Sunday, August 22, 2010

Enterprise Architecture creating the engine for network-based business models


In a world where the network-based organizations are creating the new business models, Enterprise Architecture play the key role in making it all happen.
Value chains represent all activities performed to create the value experienced by a customer. Michael Porter has described this in his 5 Forces where the relative strength of each participant is reflected in the amount of profit they can extract from the value chain.
The business model is the engine in a firm's network-based strategy in how to cooperate with others to create value. The business model therefore plays a crucial role in determining how much profit a single firm can extract from the value chain.
In a value chain there are four sources of value creation; Novelty, Lock-In, Complementaries, and Efficiency.

Two questions that struck me are:

  • How can a single firm control and steer its business model in a network-based value chain? 
  • How can Enterprise Architecture enable the business model to become the engine through leveraging the four sources of value creation?
I think the answer to both questions can be found in using Enterprise Architecture, EA, to guide and steer successful execution enabling the four sources of value creation. Most transactions and interactions, if not most of the value, are created through IT systems. Enterprise Architecture will enable an organization to identify the most crucial parts of its IT system that creates the four sources of value creation. Once identified the organization can through Enterprise Architecture focus its effort on each of the four sources:
  • Efficiency
    • Integration with other partners done quickly and with no effort. Finding the best suited product with low search costs. Reliable lead-times and costs.
    • EA focuses on the business processes and information exchanged. Thus it is possible to remove bottlenecks and based on which levels of efficiency creates the most value put the efforts there.
  • Complementaries
    • Flexibility in terms of vertical and horizontal integration. Offer additional services and products that complement the product. 
    • EA will based on which types of vertical integration is available enable fast and smooth integration. Information necessary to provide data about available complementaries, especially those that change over time, is identified through EA.
  • Lock-in
    • Raising the switching costs through efficient loyalty activities. Recognizing me as a customer. Not just discounts but more importantly access to improved information, priority, customization, etc.
    • EA identifies which information and business processes that drive the most customer loyalty. Providing that information through the different processes and through the value chain enables larger shares of profit to be extracted.
  • Novelty
    • Enable flexibility in terms of transaction structure, transaction content, offerings through network of partners and complementaries.
    • EA does not only focus on the current state of affairs, but more importantly where the organization is heading. Areas where Novelty are important will be identified and necessary information, business process and IT system support is created.
I think you should ask yourself: What is you position within the value chain? How are we utilizing the four sources of value creation within our current business model? Which IT system support is needed?

Further reading:
  • The Network Challenge: Strategy, Profit and Risk in an Interlinked World by Paul R. Kleindorfer
  • TOGAF 9 A Pocket Guide by Andrew Josey

1 comment:

Unknown said...

I agree: EA is a tool to control the networked Enterprise.
How is the networked Enterprise managed? The Governance function, that identifies the Enterprise, must be emphasized. Every Enterprise consists of four basic functions: Governance, Operations, Development and Support. All of them can be outsourced except Governance which coordinates the networked Enterprise. The Cloud adds another dimension to the virtual Enterprise.
See these papers on the Virtual and Cloud Enterprise:
http://www.tinyurls.co.uk/Z9621