Trust, Responsibility and the Globally Integrated Enterprise

There is general agreement that the corporation is going through dramatic changes in the 21st century, driven by a combination of advances in information technologies - especially the Internet - and the heightened competitive pressures brought about by globalization.  For example, consider one of the major findings of IBM's Global Innovation Outlook (GIO) 2.0:

"The nature of competition — increasingly intense, global and unpredictable — requires strength across the board.  So the objective is to decompose the enterprise into its component parts, understand with great precision what is truly differentiating — where the enterprise has strengths and weaknesses — and then make decisions about how to build, buy or partner for world-class capability.  In this model, companies can focus their energies on their true point of differentiation, instead of trying to master many domains and ultimately squander competitive advantage by dispersing focus and investment. Rather than existing as static and fixed organizations, more enterprises could essentially become an aggregation of specialized entities with complementary interests — expanding, contracting and reconfiguring themselves in a way that best adapts to or even anticipates market dynamics."

Business strategist and author Don Tapscott has focused on the changing nature of companies in his research at New Paradigm and has written extensively about what he calls Enterprise 2.0 or the Open Networked Enterprise.  For example, in this article he says:

"We came to the conclusion that the corporation is arguably going through the biggest architectural change in a century. Throughout the 20th century we created wealth through vertically integrated companies that did everything from soup to nuts. . . . But the rise of the Internet means that boundaries are far more porous. A new model is emerging, enabled by IT and networks. Vertically integrated companies are unbundling into business Webs, or what I call the open networked enterprise. These are companies that think and act differently, that take a new approach to doing business in a highly networked world."

As enterprises increasingly outsource and rely on business partners for many of the functions once done in-house, one of the major management challenges is how to sustain the reputation of the company and its brands given such a distributed model.  How do you ensure trust in your company and its products and services when major parts of its operations may be shaped by other companies that are part of your virtual enterprise? 

This question was very prominent in the news in the last few weeks because of events surrounding the Thomas the Tank Engine & Friends children’s toys.  RC2, the company that develops and markets these toys, recalled about 1.5 million toys because a plant in China to whom RC2 outsources their manufacturing had been using lead-based paint over the last two years.

The incident raised serious questions about outsourcing, and in particular, offshoring or the outsourcing to other countries, especially China, where the vast majority of the world's toys are manufactured.  David Leonhardt wrote in a June 20 New York Times article that  "Over the last two decades or so, American companies have generally followed a two-pronged outsourcing strategy. First, the companies have tried to move as much of their manufacturing as possible to places where wages are just a fraction of what they are here. Second, the companies have distanced themselves from their overseas production. They usually don’t own the factories and refuse to say much about them," and later added "The companies get the cost advantages of outsourcing without the publicity disadvantages."

The basic principles here are not very complicated.  IBM Chairman and CEO Sam Palmisano put it very succinctly in a recent article based on a speech he gave at INSEAD in France:

"Of all the issues facing leaders in business, government, academia and beyond, I believe [trust] to be the most fundamental.  This isn't just about issues such as ethics and legal compliance. What I'm talking about goes far beyond that.  You may choose to leverage the expertise and scale of partners; indeed, there are compelling reasons to do so.  But, ultimately, you cannot outsource trust and responsibility."

In other words, a business is responsible for its actions, and those actions done on its behalf, regardless of whether the work is done by in-house employees or external partners or whether it is done in its own offices and plants or in offices and plants in faraway countries.

Think about it.  If you go to a restaurant and the fish you order does not taste good, you would not be very tolerant if the chef offers as an excuse the fact that she now uses a wholesaler in another country that offers fish at lower prices but their quality is sometimes suspect.  If you hire a contractor to build you a house, and you are dissatisfied with the finished product, the contractor cannot get away with the excuse that his sub-contractors did not perform the work to the proper standards.  If you buy a consumer product and it does not work well, the excuse that some of the components made by suppliers were faulty will not go very far.

A business can outsource work, but as Sam said, a business can never, ever outsource its trust and responsibility.  Managing a good globally integrated enterprise - with employees, business partners and customers around the world - is very difficult, indeed.  It requires the proper business culture, as well as operational excellence.  Perhaps most of all, however, it requires that the people and organizations across the extended supply chain – who must necessarily be empowered to make countless decisions on their own, without top-down supervision – share a common set of core values that shape their actions and decisions.

As difficult as this is, in the real world we live in – both increasingly global and increasingly open – there is no choice.  If it gets too hot - that is, if managing such a global enterprise proves to be beyond your abilities - then you had just better get out of the global kitchen before the forces of the marketplace push you out.

Comments

[Padmanabha Rao]

A Virtual Enterprise will have to aim for the global market (as one market) to build and maintain trust, I think. Defining sub-markets is a tried and tested method to erode trust.

[Anne Johnson]

Irving,

"that the people and organizations across the extended supply chain – who must necessarily be empowered to make countless decisions on their own, without top-down supervision – share a common set of core values that shape their actions and decisions."

The creation and maintainance of a "common set of core values" needs to happen across the supply chain - it also needs to extend to users/customers, since it helps if they also share context and have similar expectations. Over on Global Neighbourhoods,
http://redcouch.typepad.com/weblog/2007/07/the-roll-your-o.html
Shel Israel is conducting a survey about Social media; it would seem that companies which can master the concept of social media (not necessarily a particular instance of it, whether blogging, wikis, forums, etc) have a head start on ways to create and share core values. HP did this successfully in the late 80s, with an internal implementation of Usenet.

[Tony]

It seems that the discussion is geared towards manufacturing... how about programming? Many companies today do not have an extra programmer around so they outsource these tasks.

How do you do you cultivate the "common set of core values" when you never met these individuals and they've never met your company... How was it done before (before offshoring that is).

It seems to me that if a function (be it programming, manufacturing etc) is really important to your company then outsourcing is not an option.

It is a real challenge to balance between outsourcing and in house management.

[Morris Young]

If a man comes to your front door and says he is conducting a survey And asks you to show him your bum, do not show him your bum. This is a scam. He only wants to see your bum. I wish I had got this yesterday. I feel so stupid and cheap. -The Bum http://www.widgetmate.com

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[x-ray fluorescence]

Hi,
Very interesting post.I think defining sub-markets is a tried and tested method to erode trust..