CO-MANAGING VALUE:THE ESSENTIAL LEVEL 5 DIFFERENTIATOR

Moving from level 4 to level 5 in the extended enterprise is analogous to
moving from level 1 to level 2 in the stand-alone company.
The authors recall a conversation with the logistics manager of one of the
U.K.�s major retailers. The retailer had just announced that its distribution
centers were about to go stockless. When questioned about how this had been
achieved, the manager said that suppliers would deliver more frequently, in
smaller lots, closely matched to the most recent store demand data. Later in the
conversation, the question of value arose. Had the value in the chain overall
gone up or down? Not only did the manager not know, but the question had
not occurred to him. If the value had been reduced, at the suppliers� expense
of the extra less efficient deliveries, then this would eventually find its way back
into the value chain�s economics. The suppliers would gang up on the retailer
to force more profitable dealings, they would fail as their profits were reduced,
So how should a level 5 extended enterprise manage value? We suggest one
approach, based on an example of the value chain to deliver a bottle of carbonated
soft drink to the end customer. The supply chain for this simple product
is surprisingly complex, from plastic at the upstream end through the bottling
and packaging processes to the supermarket shelf. Even two or three years ago,
we would not have contemplated treating this as a single entity. For one thing,
we did not have the necessary tools. Now, the Internet and effective process
management mean we can move information to where we need it, and fast
schedulers give us the power to synchronize the flow of materials through the
whole network.
The challenge we face is bringing it to life, winning the extra value and
sharing it equitably between the partners. And that requires doing no more than
we have done many times before at level 1 � except that now the �functions�
are the businesses in the extended supply chain
Given that we can map the extended enterprise, we can also create an
economic model for it, a pseudo-profit-and-loss statement and balance sheet. By
combining these, we can build an economic value added (EVA) model, similar
to and with the same role as the level 1 return on net assets model, with the
exception that, for the extended enterprise, we must factor in the cost of capital
for each of the partners
We do this so we can see where value is gained and lost across the chain, so
as to manage it fairly. This is analogous to the investment in the active ingredient
plant in the Zeneca example in Chapter 3, where the value was �gained�
elsewhere in the chain.
A little research into most value chains will uncover many value-creating
opportunities. The interesting thing is that an understanding of the value chain
and its value models will show that EVA is not equally spread. In the case of
our soft drink bottle, it is heavily skewed to the downstream, as shown in Figure
7.7. No proposition will succeed if it relies on persuading one player to give
up part of its value. But it just might succeed if, by collaborating, we raise the
whole EVA curve and generate more value for everyone!
Ultimately, the level 5 extended enterprise will outstrip its lower level
competitors in cost, quality, and time to market. The entry ticket is a willingness
to engage, and the prize is a share in the increased value in the entire extended
enterprise.