The Bottom Line on the Extended Enterprise: How Collaboration Can Lead to Real Financial Rewards

When it comes to business deals and contract negotiations, we often think about winners and losers. But what about arrangements in which multiple firms win?

For well over a decade, Darden Professors Robert E. Spekman and Edward W. Davis have been interested in the extended enterprise, a collaborative approach to supply chain management in which key members view one another as partners rather than adversaries.

In these networks, also known as collaborative supply chains, buyers and sellers share similar goals and work together to create a better product. When done correctly, this approach leads to lower costs, higher customer satisfaction and increased flexibility in reacting to market demand.

“Collaboration in a supply chain context is defined as a win-win arrangement that is likely to provide improved business success for both parties,” said Davis and Spekman, who in 2004 quite literally wrote the book on the topic, The Extended Enterprise: Gaining Competitive Advantage Through Collaborative Supply Chains.

They warn, however, that true collaboration is neither easy nor simple, as it goes beyond mere cooperation or even coordination. Collaboration involves sharing information, managing expectations, determining demand allocations and jointly monitoring performance goals. For these reasons, trust and transparency are paramount.

While some managers might think, “Sure, that sounds nice, but I’ve got to think about my bottom line,” Spekman and Davis note there are real financial rewards to be had from taking a more collaborative approach.

As a case in point, Davis pointed to the auto industry. “Toyota and Honda are two examples that have been very, very successful,” he said, noting that both companies have worked so closely with their suppliers in the past that their supply chains have become almost like business units of each company

Those relationships have led to a number of different benefits for Toyota and Honda, such as being first to see a supplier’s newest technology, getting the supplier’s best personnel for support and receiving the best pricing.

Spekman and Davis noted that a recent continuing study of the U.S. auto industry put a dollar amount on those benefits and found that Ford, General Motors, Fiat Chrysler U.S. and Nissan would have collectively earned $2 billion more in operating profit in 2014 had their supplier relations improved as much as Toyota’s and Honda’s during the year.

Ironically, it was actually a former CEO of Chrysler, Tom Stallkamp, who first trademarked the term “extended enterprise” in the 1990s — and the implementation of extended enterprise principles is estimated to have saved Chrysler $5 billion during that decade. But according to Davis, the 1998 merger with Daimler changed everything for the company. “The German managers changed things around a lot,” he said. “So Chrysler today is not the best example.”

Of course, it is not just the auto industry in which companies can benefit from increased collaboration. Various firms in other sectors — such as aerospace, consumer packaged goods and technology, among others — have also successfully implemented the extended enterprise approach and demonstrated the power of collaborative advantage.

In a recent invited paper for the 45th anniversary special issue of the highly respected International Journal for Physical Distribution & Logistics Management — which celebrates the 20 most cited articles in its 45-year history while also looking toward the future — Spekman and Davis shared some key takeaways for any manager, regardless of industry, who is interested in the extended enterprise:

It doesn’t really matter what you call it:

The business community is rife with jargon, and sometimes the terms in one sector do not perfectly align with those from another. In their research, Spekman and Davis noted that “collaboration” and “extended enterprise” can be used almost interchangeably, and they ultimately represent the same philosophy. Similarly, members of a collaborative supply chain might see themselves as a network, partnership or alliance. The difference in semantics is negligible. What matters is not the name but the principle behind it.

Short-term thinking does not lead to improved long-term results:

Spekman and Davis noted that in the past, they have heard procurement heads argue, “If I squeeze my suppliers to get a 10 percent decrease in price, I know how the result falls to my bottom line.” But the short-term benefits of taking such an adversarial approach often carry hidden long-term costs. Companies that choose not to take part in collaborative supply chains may ultimately see higher costs, reduced service levels, longer lead times and lower end-use customer satisfaction.

Understand the difference between knowledge sharing and oversharing:

While trust and transparency are essential in an extended enterprise, Spekman and Davis do not advise that companies totally abandon caution. “It’s not essential that partners share all their knowledge, since some knowledge is core to the firm and might need to be protected,” the professors said. There is a difference between open and honest communication and giving away company secrets. Spekman and Davis note it is perfectly fine for network partners to withhold certain core knowledge, so long as the boundaries are set clearly and early on in the relationship.

Know the risks:

Achieving a collaborative enterprise is not easy, and a single company cannot do it alone. All key members in a supply chain must strive to behave as a single entity with a common goal. This means firms must select their supply chain partners carefully and also be aware of any cultural issues that might arise. As emerging markets such as China, Southeast Asia and Eastern Europe continue to play an increasingly important role, ideal supply chain managers may require a different skillset that prioritizes cultural sensitivity, joint decision-making and, of course, trustworthiness.

Rethink your rewards:

While a company might embrace collaboration in theory, it might not encourage it in practice. Specifically, traditional performance metrics tend to be intra-organizational rather than focused on inter-organizational success. To truly act as an extended enterprise, each network member may need to rethink how it evaluates and incentivizes performance so that metrics are future-oriented and span the entire supply chain.

The future of competition is collaboration:

The business world has entered an era of network competition, in which the winners will be those supply chains that are close enough and agile enough to react effectively to increasing customer expectations, shortened product life cycles, rapid technological advances and cyclical shifts in the global economy.

Trust has to be earned. And then protected:

There can be no collaboration without trust. “Trust is an essential ingredient in any attempt to transfer knowledge because it acts as a counterpoint to opportunistic behavior,” Spekman and Davis said. For as important as it is, trust is also fragile and easily damaged. If a break occurs, it must be repaired quickly.

Looking forward, Spekman and Davis expect to see more companies building collaborative supply chains in order to successfully compete in the changing global marketplace. And, as such, they hope to see more research done on the topic. But they stress that academic researchers must take a cross-functional and cross-disciplinary approach if they hope to truly understand the extended enterprise approach. In other words, to study collaboration, the academics, too, must collaborate.

Darden Professors Robert E. Spekman  and Edward W. Davis co-authored “The Extended Enterprise: A Decade Later,” published in the International Journal of Physical Distribution & Logistics Management., Vol. 46, No. 1, 2016.