A Taxonomy of Virtual Business Networks

Virtual business networks are appearing everywhere and in many guises and names such as Collaborative Networks, Virtual Clusters, Virtual Enterprise Networks, Collaborative Supply Chains, Networked Enterprises and Star Alliances to name just a few.But how does a business leader or a government policy-maker make sense of them all?

Introduction

Virtual Business Networks seem to be the hot topic at the minute - everybody is talking about virtual business collaboration, clusters and networks.

When I say Virtual Business Network (or VBN) I mean “companies coming together to co-operate to achieve some shared business goal by forming networks enabled by various forms of internet-based technology”.

I am excluding from my VBN definition the many forms of 'social network' which are also developing extremely rapidly and in a very interesting way. (The only reason I am excluding social networks is that their membership tends to be individual rather than corporate).

VBNs are appearing everywhere and in many guises and names such as Collaborative Networks, Virtual Clusters, Virtual Enterprise Networks, Collaborative Supply Chains, Networked Enterprises and Star Alliances to name just a few.

But how does a business leader or a government policy-maker make sense of them all?

  • Are all VBNs the same or do they have significant differences?
  • Are they all equally likely to succeed?
  • Do different types of VBN produce different returns and demand different levels of commitment?

Based on detailed experience working in this area over many years I believe there are very clear differentiators, commitment levels, return on investments, advantages and disadvantages for each type of VBN.

These must be properly understood before thinking about either joining a VBN or deciding to invest in building one from scratch.

This article offers what I believe is the world’s first practical taxonomy of modern virtual business networks.

I identify and define eight distinct types of VBN and also provide real-life up-to-date examples of each VBN type to enable better understanding and provide a start-point for further investigation:

These eight types are not based on an academic framework but rather a practical classification of the different kinds of VBNs which are actually happening today:

  1. CSC - Collaborative Supply Chain
  2. CSN - Collaborative Supplier Network
  3. CPDN - Collaborative Product Development Network
  4. ETA - Enhanced Trade Association
  5. IAN - Incubation & Acceleration Network
  6. SPX - Subcontracting & Partnership Exchange
  7. TLE - Technology-Led Ecosystem
  8. VEN - Virtual Enterprise Network
I do not suggest for one minute that this taxonomy is exhaustive - it is merely a starting point. In fact, I will be massively disappointed if it does not grow significantly in terms of new types of VBN.

This taxonomy of virtual business networks will enable:

  • Leaders of small businesses to identify which type of VBN can best accelerate their ambitions for growth through virtual collaboration
  • Leaders of large enterprises to explore more effective forms of VBN-based working with smaller suppliers than traditional supply chains
  • Government policy-makers to establish which types of VBN might be worth evaluating and including in their strategies to enhance regional economic competitiveness and where they can look globally for the best case studies and exemplars


Virtual Business Networks are everywhere

We see a proliferation of virtual business networks around a number of common themes:


  • Business-Business Cooperation

  • Enhancing Business Scale

  • Mutual Business Benefit Focus

  • Internet Technology-Enabled


The terminology varies widely with labels such as:


  • Collaborative Network

  • Virtual Cluster

  • Networked Incubator

  • Virtual Enterprise Network

  • Collaborative Supply Chain

  • Concurrent Enterprise

  • Agile Virtual Enterprise

  • Collaborative R&D Network

  • Networked Enterprise

  • Subcontracting and Partnership Exchange

  • Star Alliance


Many of these labels are used interchangeably and it can all be very confusing if you try to compare two VBNs - it’s the classic apples and oranges problem.

However as well as being difficult and frustrating it can also be very costly!

Lack of a good basis for comparison of the key features of VBNs can result in a business joining the wrong kind of network or government policy-makers using the wrong VBN cases on which to build long-term regional economic development strategy.

But before we look at the differences between VBNs we should look at where all this interest in virtual business networks is coming from.

The Drivers of Virtual Business Networks

There are two main drivers of virtual business networking activity - Individual Company Activities and Regional Competitiveness Agendas.


Individual Company Activities

Companies typically join virtual business networks for a number of different business-related reasons.

Most commonly this reduces to three broad areas - increased sales, enhanced innovation and reduced costs:


Increased Sales
Collective marketing (sharing a common brand)
Collective bidding (wider product offering)
New Channels to Market (for existing products)


Enhanced Innovation
New product development (shared knowledge)
Improved efficiency and products (best practice)
Access to university R&D (technology transfer)


Reduced Costs
Sharing a resource (capacity, people)
Sharing a service (training, marketing)
Joint procurement (materials and services)


Regional Competitiveness Agendas

The development of networking and clustering schemes is a also major priority for a number of highly competitive regions globally.

These schemes usually involve some combination of:


  • Fostering and supporting collaboration among SMEs

  • Building linkages between the SMEs and global players

  • Developing and strengthening their knowledge-based sectors

  • Seeking to use and develop new technology to support all forms of collaboration

  • Enhancing International trading and reputation of companies and regions

  • Seeking sustainable mechanisms to take beyond the incubation and piloting phases


Some regions have developed substantial VBN programmes, such as Denmark, Switzerland and parts of the US.

In other areas, such as the UK there are ambitious VBN programmes which have only been running for a couple of years.

Other regions have formulated ambitious VBN policies and plans (e.g. Republic of Ireland) but have not yet started major implementation.

The need for a simple taxonomy of Virtual Business Networks

Having worked extensively in this area for many years I offer a practical taxonomy of Virtual Business Networks.

It is not intended to be exhaustive and I welcome any additions and suggestions for improvement from VBN practitioners.

The only criterion I require is that they should be real live VBNs and not just unimplemented VBN concepts.

So if you wish to forward a new VBN type for the taxonomy you must also include links to two real case studies which illustrate it!

My starting taxonomy includes the following eight types of VBN which I have listed in purely alphabetical order

  1. CSC - Collaborative Supply Chain
  2. CSN - Collaborative Supplier Network
  3. CPDN - Collaborative Product Development Network
  4. ETA - Enhanced Trade Association
  5. IAN - Incubation & Acceleration Network
  6. SPX - Subcontracting & Partnership Exchange
  7. TLE - Technology-Led Ecosystem
  8. VEN - Virtual Enterprise Network

I will explain each of these in more detail but first let’s look across all eight types of VBN to see the main differentiators between them.


Key Differentiators of different types of Virtual Business Network

From my experience there are some major characteristics which differentiate a VBN:


a) Topology

Are they based around a single large central player (i.e. a star) or not?

In other words is it a “many to one” VBN or a “many to many” VBN?

There are big advantages in having a major central player (e.g. resources and money) and big disadvantages (e.g. balance of power and over-dependency).


b) Primary Objective

What is the primary purpose of the collaboration?

For example:
Skills Development
Government Policy Lobbying for a sector
Collective Sales & Marketing
Collaborative Product Development


c) The Level of Cooperation

There are typically three levels of Co-operation in VBNs:

Light (Communicating) - exchange of external information often through organising events and external speakers

Medium (Co-ordinating) - sharing of internal knowledge on organisational best practice and common problem solving

High (Collaboration) - commitment to co-invention and risk/reward such as making collective bids

The higher the cooperation the more significant will be the likely returns. However significantly more commitment and input will also be needed from the VBN members to achieve these returns.

Participants need to balance what they want out of a VBN with what they are prepared to put in and in many cases they are only prepared for light co-operation.


d) VBN Longevity

Is the VBN on-going (usually funded through membership fees or government support)?

Or has it been formed for a very specific purpose and lives for just 6-18 months and then dissolves?


e) Legal Formality

The legal formality needs to be appropriate to the level of risk and reward the members are taking in cooperating together and usually evolves over time - provided the co-operation is fruitful.

Too much formality at the start of a VBN can distract and inject a dynamic of distrust into a VBN which will kill its chance of entrepreneurial success before it even starts.

On the other hand no formal agreements leave a VBN and its members open to abuse

The different options include:

  • Loose co-operations with no legal basis
  • Semi-Formal with Non-Disclosure Agreements and Ground Rules
  • Multiple bilateral legal agreements between each VBN member (“many too many” like a joint venture)
  • Single “virtual business network agreements” which all members must sign up to as a condition of joining the VBN (“many to one”)



The VBN taxonomy with definitions and examples

1. CSC - Collaborative Supply Chain

Definition:

A supply chain, around a major player, but which seeks to operate much more collaboratively than traditional supply chains

Examples:

Virtual Agility Movement (US)
The Agile Virtual Enterprise (Ted Goranson, 1999)

In the US there has been a significant movement within the large contractors in the defence and advanced engineering sectors (e.g. automobile and aerospace) to develop more agile supply chains by working differently with their suppliers.

Agility is defined as “the ability to respond to unexpected change”

2. CSN - Collaborative Supplier Network

Definition:

A group of suppliers who present a common public identity and address areas of common concern such as training and business development

Examples:

The Danish Networking Programme
“Networks of Innovation” Report, Forfás Ireland 2004

In 1989 a government-funded report declared that prospects for the Danish economy were bleak, “size is the problem.” The Danish economy consisted of a large number of small firms (with 10 to 30 employees) which were too small, too dependent and too diversified to compete in an increasingly global market.

In March 1989, the Danish Ministry of Trade and Industry announced its “Strategy ‘92” which included a Network Plan aimed at creating business networks among small enterprises. Within a year of its launch, the Network Plan had more than 1,500 firms operating in networks. EU Cooperative Research (CRAFT)


Supply Network Shannon (SNS)

An open network of companies in the Shannon Region, which was established in 1998 representing companies in the Shannon region of Ireland. SNS aims to promote, develop and market sub-supply capability in the Region.

3. CPDN - Collaborative Product Development Network

Definition:

A group of companies who are collaborating on new product development, new channels to market or applied research and development

Examples:

EU Cooperative Research (CRAFT)

CRAFT Proposals must be collaborative, involving companies from at least 3 EU member states, SME oriented and technology focused. Projects run for a minimum of one year and a maximum of two years. Each project should cost between €0.5 and €2 million. There have already been around 200 CRAFT projects completed. The third call (possibly final call) was published in December and closes 14 September 2005. Budget is €75 M. Consortia must also include at least two RTD (Research & Technology Development) performers, which are organisations with the facilities necessary to carry out research on behalf of the SMEs.

4. ETA - Enhanced Trade Association

Definition:

A Trade Association which extends its traditional activities into networks and cluster development

Examples:

Atlantic Technology Corridor (Ireland)

The cluster comprises 272 companies focused on Information, Communications and Technology companies (ICT) / Medical Technology companies in the West of Ireland.

5. IAN - Incubation & Acceleration Network

Definition:

A network organisation which supports technology business start-ups

Examples:

Networked Incubators (US)
"Networked Incubators: Hothouses of the New Economy" Harvard Business Review, September-October 2000.

Professor Donald Sull and his colleagues at the Harvard Business School have suggested that a new type of incubator, called a networked incubator, represents a fundamentally new and enduring organizational model uniquely suited to growing businesses in the Internet economy. It shares certain features with other incubators — such as fostering a spirit of entrepreneurship and economies of scale. But its key distinguishing feature is its ability to give start-ups preferential access to a network of potential partners.


Network for Satellite Navigation, Oberpfaffenhofen, Germany

Following the decision of the European Union to develop the satellite based navigation system GALILEO, the Bavarian State focused on establishing the region west of Munich (Oberpfaffenhofen) as the leading centre for applications of satellite navigation in Europe.

6. SPX - Subcontracting & Partnership Exchange

Definition:

An electronic mechanism for connecting (small) suppliers with (major) buyers.

Examples:

Subcontracting & Partnership Exchanges (UNIDO)

Subcontracting and Partnership Exchanges (SPX) are aimed at the developing nations and are organized as non-profit industrial associations run by qualified entrepreneurs. They operate as technical information, promotion and match making centres for industrial subcontracting and partnership between main-contractors, suppliers and subcontractors. The objective is to optimise utilization of the manufacturing capacities of the participating companies and industries.

Results produced by an SPX after a three year take-off period are impressive - especially given the fact they are located in developing economies, typically:

50-100 national contracts concluded per year worth €5.5M-8.7M
25-50 international contracts concluded per year worth €2.7M-5.5M

West Midlands Collaborative Commerce Marketplace (UK)

WMCCM aims to increase sales and lower costs through providing easy access to the core competences and capabilities of SMEs. It provides tools such as projects, clusters, catalogues, auctions, bazaars and marketplace tenders

7. TLE - Technology-Led Ecosystem

Definition:

A network which seeks to exploit the business opportunities offered by a new and emerging enabling technology

Examples:

Wireless Leiden, Leiden, Netherlands

Wireless Leiden is the network of professionals and companies behind the largest wireless hotspot or community network in Europe covering the whole city of Leiden and the surrounding villages. Also new applications, such as location based services; messaging and voice over IP applications are possible within the network.

8. VEN - Virtual Enterprise Network

Definition:

A group of companies who operate as a collective with the objective of winning collaborative business contracts

Examples:

Virtuelle Fabrik (Virtual Factory), Switzerland

“Virtuelle Fabrik Nordwestschweiz-Mittelland“ is four networks each of about 40 SMEs, which was formed in 1997 with the expectation of being able to realize competitive advantages when co-operating.


Yorkshire Forward VEN Programme (UK)

Focuses on specific industry areas such as Healthcare, Engineering, IT/Digital, Chemicals/Bioscience


A VBN Taxonomy - Summary and Conclusions

We need a taxonomy of virtual business networks (VBNs) to help us make sense of all the new forms of virtual business network which are emerging.

Based on detailed experience working in this area over many years I believe there are very clear differentiators, commitment levels, return on investments, advantages and disadvantages for each type of VBN.

I have offered the following starting VBN taxonomy:

  1. CSC - Collaborative Supply Chain
  2. CSN - Collaborative Supplier Network
  3. CPDN - Collaborative Product Development Network
  4. ETA - Enhanced Trade Association
  5. IAN - Incubation & Acceleration Network
  6. SPX - Subcontracting & Partnership Exchange
  7. TLE - Technology-Led Ecosystem
  8. VEN - Virtual Enterprise Network

This VBN taxonomy has to be used with discretion and common sense and all networks won’t fit into a single type.

For example The Stac (Scotland) has elements of both CPDN and CSC.

However this Virtual Business Network taxonomy should allow:

  • Leaders of small businesses to identify new ways to accelerate their ambitions for growth through network cooperation
  • Leaders of large enterprises to explore more effective forms of working with their suppliers and other partners
  • Government policy-makers to enhance their strategies for clustering to improve regional competitiveness

I also invite virtual business network practitioners to collaborate with me in extending this initial VBN taxonomy.

The only condition is that any new VBNs are real networks (not concepts!) with live case studies to back them up!



About the author

Ken Thompson was formerly the European IT Manager with Reuters in London and Managing Director with VISION Consulting in Belfast. At VISION, Ken spent over 10 years successfully delivering services to clients in the Financial Services, Government and the Small Business Sectors.

Ken is recognized as a leading expert in the emerging area of Virtual Enterprise Networks and has successfully incubated a number of these networks in the UK and Ireland.

Ken also helps distributed business teams in medium and large-sized organizations become successful through a unique approach to team design and workflow.

His strategy includes the use of key sets of team dynamics, multiple coaching interventions and the effective integration of a small toolkit of virtual collaboration technologies

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