitive filtering process lets u.sers receive real-time, personalized list- ings for items in a site's catalog of products, services, or content. The result is intelligent sites that learn their visitors' tastes and deliver dynamic personalized infor- mation aboul products and services. As the Web becomes the main marketing infrastaicture and as intelligent agents such as Firefly Passport gain more sustained use on the Web, there will be greater oppor- tunities and pressures Ibr dynamic cu.stomization. A primitive application of automated collaborative fil- tering appears on sites such as Yahoo's personalized site (my.yahoo.com), a movie recommendation site (www.filmlmders.com), and Barnes and Noble's on- line book.store (www.barnesandnoble.com). 37 Sloan Managemeni Review FaU 1998 Venkatraman • Hendenon
  6. 6. The most profound aspect of interaction in the virtual model is the emergence of electronic customer communities. Dynamic cii.stomization is po.ssihle .since these Web .sites, .suppcjrtL'd hy ugL-nts. levfiagf in real timt* each users experiences to guide others tt) rele'ant 38 content and products. The sites incorporate their entire user ba.se. not ju.st Ilie thoughts of a lew experts. Indeed. e'eiy .search engine is trying to dif- ferentiate itself llirough its .suj-Jcrior ability to create custom profiles. Organization. Ultiinutely, niodularit)- and intelli- gence are useless unless the organization de.sign is geared to deliver products and serxices on a dynamic, adaptive hasis. Organizaiions need to change how they look at marketing processes, shifting from an inside-out perspective to an out- side-in perspective. For example, in personal com- puters, Dell is clearly leading with its dynamic cus- lomization offering. Dell s succe.ss relative to others within the computer industry is attrihutahle to its ahiiiiy to develop an entirely differeni busine.ss model on the concept of building to order.'- Similarly, the challenge for McOraw-IIill's Primis division is to rnoe from textbook modularization and go on to create an organization that can deliv- er educational solutions for customers. The challenge of dynamic customization rests on greater decomposition of products and services into modules that can be combined to deliver increased functionality. The numher of Web transactions will rapidly increase as electronic commerce goes main- stream. Modules will be redefined continuously, and more information will be captured as consumers become comforiable with intelligent agents ihai work for them. Over time, consumers will expect enhanced customization for fair value in reunn for aggregators consolidating detailed personal information. Marketers will focus on as.seiiibling for modules that deliver cu.stomized solutions. Customer Communities The most profound aspect of interaction in the virtual model is the emergence of electronic cu.stomer com- muniiies. The.se coninumilies signal a power sliih from manutaciiirers to ciistoiiiers: the communities are information-gathering and information-disseminat- ing conduits. Pie iously, in the industrial economy, consumers could not he effectively linked togetlier acro.ss lime and space. Hagel and Armstrong offer live defining characteris- tics of virtual communities: distinctive focus, capacity to post their content for access to the wider conimii- nily, appreciation of member-generated content, acce.ss to competing offerings, and commercial orien- tations. They state. AVe cannot yet point to a single e.xample of a virtual community that incorporates all live of the defining cliaracterisiics."" We contend that customer communities can exist with only the firsl three characteristics. The lasl two characteristics — competing offerings and commercial orientations — apply lo only a subset (jf comnuinities. Some customer communities refiect strong commit- ment to brands. Harley-Daicison*s site (www.hadey- davicison.coin) houses the Ilarley Owners Group (IIOG) — a Weh siie for Harley owners to share their stories and pictures. This community does not overtly create new product sales liLii does maintain an important link wiih core customers und enhance brand identity. Citibank — in partnership with The Mining Company — has created a community on its Web site Ibr cus- tomers to learn about Citibank's products and ser- vices. It uses bulletin hoards, chat rooms, e-mail, and oiher features so prospecti'e customers can interact with current customers and receive testimonials directly from them (www,citibank.com; WT'w,the- miningco.com). The Intel Pentium chip case exemplifies the role and power of customer communities een when an orga- nization does not .sell its products directly to llie end user. The light-knit user comnnmity had access lo information about poieniial problems with Intel's Pentium chii> and forced Intel lo act. The community, supponcci hy Usenet groups, made Intel rethink its heiuistics for product recall. Intel nov.- has a news- group feature within its site (newsgroups,intel.com) and is activcK- participating in its customer group. The source of the group s power came from knowl- edge (about the performance parameters of the chips), not from scale and volume of purchase, I'nlike buying cooperatives. indi'iduals wiihin a cus- tomer coninuinity retain their rights about brand pref- erences and purchase decisions. Venbtiaiiian • Hendeison Sloan ManagemenI Review Fall 1993
  7. 7. Amazon.com (www.ama/.on.com) is often touted as •An example of how to lewruge the power of cus- tomer communities. .Amazon U:s created a 'irtual bookstore with minimal physical assels and a partiCLi- lar focus on customer relationships. Will Amazon fatle away as other serious competitors like Barnes and Noble (www.barnesandnoble.com). Borders (www.Borders.com). and Microsoft (ww.books.com) enter the fray? As long as ,-niazon is able to orches- trate a tight-knit amimunily of avitl readers, who cre- ate and di.stribute their own content (in the form of re'iews). competitors will h:i'e difficulty dislodging and disintegrating this comniunity. The challenge for Amazon.com is to provide balanied rex'iews rather than only f:i"orable ones. Consumer communities are in the early stages.'" Nevertheless, they could cxerci.sc significantly greater power in the future and transform the role of market- ing. .Should marketers orchestrate customer communi- ties for their own products or invohx- a third party? Companies such as Intel. Marley Oavid.son. I-gghead Software (www .eggheacl.com). Tnuelocity (www.trav- elocity.com). Toyota (owners.toyota.com'ent ranee.html) and Apple (lompuler (www.apple.com/usergroups) are forming customer communities around iheir prod- ucts and brands. At the same lime, some communities form without the involvement of major .sellers. I'or instance, photogra- phy (www.photoshopper.com). automobiles (www.autoweb.com; www .cdmunds.com. www .net- market.com), and .some specialized areas like water utility (www.waleronline.com) and air pollution (www.pollutiononline.com) gain credibility largely due to their lack of ownership links to product and ser'ice provitiers. These communities must generate and maintain ihe consumers' tru.st as they collect personal information while provitling aiue-added senices. As 'irtual organizing becomes more widespread. companies must recogni/e communities as part of the value deiiveiy system and re.spond appropriately in their strategies. Questions for Managers • Do you have a .strategy to virtually connect with your customers that Incuses on capturing information and Icv'eraging knowledge? 'Hiis contrasts sharply to .setting up a distribution .sy.stem that focuses on effi- ciently tlistributing pi'oducts anti scr'ic'es. • Have -ou dex'elopcd apjiropriate niechanism.s so customers can reach you twenty-four hours LI day, seven clays a week? Can customers experience salient product features remotely? Can cu.stomtrrs gain access to a databank of answers to frecjuently asked ques- tions so they can solve some problems themselves? More importantly, how does your remote access capaliility rank against your competitors and other companies that may do business with your cus- tomers? • How extensive is your capability to cu.stomize your products and services over their life cycles? While it is becoming relatively easier to customize the product or ser'ice at creation or delivery', the challenge is to dynamically link to the customers to refine features o'er time. • Does your organization still reflect a make-to-sell orientation rather than a make-to-order philosophy? The latter is more in line with a sense-and-respond approach to virtual encounters. • Do you plan to be a passive participant or an active orche.strator in dealing with emerging cu.stomer communities? • How are you assessing your progress in the cus- tomer interaction vector as the marketplace demands greater remote access, dynamic customization, and participation in the customer community? Asset Configuration (Virtual Sourcing) The second vector focuses on accjuiring critical assets and resources, a clear move away from vertical inte- gration toward greater reliance on components obtained from external markets. As they move from an industrial economy, many corporLitions will con- centrate on creating and deploying intellectual and intangible assets while sourcing tangible, physical assets from a complex business network. Iffective contracting for complementar' capabilities through a network of suppliers nnd .subcontractors is a characteristic of virtual organizing.'' Davidow and Malone note: "For a virtual corporation to succeed, it mu.st be closely linked with its suppliers as to create a shared destiny. . . . Ultimately, even the boundaries between them will become indistinct."" Goldman et ai. highlight the importance ofclo.se relationships with suppliers anci subcontractors to realize efficiency and flexibility — critical indicators of organizational agility.'" Quinn describes Nike as a model for effec- tive sourcing of manufacturing competencies: "Nike is basically a research, design, and marketing ctjmpany —• out.sourcing 100 percent of its athletic footwear 39 Sloan Management Review Venkatraman • Hendetson
  8. 8. manufacturing to numerou.s production partners' abroad."'" As corporations refocus on their core competencies and move away from vertical integration, they will obtain coniplementar' as.sets through interfirm rela- tionships.'" For example, confeetioner' companies like Ne.stle, Mars, and others get their packaging from leading packaging and printing companies. Nike and Reebok get their shoes, based on their proprietary 40 designs, from leaciing Asian contractors, Chrysler's turnaround is often credited to its .sourcing capabili- ties, reflected in its relatively higher percentage of conlracted parts. Dell's success is attributed lo ils superior .sourcing strategy. Hoeing developed its latest plane, Boeing 777. with a portfolio of relationships among subcontnictors and lead cu.stomers. Nearly every m:ijor treati.se on the logic of new .stnile- gy and competition di.scii.sses the requirements of effective sourcing of competencies.-" However, this is not u simple choice between niake-ersus-buy or ver- tical integration but involves a continuous reconfigu- mtion of critical capabilities asseinliled through differ- ent relationships in the business network.'' IT allows the po.ssibility of efficient .sourcing of standard mod- tiles and creates opportunities for process outsourc- ing. There are three stages of as.set reconfiguration — sourcing modules, process interdependence, and resource coalitions. Sourcing Modules The first stage in this ector deals with the benefits of efficiently sourcing standard module.s or componenis. Advances in the industrial age were based on prod- uct modularity — building a complex product from subsystems designed independently yet fimciioning us a seamle.ss, integrated entity. GM. Ford, and C;hrysler operate more like assemblers and integrators of subsy.stems than traditional vertically integrated manufacturers. Baldwin and Clark argue ihal in a new age of modularity, the value-adding role of a corporation is less in the manufactLire of a critical component than in the creation of a product or ser- vice architecture.--' Thus the designer assembles multi- ple interlocking produci modules to deliver a superi- or .solution, while controlling the architecture of the subsystem and its role in delivering value. For more than a decade, the ptjwer of electronic data interchange (HDD has sup[xirted the ability lo effi- ciently source modLilai' products. Wal-Mart pioneered a new retailing tnocle! by leveraging a sophisticated EDI network wiih its suppliers to radically lower ils invenioiy le'el. In Negroponle's words. Wiil-Mart sub- stituted bits (information) for atoms (inventory) to enhance its operating margins to a level previously unseen.-' F-DI has had a significant role in reducing inventory levels in .supply chains within con.suiner products (Procter & Gamble. Kraft General Foods), athletic shoes (Nike, Reebok), apparel (Gap. Benetton), aircraft puns (Boeing, GF), and computers (Dell. Gateway). The Web is pushing the ability to source standard product modules even further. Cisco Sy.stems Inc.. for example, expects to .sell SI.8 billion worth of Internet products. Boise Cascade Office Products (www. bcop.coni) has deployed an extranet for its largest 600 corporate customers, anci its margins haw doubled cc^mpared to its traditional openitions. Dell is .selling more than $3 billion in computers over the Web. mainly to corporate customers like Shell anci Boeing. Geneinl Electric"s Trading Process Network (TPN) started as a .ser'ice to streamiine GE's procurement of .standard products within GK Lighting. It has now expanded to cover a broader range of business units. The network links more than 2.SOU GF trading part- ners and accounts for more than SI billion of pro- curement in 1997. By initial estimates. TPN has reduced the procurement-cycle time by SO percent, procurement-process costs by 30 percent, and actual material costs by 20 percent. GH is expected to soLirce more than S5 billion of procurement annually through TPN by 2000. Sourcing Logic. Serices like GF.'s TPN force man- agers to constantly ask: What assels can we obtain from outside without loss of competitive advantage? When should we revise our sourcing logic? The selection of a.ssets is complicated because their criticality changes over time. In the 19H()s. IBM con- ceptualized the personal c-oiiipiiler market around ils proprietaiy architecture. It purchased operating sys- tems from .Microsoft (MS-DOS and OS/2) and microchips from Intel. However, as the technology architecture evolved. IBM was left withoui a critical asset in the clianged marketplace. The market shifted from :i hardware standard that favored IBM to a new standard based on .software (Windows) connected to chips (Intel). So, while IBM's original sourcing deci- sion might have been efficient and prudeni, il could Venkatramaa • Hendeison Sloan Management Review
  9. 9. not adapt ils sourcing logic to the changing market conditions.-' Process Interdependence The next stage focuses on the interdependence of busine.ss proces.ses across organiziUionai boundaries. External specialists can CLirn" OLII informution- intensi*e inisiness jirocesse.s witiiout ioss oi controi. During tile past few years. se'erai speciaiisi business process firms liae emerged in tiie areas of account- ing. inentoiy controi, customer senice. cali-centers. dataiiase anaiysis. teiemarketing, anci itjgistics. Business process outsourcing wiii continue to increase as more speciali.st iirni.s emerge in the recon- figured business network. I-or exampie: • DirecTV, which delivers aiiout ISO channels of sateliite television programs, is working witli MATRIXX. a iuisiness unit of Cincinnati Beli. to deiiv- er superior customer ser ice. From its dedicated facii- ity in Suit Like City, L'taii, MATRIXX provides tele- phone customer ser'iee and sales support, wliicli includes ecjuipnient deaier referrais. programming sign-up, and compiete customer .senice and account management. MATRIXX is tlie extension of DirecTV operations iiy providing more than 2.000 dedicated customer service representatives wlio iiandie about 20 mliiion caiis a year. Tiiis marks tlie first time a major corporation has entrusted its entire customer ser"ice operation to an outside telephone marketing company on such a grand scLile. DirecTV iiiis inte- grated its processes with MATRIXX. thereby leverag- ing its expertise at managing customer reiLitionsiiips. • Aiiegiance Corjioration recently spun off from Baxter Healthcare. The company, known for its leg- endary ASAP system, created ;i separate eniiiy to focus on logistics and malerials management process- es.-* In Miircii 1996. Baxter announced an unprece- dented agreement to work with Methodist Healthcare System of San Antonio, a joint-venture partner with Columbia Ilealtiicare System. L'nder the agreement. Baxter operates a ser-ice center to support the con- solidation and outsourcing of seiected funclions witii- in the Metiiodist Heaithcare System and to implement process iinproements to reduce costs. More impor- tantly. Metiiodist is Ie eraging Baxter's expertise in three proces.ses: distribution and logistics, operations efficiencies, and resource management. Furthermore. Baxter's compensation is directly tied to the perfor- mance ie'eis of these processes. Aiiegiance Corporation's stock price has more than doulileci since the spin-off, anci the firm has a market capital- ization of mcjre than $2 billion. • Kraft Foods is iiiterlwining its marketing processes with the data ccjilectlon anci analysis at ACNieisen. a ieading information provider in tiie consumer pack- aged gotjcis industiy. The early avaiiaiiiiity of market- ing data tiirough process integration i'>etween tiie two organizations aiiows Kraft Foods lo respond to mar- keting trends c|uicker anci more effectively than its competitors. Kraft has benefited by reconfiguring its marketing processes across organizational boundaries. • National Semicoiiciuctor (NSC), tiie tiiirtcentli iargest computer-chip maker, entereci an agreement ill whicii FedEx manages its iogistics operations. In tiie eariy 1990s, NSC reaiized that a major driver of its operationai inefficiency was its outmoded process for mo*ing in'entory. Since NSC could not aciiie'e the iiest-in-ciass process ievels of a iogistics company without taking vaiuable resources away from product design and manufacture, it outsourced its processes to FedEx. NSC. tiirougii its iink with I'edFx. has iiiipro'eci its process performance: it nioes products from facton- to customer in about four days. ;md its distriijution costs have failen from 2.6 percent of rev- enues to 1.9 percent. • KedEx. on tiie otiier iuuici. has iiecoiiie a j")iuyer in tile eiectronics commerce anci iogistics maiketfiiace ij' piu-sicLiliy mo'ing goods from far-Hung manufac- turers to their gloixii customers. Its new ser'ice. Virtual Orcier. takes and processes orders, inciuding arrangements for siiipping. provides access to ship- ment status, and iuinciies customer c|ueries. Indeed. its goal is to become the airline of the Internet. It has combined electronic ct)mmerce and logistics opeiii- tlons and accjuired Caiii)er Logistics to ensure a f'uil range of sei-vice capai>iiities. l^rocess reengineering captured managers* imagina- tion in the 19HOs and early 1990s for one rea.son: inipro-ed operating margins. Now. another shift. process outsourcing, is "the deiegation of one or more business [processes to an external provider wiio tiien owns, manages, and administers die seiected processes based on measurable metrics."-" This is attractive because of greater asset utilization. As processes become more standarciized and as tiie mar- ket matures witii more staiiie participants, many cor- porations wiil recognize the criticality of business process outsourcing. Specialized firms like MATRIXX 41 Sloan Managemenl Review Fall 19gB Venkatraman • Headenon
  10. 10. and FedF.x can seamlessly carry out customer service anci iogistics: at tiie same time, extranets can ensure liiat linns do not lose controi of their processes. E'ery corporation siiouici assess tiie iieiieflts anci risks of cariying out these processes themselves. Tiius IT is fundamentally affecting the business scope ol most organizations.-^ Resource Coalitions The third stage in the asset configuration vector 42 focuses on the establishment of a resource network. in wiiicli tiie firm is part of a 'ii5rant, dynamic net- work of compiementaiy capaiiiiities. A corporation becomes, not a conventional portfolio ot products or businesses, but a portfolio of capabilities and rela- tionsiiips. Every organization is either impiicitiy or expiicitly positioned in a network of resources wiiere it acc|uires compiementary capaiiiiities. Corporations are increasingly relying on external sources not only for support activities liut aiso for critical resources. Positioning a firm within a iiroader netwcjrk of resources in the marketplace is a driver of competi- tive advantage. Consecjuently. tiie strategic ieadership ciialienge is to orciiestrate an organization's position in a ciynamic. fast-changing resource network. Three examples heip iiiustrate the ix-nefits of re.source coalitions: • When viewed as a portfolio of capabilities through relationships. Nike is a new breed of organization that has positioned ilself slrategicaiiy within a net- work of complementaiy resources. Nike a.ssemiiies liie rec[uireci capabilities tiirougii a coaiition. inciud- ing production suiicontractors in Asia, ad agencies (Weiden-Kennedy), web suppcjrt (Vivid Publisiiing). retaii outiets (Eootlocker). exciusive contracts witii athietes (Michaei Jordan. Tiger Woods. Andre Agassi), preferred contracts witii |)rofes.sionai teams (Daiias Cowboys), and universities (Ohio State footixiii. University of North Caroiina basketbaii). Nike's adaniage is based c^n the superior orchestration of its position in the resource coalition. As it.s competi- tors strive lo construct similar coalitions to neutralize Nike's acivantage, Nike's success wiii dei^enci on proactively aciapting its network to responci to new market rec|uirements. • Charles Schwab has successfully eoleci from :in undifferentiated discount broker it) a key playei" through its offering, OneSource Schwab positioned itself within a resource coalition composed of inde- pendent financial acK'isers (who acl on behalf (jf indi- vidual in'esiois). a broad array of financial product companies (mutual funds, stocks, initial public offer- ings, debit cards, anci iife insurance), provicieis of researcii reports. ;iiici se'ei*Lil teciinoiogy flriTis (suji- porting its e-sciiwaii seivice). This vigcjrous network underpins Schwab's coiupetiti'e acKantage. Wliiie inciividual eiements of the network can iie imitated, Schwaii's aiiiiity to integrate tiie different fLicets cohei'cntK is clistinctie. Ils future Micce.s.s wili be fundamentally ba.sed on its ability to adapt this net- work to ciianging market and competitive ccjdditions. • As part of Amazon's attempt to create a powerful iiusiness modei. ii is orchesti'aling afflliateci sites as associates to sei-ve as extencied bookstores. The asso- ciates establish their own book.stores on their Web sites or place banners and k)gos to direct traffic to Amazon's site, ln return, they receix'e a conimi.s.sion on books purchased ihrough their relerrals. l-'or instance, a search on AkaX'isia triggers an opportunity to order books on the selected topic. Amazon's suc- cess will be significantly affecled by ils ability lo cvn- trally position ilself in the constantly reconfiguring resource network. Participation in Resource Coalitions. In the irtual integration model, one firm does not dominate all others in a network. 'I'luis es'eiy firm balances ils leadership position relative h) one set of resources. with secondary" roles related to olher c-omplemeiitary resources. F'or instance. IBM is dominant in the main- frame coiiipuler arc-hitec-[ure while it follows stan- dards established in other areas (e.g., Vinck)ws-Inlel architecture). Siiiiilariy. I-'ideiity distriixites its funds tiirougii Sciiwab wiiile aggressi'eiy promoting its own Funds Network as an alternative. Those compa- nies tiiat can carefuiiy anaiyze tiieir relative ciepen- dence on otiier piayers in tiieir resource coaiition and ensure their unic|ue capabilities will be successful. Eery organizalion is dejienclent on lelatioiisliips for assembling complementaiy capabiliiies. StarliLicks has eiiieiged as a major coffee retaiier witii saies of more tiian SI biilion and a 6.3 per- cent return on in'estment. Moiv impressi'e is its sttjck market capitalization — more than SS billion in June 1998. Instead of committing its internal resources to build a brand image. Starbucks has fbrmeci a iriual network of complementaiy players into a coalition of I'niteci Airlines, .Marriott anci Westiii Hoteis, Star Markel. Pepsi, and Barnes and Noble, among otliers. In doing so. it has created a Venkatraman • Henderson Sloan Management Review Fall 1998
  11. 11. le'el of brand ecjuity far greater than its ievei of resource depioyment. Shifting Value Drivers. The importance anci reiati'e priorit)" of resources ciianges o-er time. IB.M, Apple, and Motorola pooled their resources to create the PowerPC. However, they could not establish a iable alternalix'e to Vindows95/NT anci aiiandoneci tiie coaiition. Now tiiey are part of tiie resource network dominated by Microsoft anci Intei. More recentiy, IBM. Sun. anci Oracle formed a network to establish the Network Computer (NO as an alternative to the Wintei piatform. Such coalitions highlight another impor- tant characteristic of virtual organizing: the hlurred distinction between competi- tion and cooperation. Sucii coaiitions iiigiilight another important charLicter- istic of virtual cjiganizing: the blurred distinction Iietween competition and cooperation. E'eiy compa- ny is positioned witiiin A resource network and simuiiancously plays both competitive and coopera- tive roles. Sheli and Amoco iia'e pooied most of their w-est Texas oii fields to make upstream opera- tions more efficient, while competing witii eacii otiier in rcftaiiing. BP and ARCO Aiaska iiave a cooperative agreement on maintenance, operations, procurement transpcjrt, and driiiing. while the' compete in other areas of the value chain. Blurring boundaries are also evident as Netscape. Sun. Microsoft. Oracie. Appie. IB.M. Digital, Intei. Lind others simuitaneousiy tr' to estaiiiisii superiority anci ciistinction on liie Internet wiiiie recognizing tiie need for interoperaiile technoi- ogy architecture. Knowing where and how to add value is important tt) strategy deveiopment in tiiis new game of co-opetition (tiie iogic of comi^ining cooperation and competition).* Creating a resource coaiition anci nax'igating under fast-ciianging market conditions is not simpie. Riiie makers in a resource coaiition can iose liieir ability to set rules wiiile internal and externai conditions change, as in the IBM PC case. Similariy, Appie. which iiad a central position in the resource coalition for tiie personai ciigital assistant (wiien it introduced Newton), iost its position to Pilot. Hewlett-Packard, and Casio. Similarly, Xerox did not capitalize on its early leaci in tiie graphicai user interface. Digitai's resource coaiiiion faitered. whiie .Microsoft, Sun. anci Intei gained tiieir positions due to superior resource networks. Questions for Managers • Does your organization lia'e a logic for sourcing that distinguishes the assets to manage inside from those that can be a.ssembled via relationships in the business network? • Do you ha'e a .sy.stematic approach fbr identifying the modules that you can obtain from external part- ners? How efficient is your sourcing process com- pared to companies such as GE's TPN? • Do you consider process outsourcing as the best way to allocate internal resources to high-valuc- :idding areas? .More importantly, do you still carry' out processes iniernaliy tiiat may best be done outside? • Can your sourcing strategy dynamicaiiy respond to make-partner-buy decisions? Is it structuring and iiKuiaging a portfbiio of relationships for obtaining the ret|uired capabilities? • Can you create interdependencies within your processes across organizational i')oundaries? .^re tiiey seaniiess and supporteci by IT? • How weli arc you iiaiancing dependence on part- ners in tiie resource coaiition witii tiieir dependence on you? Are the coaiition partners favoring you over your competitors (wiio may aiso overiap witii tiie network fbr accessing siniiiar resources)? • How are you asse.ssing your progress in tiiis vector as you stri"e to efficientiy source moduies. reconfig- ure processes, and orchestrate a superior position w ithin the resource coalition? Do you liave a score- card of financial and operational metrics to monitor your performance? Knowledge Leverage (Virtual Expertise) The current trend is toward greater empioyment opportunities in smalier companies, fewer permanent or guaranteed joiis. more work done at remote ioca- tions, greater reiiance on contract workers, and greater miiization of teams. Drucker has asserted that companies are siiifting "from the command and con- trol organization, the organization of departments and di"isions. to the information-based organization, the organization of knc;)wledge specialists."-" The basic economic resource is not land, physical resources, or cajiital but knowledge and inteiiectuai assets."' In 43 Sloan Management Review Fail 1998 Venkatraman • HendersDn
  12. 12. Quinn's view of an inteiiigenl organization rooted in knowledge: "These knowlecige assets can disinterme- diate iiureaucracies, draniaticaiiy iower overiiead costs, support rapid execution of strategies, and suii- stantially increase the iearning rate of empic^jyees and tiieir response to customers."" l^otii iinpiy tiiat effec- tiveness comes from ieveraging inteiiect and knowi- edge rather than from economies of scale in opera- tions or physical sources of acivantages. 44 This vector complements the logic of virtual organiz- ing in the previous two vectors. Here we focus on tiie possii^iiilies and meciianisms fbr ieveraging expertise at many levels. Senior managers face these questions: How do we recognize anci ieverage knowiedge as a corporate a.s.set? How siiould we manage knowledge workers wiien iuiman resource poiicies are geared toward prociuction anci adminis- trative workers? How do we design processes for ieveraging knowledge when most proce.sses are ciesigned fc^r cosi optimization and efficiency? What mechanisms shouici we use for ieveraging lacit knowledge, since we have focused previously on explicit (codified) knowledge? What incentives anci compensation practices fiike stock options) wili attract and keep knowiedge workers? To address these and related questions, we delineate three stages of knowledge leverage: iiarnessing work-unit exper- tise, recognizing knowledge as a corporate asset, and gaining access to broad professional community expertise. Work-Unit Expertise Recently, the redefinition of tasks has been accompa- nied by more work being distributed across time and distance. More tasks can be decomposed so they can be done at different lcjcations and time periods (for example, customer service, order fulfillment, or new product development). However, their effectivene.ss is ensured througii the depioyment of integrateci controi systems supported iiy groupware. The expertise to carry out the tasks of a work unit, lo achieve performance improvement as a leam, cannot be achieved iiy individuals. American Airlines deployed an expert .system. Smarts, to complement its reservation system, Saiire. .so sales repre.sentatives couici develop target proniotionai programs to increase its market share anci profitability.'- Merriii Lyncii's succe.ss is attriiiuted to its aiiiiity to codify and distrii>ute higii-ievei anaiyticai skiiis to its differ- ent work units.'' Hewlett-Packard faceci the challenge of capturing the knowledge from tiie use anci support of its compiex gioiial products. Customers neecied support thai involved constantly changing technical configurations. In 1995, HP created a case-based reasoning tool to capture teciinicai support knowledge for possiiiie use i")y sen'ice and support personnel worlciwide. This initiative iias made tiie distributed service work unit effective: tiie average time for caiis has been reduced two-thirds, and tiie cost per cali has iieen lowered SO percent.'' An organization s aiiiiity to make proce.s.ses effective is increasingiy supported by impro'ements in IT functionality like groupware (Lotus Notes), ideocon- ferencing, and intriinets tliat facilitate teani-leel coor- dination and exciiange of information and knowi- edge. Teams de'eiop efTecti'e routines fbr siiaring knowlecige anci expertise. Consulting companies have created successful modeis of knowiedge siiaring w'itiiin teams tiiat are not in tiie same time zone. Pharmaceutical companies iiae cieployed new prod- uct development teams that take advantage of the twenty-foilr-iiour ciock by ciistriiiuting work to teams in differenl time zones. Teams in financiai senices firms work around the ciock to create products and service clients in the global financiai marketpiace. Case-iiaseci reasoning tools (like tiie HP case), expert systems, neurai nets, and the Weii aiiow firms lo capture anci ieverage knowledge to these ciisiributed processes on a giobai basis. The real challenge in maximizing work-unit expertise lies not in ciesigning the technological platform to sup- port group work but in designing the organization structure and processes. What is the best way to bring different perspectives into a task team? How do we balance tlie need for colocation w itii the rec]uirement lo get the iiesl possiiiie expert? How do we design tiie performance assessment system for tiie work unit so that it encourages teamwork ratlier than individual performance? Many compa- nies iike Honcia. Unilever, Joiinson <!<: Johnson, Motorola. GH. Boeing. Kodak, Xerox, and others are experimenting witii structures, processes, and technologies that maximize work-unit expertise as they move away from functionaliy baseci organiza- tions to a process-driven approach. Corporate Asset Tiiis second stage focLises on harnessing the collec- tive expertise acro.ss work uniis. rather than within fenk3traman • Hendeison Sloan Management Review
  13. 13. units. The main focus is less on tangible and codified knowledge and more on tacit knowledge to collec- tively leverage. Both Xerox and IiP treat knowledge as a corporate asset, one of the new drivers ot bot- tom-line profits and top-line growth. • Xerox captures knowledge about new ways of ser- vicing its machines. Many different knowledge workers — customer service engineers, field .sendee engineers, and product .specialists — created the Eureka prcx'ess, which rests on a database called Tips. Key to this prcK'ess is the emphasis on validation of expertise and knowledge. After a "tip" (an idea or suggestion to .solve a problem) is submitted, tip authors can monitor its progress through the validation proc-ess. and the origi- nator's contribution is recognized. They can obsen-e all die comments and interact with alidators. The tip is seen not as the asset of an isolated department or a function but ofthe corporation.'' • Starting in 1995, BP has experimented with a vinu- al teamwork program. When ecjuipment fails in the North Sea, the drilling engineers haul the faulty hard- ware in front of a tiny video camera connected to BP's virtual teamwork .stations. Using a satellite link, they can call a drilling equipment expert in Aberdeen who can visually inspect the part while talking to the shipboard engineers. Thus distributed expertise is vir- tually brought to bear on the problem tliat recjuires time-sensitive response."' According to John Browne, group chief executive, British Petroleum: "Advances in communications technology — particularly high bandwidth communication and information systems — allow the people working on a field in the North Sea to talk directly and to share experience with the people working offshore on a field in the Gulf of Mexico 5,000 miles away."'' Knowledge is a corporatewide asset that should be systematically managed. Consulting organizations like Arthur Andersen. McKinsey, KPMG, and others are also focusing on identifying, capturing, and leveraging their knowl- edge assets. Arthur Andersen combined convergent and divergent systems; the former focuses on codi- fied information translated into knowledge and com- municated through standard channels at prespecified inten'als; the latter is a knowledge-creating system based on information not codified but disseminated in real time. Similarly, the World Bank is reposition- ing itself as a provider of knowledge-driven services (www.worldbank.org). According to James Wolfensohn. president of the World Bank: "We need to become, in effect, the Knowledge Bauk.'"" Common to these examples is the notion that knowl- edge (or intellectual assets) is a corporatewide asset that should be systematically managed. At the U.S. Army's Center for Army Lessons Learned (CALL) dur- ing the 1994 Haiti invasion, CALL experts inter'iewed soldiers about incidents with mobs and confrontation with local authorities, obsen'ed after-action reviews (AARs). and read intelligence reports to compile les.sons. CALL developed twenty-six training scenarios for replacement units getting ready for Haitian duty; in the following six months, the units encountered twenty-three of the twenty-six scenarios. Similarly, the CALL process helped the army in Bosnia with early reports of incidents and the consequent distilla- tion of likely actions." Companies like Motorola. GE, Stc'clcase, BP," and GM'' are beginning to u.se the AARs developed by the army — each developing their own scenarios or lessons. Professional Community Expertise In the third stage, the focus is on the community of professional expertise — well beyond the domain of a focal organization. For instance, 1,000 staff people at HP collaborate with more than thirty of their part- ners and suppliers through a virtual team platform, desktop collaboration, information-sharing tools, and videoconferencing. Through coaching, BP has been able to transfer tacit knowledge acro.ss lioundaries. Organizations are increasingly leeraging the exper- tise in the extended network (suppliers, customers, partners, alliances, and so on) and the broader pro- fe.ssional community. For instance, .some firms retain a core of experts on their payroll while contracting for other skills as needed. LInlike contract workers who smooth out fluctuating demand, this expertise is for specific tasks and is often connected electronical- ly. The knowledge of lawyers, medical practitioners, advertising executives, investment bankers, and tech- nology gurus is often leveraged within an extended community through electronic networks. Recent advances in IT — especially the deployment of a global, accessible, collaborative infrastaicture —• fundamentally enable this virtual leveraging of exper- 45 Sloan Management Review fall mi Venkatraman • Hendeison
  14. 14. tise in the professional network. It is possihle to get a second opinion on a medical procedure by allowing other experts to 'iew the complete medic'al liistor- and associated images from remote locations. Multi- ple experts from different locations can simultaneous- ly interpret the meaning of an unforeseen ex'ent like a currency crisis in Mexico or lairope or realignment in the e.xchange rate between the K.S. dollar and the Japane.se yen. As com|-)anies identify antl integrate expertise from multiple sources, they face the clial- 46 Icnge of how best to compensate anci motivate employees with expertise. The traditional employ- ment c-ontract might have to be replaced with a more specific contract linked to the le-erage of expertise. Kmergent x'irtual ct)mmunities .sen'e as a primar>' mechanism for collecting and legitimizing know-ledge and expertise. The Motley Fool (www.fool.com) is one example; more .sLicli communities will likely emerge. Amazon is strategically positioning itself in the knowledge network to indutle book reviewers and critics, technology de'elopers who constantly pLisli Amazon to the cutting edge of the Web platform, logistics experts who optimize the physical distribu- tion of books, and sociologists who stud- the emerg- ing patterns of electronic communities. Amazon needs a wide range of experti.se if it is to be at the top of this new business model. The knowledge net- work from the community is more important as it expands be-ond books to incliEde movies. CDs, anci oiher products ibr the same customers. Its aiiility to Ie'erage the knowledge and expertise of its commu- nity might help Amazon maintain its leadership posi- tion. Questions for Managers • Does your organization recognize the importance of knowledge and intellectual assets in creating -aiue? If .so. what are the mechanisms (formal and informal) for implementing? • How well are your task units fteams and groups) le-eraging their collecti-e expertise? What characteris- tics of the IT platform support knowledge leveniging %-ithin the unit? • Do you treat knowledge as a corporate asset? If .so. how is knowledge linked to organizational effectiveness? • Are you effecti-e in positioning your prtjfessional expertise within a comnumity rele'ant for your busi- ness? What is your position in the community, rela- tix' to your competitors? • Wliat qualitative anci quantitative indicators are you adopting to better le'erage knowledge in creating value? What companies cio you Lise for benchmarking? Nine Challenges for Transition The implications of making a transition to the new business model are: 1. Shifting value drivers. i-A ei"j- corponition should develop a systematic approach to recognizing and responding to shifts in what dri'e.s value. Microsoft, Intel. Starbucks, Amazon.com, 'ah()o!. IW l-!xplora- tion, and others are focusing c^n kntjwledge as dri- ers of their business capabilities. The stock market values these firms for their intellectual assets more than for their physical assets. Recognizing the shift anci responding to it is key. 2. Designing the new business model. Tlie business model is a coordinated plan to design strategy" along all three vectors rather than leading in any one 'ec- tor. Strategies should ret-ognize the interdependencies among the three vectors. 3. Governing beyond outsourcing. Sourcing has become a primaiy aspect of the strategic logic. Companie.s should cie'elop a strategic approach to g{)ernance that constandy shifts the management of tangible assets to the market 'here the market is [iiLiture. At the same time, they sht)uld focus on the go'ernance of 'alue-addeci intellectual assets inside. 4. Interacting with customers for knowledge lever- age. Distribution channels are a strategic link with c-ustomers for gaining ai-cess to critical knowledge. Customers increasingly participate in the product or senice development proce.sses much earlier and pro- 'ide useful information for enhancing prodLict 'alue. More importantly, participating in the customer com- munities enables a company to be in the midst of information flows about new product features. 5- Navigating across muitipie communities. Market leaders are differentiated by their ability to positicju themsel-es in a network of communities — cust<}mer communities, resource coalitions, and professional communities. Companies need to play arious roles -itliin these communities — sometimes active, other- wise passive: setting rules sometimes while folto'ing rules at others; and competing and cooperating with the same firm at different times or in different settings. Venkatraman • Henderson Slaan Management Heviaw Fnll m^
  15. 15. 6. Deploying an integrated IT platform. Market lead- ers sliould design ati integrated IT platform for the new virtual busine.ss tnodel. They should experitnent with various tec-hnological alternatives as they .stt-ive to align their business stt-ategy with the IT strategy. The Internet (iticluding inti-atiets and extninets) tnakes possible a common platform that allows for inter- and intraorganizational coorditiation oti a scale not preiousiy possible. IT is both a cause (dist-uption of tnat-ket equilibrium) and a solution (building blocks for the new organizational logic). The technol- ogy t-ec[uiretiients for [lie tht-ee 'ectors are converg- ing, thus com]iellitig managet-s to take a more central look at the IT platfortii. .Senior managers catinot .sim- ply delegate resjionsibility to opet-atitig managers to execute ati informatioti strategy- that supports the business strategy. The rec|uitetnetit of continually aligtiitig business atid IT stnitegies is now tnore itnpoiiatit thati ever before. 7. Allocating resources under increased uncertain- ty. Leaders are difierentiated by how- they allocate critical t-esources. llnder conditions of relative certain- ty, cotiipanies can adopt preciictable models of resout-ce allocation (for example, the discounted cash tlow and traditional net presetit 'alue calculations). Howeer. the future is expected tcj be Lincertain. Leaders should adopt the di,scipline ofthe real options Lipproach to Licti'ely allocate resources.'- That a|-)pt-oacli brings the disciplitie of financial markets to strategic decisions and calls for setiior managers to actively manage iiuestments to respond to changes in external atid internal conditiotis. S. Designing an organization for knowledge lever- age, tiompanies are experimenting wiih matiy different organizational forms that overcotne the limitations of exi.sting .stnictures and processes. The underlying logic for new fonns should be to leverage knowledge acro.ss multiple le'els — within and across boundaries. There are no .strict or rigid principles for designing organiza- tions that leverage knowledge, but cotnpanies will con- verge on sotiie principles as new entities design organi- zations without the constraints of the old principles. 9- Assessing performance along multiple dimensions. Managers should tnove away frotn static, tnyopic tnet- rics like market share, as they Ix'cotne tneaningless with changes in tnarket definition. Sitnilarly, they should sup- pletnent accounting metrics like ROI, ROA, and ROE with tnore contetnponiry metrics like EVA (econotiiic 'alue added), MVA (market value added), and metrics that capture the share of new wealth creation. Clearly, Yahoo! and Atnazon.com are not succe.ssful if we look at tlieir profitability nutnlx^rs but are successful frotn a stcK'k market valuation viewpoint. Conclusion While vittual organizing is a powerful concept, "irtu- al organization" is an imfortunate term. It connotes impo.ssibilities such as a "hollow corporation" or a liroker." Virtual organizing as a concept focuses on the importLince of knowledge anci intellect in creating 'alue. Our approach recognizes three interdependent ecEots — irtual encounter, virtual sourcing, and vir- tual expertise — supported by a powerful, integrated IT platfortn. The strategic logic for the new business tnodel is rooted in the interdependence atnong the three vectors. It will be difficult — if not itnpossible — to craft an effective strategy and structure without harmony atnong the three vectors. 47 References This paper is based on a research project with a grant from the Advanced Practices Council (APCI Df the Society for Information Management (SIMI tilled. "Avoiding the Hoiiow: The Bjilding Blocks of Virtual Organizing." We thank Madeline Weiss, Bob Zmud, Lee Sproull. and members of the SIM-APC and Boston University Systems Research Center for sharpening the framework and developing the management implica- tions. This work was also supported by the National Science Foundation under Grant No SBFl 9422284 IPrincipal Investigator. N. Venkatraman). Any opinions, findings, conclusions, or recommendations are the authors' and dc not necessarily reflect the views of Ihe National Science Foundation. We also thank Lee Sproull for stimulating our thinking about knowledge ne^vorl^s and the role of communities and PR Balasubramanlan for useful comments. • 1 P. Drucker, Post-Capitalist Societ England: Butterworth Heinemann, 1993); JB. Quinn, Intelligent Enterprise {New "{QI]!:. Free Press, 19921; and G. Hamel and C K Prahalad, Competing for the Future IBoiXon: Harvard Business School Press, 1994). Womack and Jones coined the term "lean organiza- tion" to extend the original concept of lean produc- tion. See. J P Womack, O.T. Jones, and 0. RODS, The Machine That Changed the WorldWevi York: Rawson Associates, 1990). C Handy. The Age of Unreason {BosXon. Harvard Business School Press, 1989). • 2. See, for instance: D. Nadler, M Gerstein, R, Shaw, and associates. Organizational Architecture: Designs for Changing Organizations (San Francisco: Jossey-Bass. 1992). • 3. S.E. Rasmussen. Experiencing Architecture (Cambridge, Massachusetts MIT Press. 1991), • 4. Nadler etal. (1992). • 5. For an overview of the characteristics of the new marketspace, see: J.F. Rayport and J. Sviokia, "Managing in the Marketspace," Harvard Business Review, volume 72, November-December 1994, pp. 141-150. • 6 See J. Hagel III and A.G. Armstrong, Net.Gain: Expanding Markets through Virtual Communities (Boston: Harvard Business School Press, 19971 • 7. When we refer to customer, we include both customers and end-consumers • 8. N. Negroponte, Being D/pifa/[New York. Alfred A. Knopf, 1995). • 9. See, for instance: J.B. Quinn, J. Baruch, and K.A. Zien, Innovation Explosion (New York: Free Press 1997); see also: A.J. Slywotsky and D Morrison, The Profit Zone Sloan Maoagemenl Review Fall 1998 Veokattaman • Henderson
  16. 16. (New York: Times Business, 1998). • 10. C, Baldwin and K. Clark, "Managing in an Age of ModLlarily," Harvard Business Review, volume 75, September-October 1997, pp. 84-93. • 11. B.J. Pine III, Mass CustomuationiBo^tan: Harvard Business School Press, 1993). • 12. M. Dell, "The Power of Virtual integration," Harvard Business Review, voiume 76, March-April 199B, pp. 73-84. • 13. Hagel and Armstrong (1997), p. 37. • 14 For an overview, see Hagel and Armstrofig 11997). • 15 In this paper, we use the lerms competencies 48 and capabilities interchangeably. The main distinc- tion in our view is that Prahalad and Hamel use the term competencies in their paper more narrowlv to refer to technology-based competencies. See: C.K. Prahalad and G. Hamel, "The Core Competence of the Corporation," Harvard Business Hevieiv. vol- ume 68, May-June 1990, pp. 79-91. Fora broader view, see: G. Stalk, P. Evans, and L E. Shulman, "Competing on Capabilities: The New Rules of Corporate Strategy," Harvard Business Review, March-April 1992, pp. b7- 69. We adopt a broader definition when using the two terms interchangeably. • 16. W. Davidow and M. Malone, Itie Virtual Corporar/on (New York: Harper Collins, 1992!. • 17. S. Goldman, P. Nagel, and K. Preiss, Agile Competitors and Virtual Organiiations (New York: Van Nostrand Reinhold. 1995). • 18 Quinn (1992) • 19. See Quinn (19921: and R Venkatesan, "Strategic Sourcing: To Make or Not to Make," Harvard Business Review, volume 70, November-Qecember 1992, pp. 98-107. • 20 See, for instance: J. Lewis, The Connected Corporatior) (New York: Free Press, 1995); Guinn 11992): and B. Gomes-Casseres, Ttie Alliance Revolution (Cambridge. Harvard University Press, 1996) • 21. See. for instance Venkatesan (19921 • 22. Baldwin and Clark 11997). • 23. Negroponte (19951. • 24. For more details, see. H V^. Chesbrough and D.J Teece, "When Is Virtual Virtuous' Qrgani/ing for Innovation," Harvard Business Review, volume 74, January-Febmary 1995. pp 65-73 • 2b- See J. Short and N. Venkatraman, "Beyond Business Process Redesign: Redefining Baxter's Business Network," Sloan Management Review, vol- ume 34, Fall 1992, pp. 65-73. • 26. G2 Research. • 27 See N Venkalraman, "IT-Enabled Business Transformation: From Automation to Business Scope Redefinition," Sloan Management Beview. volume 35, Winler 1994, pp. 73-87 • 28 See A. Bfandenburger and B. Nalebuff, Co- opelition{Uevj York. Currency Quubleday, 19961 • 29. P Drucker, 'The Coininij uf the New Organization," Harvard Business Review, volume 66. January-Februarv 1988, pp 44-63 • 30. See, for instance: T. Stewart, Intellectual Capital{^e York: Currency- Doubleday, 1997). • 3l.0uinn|1992|.p 102 • 32. N. Venkatraman and E. Christiaanse. "Electronic Channels for Expertise Exploitation' An Empirical Test of the Airline-Travel Agency Relationships," Academy ot Management Best Paper Proceedings. 1996 • 33. See J.B. Ouinii, R Anderson, and S. Finkelstein, 'Managing Piofessicnal Intellect Making the Must of the Best," Harvard Business Review, volume 74. March-April 1996, pp 71-80 • 34 See T Davenport and L. Prusak, Working Knowledge How Organiiatioiis Manage What They ^nuwlBoston: Harvard Business School Press, 199B). • 35. See D. Bell, D. Bobrow, 0 Raiman, and M Shirley, Dynamic Documents and Situated Processes Building on Local Knowledge in Field Service." in T Wakayama. S Kannapn, C M Khoong, S Ndvdthe, andJ Yales. n^^. Information and Process Inlegrdlion in Enterprises: Rethinking Documents HaNe. Massachusetts Kluwer Academic Publishers, 19971. • 35, Field research at Boston LJniversity School of Management, Systems Research Center, 1997. • 37 J Browne, speech, "Science, Technology, and Responsibility" (London. Royal Society, 28 October 199/1 • 38. J Wolfensohn. 1996 annual meeting speech. Available at miAv.worldbankorg/html/extdr/extme/jdwamsaB.htm. • 39 See G R Sullivan and M Harper. Hope Is Not a Method What Business Leaders Can iearn troni the AiinyiUtiw York Bruddway Buuks. 1995). • 4(J Field resedrch at Bustun University Schoul of Management. Systems Research Center • 41. Boston University School of Management, research on knowledge management, • 42 See M. Amram and N, Kulatilaka, Real Options Managing Strategic Investments in an Uncertain l/Vo/WIBoston Harvard Business School Press. 1998). and N. Kuldtilaka and N Venkatraman. "Are You Preparing to Compete in the New Economy? Use a Real Options Navigator" (Boston. Boston University School of Managenient, working paper, August 199B|. Reprint 4013 Venkatraman • Hendeison Sloan Management Review Fall 19gB

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