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Chapter 10. Strategic Partnering, Outsourcing, and Virtual

Organizations

Foundations of Net-Enhanced Organizations

Detmar Straub, 1st EditionCopyright © 2003 John Wiley & Sons, Inc.

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Virtual Organization• A virtual firm focuses on the operational use of

informational processes. Key to this is: – Operating as if it were a group of enterprises– Depending on contracts, not ownership, of the

resources and services it uses to do business.• Virtual firms also tend to be highly decentralized,

transferring non-core physical processes to contractual or even informal arrangements.

• Inherent in their design is the ability to substitute electronic connections for more conventional work processes.

3Figure 10.3 Physical versus Virtual Organization Designs

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Virtual Organizational Designs• Virtual firms are

managed through the Web and often physically dispersed, needing only occasional face-to face meetings.

• Their command of high margins depends on capitalizing on their intellectual assets and owning intellectual properties that create profits or allow them to innovate and move decisively into new markets or business ventures. Figure 10.4 Virtual Connectivity with

Stakeholders from Virtual Firm Facilities

5Figure 10.5 The Partnership Continuum

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10.6 Managerial Control, Core Competencies, and Selective Sourcing

• There are two ways a firm can maintain its oversight over the firms to whom it outsources while continuing to focus on its core competencies:

1. Use of outcome or performance measurements only to monitor outsourcer (in systems, these are known as “service level agreements” or SLAs)

2. Trust in outsourcer’s process controls – that is, day-to-day task assignments are monitored by the outsourcer’s operational level management.

• A firm reduces its managerial control responsibilities by hiring agents to take charge of the process controls while it continues to monitor outcomes.

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Managerial Control, etc. (cont.)

• The outcome controls become the core competencies when a firm virtualizes. – This is not complete control but sufficient

control.

• The essential sourcing question destroys the distinction between suppliers and other provisioners, including competitors, and is based on whether an activity is a unique, distinctive skill of the firm, and if not, who else should do it?

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10.7 Making the Sourcing Decision

• When should an NEO source a component, service or process?

• This is the rudimentary “buy vs. make” decision.• New theories for NE can help to decide where it is

advisable or and where it is not. • The four basic reasons are as follows:

Reason 1: Achieving Strategic Focus

Reason 2: Cost Saving

Reason 3: Staff Flexibility

Reason 4: Imitation (Bandwagon effect)

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10.8 Deciding on NE: Cost-Benefit Analysis

• For small investments, the selection of a vendor needs to be efficient and effective.– This may be done using comparison pricing

of online stores, etc., and personal contacts to check quality of service.

• Longer term investments require a more detailed investigative process.

• The first question, though, is whether or not to virtualize the process. (i.e., perform a cost-benefit NPV analysis)

10Figure 10.13 Insource versus Outsource (Level II)

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Working with Rivals• Money is generally the key reason to cooperate

with rivals.• If assuring quality supplies and components can

result from a joint venture with competitors, this can benefit the entire industry.

• NEOs are particularly receptive to the model of strategic alliances as they are inclined to be virtual anyway.

• However, these alliances can also be dangerous, so care must be exercised.

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Figure 10.17 A Possible Outcome Matrix for Information Sharing (cf. Gefen 1997)

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Chapter 11. Strategizing for E-Markets

Foundations of Net-Enhanced Organizations

Detmar Straub, 1st EditionCopyright © 2003 John Wiley & Sons, Inc.

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Strategy and E-Markets

• When firms move towards greater virtuality, they must explore channels “outside the box”. – Where and when should such channels be deployed?

• “Channel conflict” is a critical issue that must be resolved as channels need to complement each other whenever possible.

• In what ways will pricing at all supply chain levels change as a result of Net-Enhancement?

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11.3.1 Unique Capacity #1: Online Auctions

• Gathering individuals from the far reaches of the planet at a given time, with the overall auction running continuously, is not feasible in physical commerce.

– This is the perfect case of the substitution of informational for physical processes.

• The challenge is to retain user interest and liveliness of bidding so both buyers and sellers return frequently to the site.

• eBay’s markets for small groups of buyers and sellers are unique to each transaction.

– Buyers and sellers must return for new purchases.

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11.3.2 Unique Capacity #2: Web Exchanges

• Online exchanges represent an unprecedented expansion of markets as they can potentially reach a global market at a fraction of the cost of bringing buyers and sellers together in the physical world.

• Through issuance of a request for bids (RFB), the features of each lot of product can be specified– Bidders who might ordinarily be frozen out can

participate.

• Online exchanges therefore favor multi-sourcing over sole sourcing.

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11.3.3 Unique Capacity #3: New Communications Media

• Media enhancements through Internet technologies affect nearly all channels.

• Interactive responses (such as online chat) can be a powerful tool in strengthening customer relationships.– Furthermore, sales reps in cyberspace are

capable of maintaining contact with 3 customers at a time – a 3-fold increase in productivity!

• Newer technologies promise ever greater simulations of human social contact.

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11.3.4 Unique Capacity #4: Web Cam Broadcasting

• Influential brand images can now be conveyed using “video streaming” over the Internet, delivered anywhere at the customer’s convenience.

• Live shots capitalize on a sense of immediacy that is important in establishing customer involvement.

Figure 11.2 real-time traffic on the Verrazano Narrows bridge.

See also GA Navigator website.

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11.3.5 Unique Capacity #5: Peer-to-Peer (P2P) Communications

• P2P technology allows entities to exchange data, such as file-sharing, directly, without the intervention or control of a 3rd party.

• The software includes a search capacity to determine where the information is located and then to establish a direct connection through the Internet to that IP address.

• The digitalization of content combined with the ability to share it over networks has overturned physical constraints and made new business propositions possible.

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11.3.6 Unique Cap. #6: Global Reach and Range• Global accessibility is one of the unique and

distinctive features of the Internet.• Range can be achieved by companies like

Amazon.com, with extensive inventory often supplied by affiliates and based on its ability to aggregate content from their own and other firm’s sites.

• Products and services can thus be offered on a worldwide basis via a comparatively modest investment.

• Results in the ability to profitably sell low volume products that would not be viable for traditional retail situations (long-tail marketing).

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11.3.7 Unique Capacity #7: New Pricing Models

• Priceline and other variants have changed the underlying pricing of traditional auctions by reversing the roles of buying and selling.

• Here the price is initiated by the buyer but is determined by the lowest bid the seller will accept

Figure 11.4 Priceline’s new pricing model

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11.3.8 Unique Capacity #8: Novel Display Capabilities

• Wine.com is an example of the way goods and services are able to be presented in unique ways, by type, region or winery, in ways that would be impossible to duplicate physically.

• In cyberspace, each way of displaying the inventory is equally valid because the physical processes of display have been supplanted by information.

Figure 11.4 Novel display features at wine.com

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11.3.9 Unique Capacity #9: Personalization and Recommender Systems

• The Web can be programmed to treat customers as individuals.

• When a customer identifies him/herself or is identified by cookies that are set, this underlying intelligence can be used to effectively respond to customer needs.

• Recommender systems that assemble and process customer needs can personalize responses in ways that are difficult for physical stores to duplicate.

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11.4 Reprise: B2B Versus B2C

• B2B relationships tend to be higher in volume and less cash-driven– They tend to involve higher levels of trust than B2C as

well as different procurement process structures and intermediary handling of goods and services.

• For individual buyers in B2C systems, trust in the product and vendor is relatively important– But building a long term relationship with the vendor is

less so than B2B since many transactions are infrequent and sales values relatively small.

25Figure 11.8 Criteria for determining competitors and

complementors

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11.7.3 B2B Information Visibility

• As trust grows between partners, information sharing helps reduce bottlenecks in the supply chain, thus countering the “bull-whip” effect – over/under ordering due to imprecise information.

• Buying networks also create flexibility by contracting dual and multi-sourcing arrangements.

• Sharing transactional information can greatly help all downstream partners estimate demand and develop a long term perspective.

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Figure 11.14 Bullwhip effect from information invisibility in the supply chain

-from Fine, 1998

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11.8.2 Inherent Deficiencies and Advantages of Online Shops

• Feature #1: Websites can present the consumer with visually and aurally stimulating information, but cannot emulate the sense of touch.

• Feature #2: Digital stores cannot transfer physical offerings directly to customers (deferred delivery).

• Feature #3: Dynamic pricing is much easier to manage in a Web store.

• Feature #4:Customers entering their own data can give insights into patterns of buyer behavior, but privacy is an issue.

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Inherent Deficiencies and Advantages of Online Shops (cont.)

• Feature # 5: Immediacy in terms of shopping where one is, but online security is an issue.

• Feature #6: Search engines are the boon and bane of Web stores because, while they open up the world markets, they still generate many false hits.

• Feature #7: Email and FTP are potential channels for communicating with customers for after-sales support, etc.

• Feature #8: The Web is a pull rather than a push phenomenon, so customers are usually ‘half-sold’ already.

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3 Forms of Personalization

• Tailored offerings: Amazon.com, for example, exploits this capacity by “pushing” information about products related to prior purchases.

• Recommender Systems: these are Web applications that accept general preference information from individuals and then try to match these interests with products and services

• Configuration Engines: these personalize by offering customers their choice of features on products or complementary products, and can advise when products will not function together.

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11.9 Pricing Issues in Cyberspace (B2B)

• A price is an economic equilibrium point that represents a compromise between a buyer and a seller.– For longer term B2B relationships, the agreed on price

will benefit both parties.

• Opportunistic behavior should be minimal as it is not in the interests of either party to see the other fail.

• Buyers have a broader awareness of pricing options, while sellers have a larger marketplace for their bids.

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Pricing Issues in Cyberspace (B2C)• Dynamic pricing is a potential marketing

advantage for Web stores.• Moreover, pricing can be programmed, based

on immediate demand conditions, etc (as airlines do), and in this way higher volumes or higher margin goods or services can be sold.

• In theory, with the availability to compare prices on the Web, there is every reason to believe that consumers will enjoy lower prices in the long run.