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  1. 1. E-business strategy ► What is e-business strategy? ► Strategic analysis ► Strategic objectives ► Strategy definition * 1
  2. 2. Introduction ► Strategy defines the future direction and actions of an organization or part of an organization. ► Strategy ► Definition of the future direction and actions of a company defined as approaches to achieve specific objectives. ► the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a changing environment to meet the needs of markets and to fulfil stakeholder expectations. ► E-business strategies share much in common with corporate, business and marketing strategies. ► These quotes summarizing the essence of strategy could equally apply to each strategy: ‘Is based on current performance in marketplace.’ ‘Defines how we will meet our objectives.’ ‘Sets allocation of resources to meet goals.’ ‘Selects preferred strategic options to compete within a market.’ ‘Provides a long-term plan for the development of the organization.’ ‘Identifies competitive advantage through developing an appropriate positioning defining a value proposition delivered to customer segments.’ * 2
  3. 3. E-business Strategy ► E-business strategy Definition of the approach by which applications of internal and external Electronic communications can support and influence corporate strategy. organizations have different levels of strategy, particularly for larger or global organizations. These are summarized within Figure 5.1. They identify ► corporate strategy which is concerned with the overall purpose and scope of the organization, ► business unit strategy which defines how to compete successfully in a particular market and ► operational strategies which are concerned with achieving corporate and business unit strategies. ► Additionally, there are what can be described as functional strategies that describe how the corporate and business unit strategies will be operationalized in different functional areas or business processes. ► Functional or process strategies refer to marketing, supply chain management, human resources, finance and information systems strategies. * 3
  4. 4. Figure 5.1 Different forms of organizational strategy * 4
  5. 5. Management issues ► How does e-business strategy differ from traditional business strategy? ► How should we integrate e-business strategy with existing business and IS strategy? ► How should we evaluate our investment priorities and returns from e- business? * 5
  6. 6. E-channel strategies ► E-channel strategies Define how a company should set specific objectives and develop specific differential strategies for communicating with its customers and partners through electronic media such as the Internet, e-mail and wireless media. An important aspect of e-business strategies is that they create new ‘e- channel strategies’ for organizations. ► E-channel strategies define specific goals and approaches for using electronic channels. This is to prevent simply replicating existing processes through e- channels, which will create efficiencies but will not exploit the full potential for making an organization more effective through e-business. ► Without specific goals and strategies to communicate the benefit of e- channels for customers and partners, adoption of the new channels will be slow relative to a structured approach. ► online contribution can be set which suggest the percentage and value of leads, sales, services and purchases that are facilitated through e-commerce transactions. * 6
  7. 7. ► Multi-channel e-business strategy Defines how different marketing and supply chain channels should integrate and support each other to drive business efficiency and effectiveness. ► E-channel strategies also need to define how electronic channels are used in conjunction with other channels as part of a multi- channel e-business strategy. ► This multi-channel e-business strategy defines how different marketing and supply chain channels should integrate and support each other in terms of their proposition development and communications based on their relative merits for the customer and the company. ► Finally, we also need to remember that e-business strategy also defines how an organization gains value internally from using electronic networks, such as sharing employee knowledge and improving process efficiencies through intranets. * 7
  8. 8. Characteristics of a multi-channel e- business strategy are: E-business strategy is a channel strategy; Specific e-business objectives need to be set to benchmark adoption of e-channels; E-business strategy defines how we should: Communicate the benefits of using e-channels 1 Prioritize audiences or partners targeted for e-channel adoption 2 Prioritize products sold or purchased through e-channel 3 Achieve our e-channel targets; E-channel strategies thrive on creating differential value for all parties to a transaction; But e-channels do not exist in isolation, so we still need to manage channel integration and acknowledge that the adoption of e-channels will not be appropriate for all products or services or generate sufficient value for all partners. This selective adoption of e-channels by business according to product or stakeholder preference is sometimes referred to as ‘rightchannelling’ ► in a sell-side e-commerce context. Right-channelling can be summarized as: – Reaching the right customer – Using the right channel – With the right message or offering – At the right time; ► E-business strategy also defines how an organization gains value internally from using electronic networks, such as through sharing employee knowledge and improving process efficiencies through intranets. * 8
  9. 9. e-Business development Going Forward Environment Support Levels Enterprise Development Levels Taxation & Finance Legal & Regulator y Security & Trust Research & Developmen t National Infrastructur e Support Service s Skill s Educatio n ICT adoption & use Investment in e-Business Growth in numbers of e-Businesses Numbers employe d National Strateg y E-Business Market Size E-Business Export growth E-business Development Number of e- Commerce transcations Electronic Business Processes E- Government * 9
  10. 10. Key Technology Trends and Strategies Going Forward eBusiness evolution and business benefit Intranet / Web- mail Web page Order taking, making and tracking eBusiness functionality implemented Supplier Integration Full supply chain integration INFORM INTERACT TRANSACT INTEGRATE * 10
  11. 11. What is working? ► Pornography ► Travel / Tourism ► Retail - items that don’t need personal touch - objectivity in product quality and performance ► music, books, gifts, Computers, electronic items ► Auctions ► Real Estate - houses and investment properties. ► Customer support services ► More efficient and effective processes between businesses (B 2 B) * 11
  12. 12. What is not working? ► Items which require “touch and trial” ► Luxury goods ► Clothes - beyond Tshirts ► Groceries - it works for some people but market is restricted Note: Many OFF line factors determine success of Online service. Eg. Transport network, customer profiles, * 12
  13. 13. Sell-side E-commerce strategy or E-marketing/E-CRM Strategy ► Sell-side e-commerce is a channel strategy ► Objectives for online contribution percentage should drive our strategy ► Our e-commerce strategy defines how we should: ► Hit our channel leads & sales targets ► Acquisition, Conversion, Retention, Service, Profitability ► Communicate benefits of using this channel ► Prioritise products available through channel ► Prioritise audiences targeted through channel ► Select partners for this channel ► Channel strategy thrives on differentials ► BUT, need to manage channel integration. * 13
  14. 14. Buy-side E-commerce strategy or E-supply chain management strategy ► Buy-side e-commerce strategy is about maximizing operational efficiencies while improving customer service quality ► Operational efficiency should drive our strategy ► Our buy-side e-commerce strategy defines how we should: ► Automate internal processes ► Link internal resource management systems with external purchasing systems ► Prioritize suppliers/partners collaborating using this channel ► Prioritize applications for E-SCM – create a roadmap ► Involves selection of appropriate strategic partners. * 14
  15. 15. E-business strategy ► An IS strategy or change management strategy which ensures resources are managed effectively to achieve opportunities from Buy-side and Sell- side e-commerce. Also involves deploying IS to manage administrative internal process and employee knowledge ► Involves management of information systems resources (e-business applications, infrastructure/hardware and people/change/ knowledge management). * 15
  16. 16. Figure 5.2 Relationship between e-business strategy and other strategies * 16
  17. 17. Business and E-commerce Strategy ► E-commerce has changed business strategy. ► A strategy is a broad-based formula for how a business is going to compete, what its goals should be, and what plans and policies will be needed to carry out those goals.1 1 Michael Porter “What is Strategy”, Harvard Business Review, November 1996, pp. 69-84. * 17
  18. 18. E-commerce Strategy ► An e-commerce strategy is a … ► To build an e-commerce strategy requires two view of an organization’s strategy: what it wants to do (conceptual) and how it will do it (technology strategy). ► One strategy being used by many companies is customer relationship management which enables them to create to one-to-one marketing experience for their customers. ► Other e-commerce strategies include virtual showrooms, increased channel choices, wider component choice, and use of mobile technology. * 18
  19. 19. E-commerce Business Models (cont.)1 Business Model Description Examples Comments Brokerage Brokers bring buyers and sellers together for a fee. There are many types of brokerage models in all types of e-commerce. Advertising An extension of the traditional media broadcasting model in which ads appear on Web sites. There are many different types of advertising, but all depend on a large volume of viewer traffic. Merchant Sell products, both physical and electronic, to consumers Commonly referred to as e- tailers, merchants can use pure e-commerce or a combination (click and mortar). 1 Adapted from Micheal Rappa, html.
  20. 20. 1 Adapted from Micheal Rappa, html. E-commerce Business Models (cont.)1 Business Model Description Examples Comments Manufacturer Direct Make and sell products directly to customer Products can be purchased (PCs), leased (servers), or licensed (software). Affiliate Affiliate Web sites are paid a fee when purchases come through them. Can also include banner ad exchange between affiliated sites as well as revenue-sharing. Community Based on user loyalty because of high investment of time and emotion. Revenue is generated through sale of ancillary products or voluntary contributions
  21. 21. E-commerce Business Models (cont.)1 Business Model Description Examples Comments Subscription Users are charged fee to subscribe to service to service or information source Subscription may be for premium services; advertising model may be combined with this model Infomediary Provides data on consumers and consumption habits Usually aimed at helping businesses rather than consumers Coopetitive Enable competitors to cooperate on a Web site Usually aimed at individuals or small businesses that cannot attract customers to their own Web site. 1 Adapted from Micheal Rappa, html.
  22. 22. Web Sites Classified By Purpose Web Site Type Purpose Example Business Model Portal A gateway to many other Web sites Advertising, Affiliate Search Engine Finds Web sites that contain a word or phrase Advertising, Affiliate, Infomediary Browse or search and buy Sell goods and services Merchant, Infomediary, Manufacturer Direct, Coopetitive Sales Support To provide information on a product before or after the sale Community, Infomediary
  23. 23. Web Sites Classified By Purpose (Cont.) Web Site Type Purpose Example Business Model Information Service To provide news, information, commentary, and so on. Subscription, Community, Affiliate Auction Facilitate sales between third parties Brokerage Travel Sell travel tickets and tours Merchant, Brokerage, Coopetitive Special Interest or Services Provide information, product sales and support, and contacts between Community, Merchant, Affiliate, Infomediary, Advertising
  24. 24. B2B Business Models ► Strategic sourcing is often carried out through a one-to-one business model, but company-centric and exchange models are also used. ► The single company dominates the market and controls the information systems that supports the transactions. Electronic data interchange (EDI) or an extranet is often used to link trading partners. * 24
  25. 25. Company Centric Business Model * 25
  26. 26. Exchange Model ► In the exchange business model, many companies use an exchange to buy and sell from each other through spot-buying transactions. * 26
  27. 27. Mobile Commerce ► Mobile commerce (m-commerce) relies on the use of wireless devices, such as personal digital assistants, cell phones, and smart phones, to place orders and conduct business ► Issues confronting m-commerce ► User-friendliness of the wireless device ► Network speed ► Security * 27
  28. 28. What happens where there is no e-business strategy? ► Missed opportunities for additional sales on the sell-side and more efficient purchasing on the buy-side ► Fall-behind competitors in delivering online services – may become difficult to catch-up, e.g. Tesco, Dell ► Poor customer experience from poorly integrated channels. * 28
  29. 29. Electronic Payment Systems ► Digital certificate: an attachment to an e-mail message or data embedded in a Web page that verifies the identity of a sender or a Web site ► Certificate authority (CA): a trusted third party that issues digital certificates ► Secure Sockets Layer (SSL): a communications protocol used to secure sensitive data ► Electronic cash: an amount of money that is computerized, stored, and used as cash for e- commerce transactions * 29
  30. 30. Figure 5.3 BA communicates their online value proposition (www.britishairways. com) Source: Based on Revolution (2005) * 30
  31. 31. Figure 5.4 A generic strategy process model * 31
  32. 32. Figure 5.5 Dynamic e-business strategy model Source: Adapted from description in Kalakota and Robinson (2000) * 32
  33. 33. Figure 5.6 Elements of strategic situation analysis for the e-business * 33
  34. 34. Strategic analysis or situation analysis involves review of: • The internal resources and processes of the company to assess its e-business capabilities and results to date in the context of a review of its activity in the marketplace; • The immediate competitive environment (micro-environment), including customer demand and behavior, competitor activity, marketplace structure and relationships with suppliers, partners and intermediaries • The wider environment (macro-environment) in which a company operates; this includes economic development and regulation by governments in the form of law and taxes together with social and ethical constraints such as the demand for privacy. * 34
  35. 35. Figure 5.6 Elements of strategic situation analysis for the e-business • Resources are the tangible and intangible assets which can be used in value creation. • Tangible resources include the IT infrastructure, bricks and mortar and financial capital. • Intangible resources include a company’s brand and credibility, employee knowledge, licences and patents. • Capabilities represent the ability of a firm to use resources effectively to support value creation. • They are dependent on the structure and processes used to manage e-business, for example, the process to plan, review and enhance e-channel performance through web analytics . * 35
  36. 36. Figure 5.7 Summary applications of a portfolio analysis for The B2B Company * 36
  37. 37. Figure 5.7 Summary applications of a portfolio analysis for The B2B Company • Portfolio analysis is also often used to select the most appropriate future Internet projects. • A weakness of the portfolio analysis approach is that today applications are delivered by a single e-business software or enterprise resource planning application. • Given this, it is perhaps more appropriate to define the services that will be delivered to external and internal customers through deploying information systems * 37
  38. 38. Figure 5.7 Summary applications of a portfolio analysis for The B2B Company • E-consultancy (2008a) uses a form of portfolio analysis as the basis for benchmarking current e-commerce capabilities and identifying strategic priorities. • The six areas for benchmarking are: • 1 Digital channel strategy. The development of a clear strategy including situation analysis, goal setting, identification of key target markets and audience and identification of priorities for development of online services . • 2.Online customer acquisition. Strategies for gaining new customers online using alternative digital media channels , including search engine marketing, partner marketing and display advertising. • 3 Online customer conversion and experience. Approaches to improve online service levels and increase conversion to sales or other online outcomes. * 38
  39. 39. Figure 5.7 Summary applications of a portfolio analysis for The B2B Company • 4 Customer development and growth. Strategies to encourage visitors and customers to continue using online services using tactics such as e-mail marketing and personalization. • 5 Cross-channel integration and brand development. Integrating online sales and service with customer communications and service interactions in physical channels such as traditional advertising, phone and in-store touchpoints. • 6 Digital channel governance. Issues in managing e-commerce services such as structure and resourcing including human resources and the technology infrastructure such as hardware and networking facilities to deliver these applications. * 39
  40. 40. Figure 5.8 SWOT analysis for The B2B Company * 40
  41. 41. SWOT analysis is a relatively simple yet powerful tool that can help organizations analyze their internal resources in terms of strengths and weaknesses and match them against the external environment in terms of opportunities and threats. • In an e-business context, a SWOT analysis of e-business-specific issues can combine SWOT related to corporate, marketing, supply chain and information systems, or a separate SWOT can be performed for each. • SWOT analysis is of greatest value when it is used not only to analyze the current situation, but also as a tool to formulate strategies. • To achieve this it is useful once the strengths, weaknesses, opportunities and threats have been listed to combine them as shown in Figure 5.8. • This format of SWOT is recommended over a typical four-box SWOT since it can be used to develop strategies to counter the threats and take advantage of the opportunities and can then be built into the e-business strategy SWOT analysis for The B2B Company * 41
  42. 42. Figure 5.9 Customer demand for e-marketing services for The B2B Company * 42
  43. 43. Figure 5.10 Competitive threats acting on the e-business * 43
  44. 44. Porter’s five forces * 44
  45. 45. Activity – impact of Internet ► For one of the industries below, assess how the Internet has changed the competitive forces, e.g. has it increased or decreased power of suppliers and customers ► Industries: ► Banking ► Supermarkets How can e-business create business value? • As Chaffey and Wood (2004) have emphasized, much of the organizational value created by e-business is due to more effective use of information. The strategic importance of business information management in an organization can be reviewed and communicated as part of vision using Figure 5.12. • This analytic tool, devised by Professor Don Marchand, shows different ways in which information can create value for organizations * 45
  46. 46. How can e-business create business value? • As Chaffey and Wood (2004) have emphasized, much of the organizational value created by e-business is due to more effective use of information. The strategic importance of business information management in an organization can be reviewed and communicated as part of vision using Figure 5.12. • This analytic tool, devised by Professor Don Marchand, shows different ways in which information can create value for organizations * 46
  47. 47. Figure 5.12 An evaluation tool relating information to business value. An organization’s use of information on each axis can be assessed from 1 (low use of information) to 10 (high use of information) Source: Marchand et al. eds (1999) * 47
  48. 48. The balanced scorecard approach to objective setting Integrated metrics such as the balanced scorecard have become widely used as a means of translating organizational strategies into objectives and then providing metrics to monitor the execution of the strategy. Since the balanced business scorecard is a well-known and widely used framework, it can be helpful to define objectives for e-business in the categories below 1 Customer concerns. These include time (lead time, time to quote, etc.), quality, performance, service and cost. Example measures from Halifax Bank from Olve et al. (1999): satisfaction of mystery shoppers visiting branches and from branch customer surveys. 2 Internal measures. Internal measures should be based on the business processes that have the greatest impact on customer satisfaction: cycle time, quality, employee skills, productivity 3 Financial measures. Traditional measures such as turnover, costs, profitability and return on capital employed. For publicly quoted companies this measure is key to shareholder value. Example measures from Halifax Bank: gross receipts (£), mortgage offers (£), loans (£). 4 Learning and growth: innovation and staff development. Innovation can be measured by change in value through time (employee value, shareholder value, percentage and value of sales from new products). E * 48
  49. 49. Figure 5.14 Direct and indirect Internet contributions for fast-growth companies in the USA Source: PricewaterhouseCoopers (2000) * 49
  50. 50. Table 5.5 Vision of online revenue contribution for The B2B Company * 50
  51. 51. Supply Chain Management What is supply chain management? Options for restructuring the supply chain Using e-business to restructure the supply chain Supply chain management implementation
  52. 52. The issues for the manager: ► Which technologies should we deploy for supply chain management and how should they be prioritized? ► Which elements of the supply chain should be managed within and beyond the organization and how can technology be used to facilitate this? ► What are the practical issues with online supply chain management? * 52
  53. 53. SCM ► Supply chain management is essentially the optimization of material flows and associated information flows involved with an Organization’s operations. ► To manage these material and information flows in e- business applications are very essential * 53
  54. 54. SCM ► Supply chain management capabilities are best known for their importance in delivering profitability. ► For example AMR (2008) reported that Nike, a company best known for its marketing, used improvements to its supply chain to increase operating margins of between 10 and 15% in each of the last four years. * 54
  55. 55. * 55
  56. 56. Problems of supply chain management ► We have reviewed some of the benefits of using technology to support supply chain management We can also review the benefits of SCM from the perspective of problems that can occur in a supply chain and consider how e- business technology can assist (Table 6.1) * 56
  57. 57. Problems of Supply chain Management * 57
  58. 58. What is supply chain management? ► Supply chain management (SCM) involves the coordination of all supply activities of an organization from its suppliers and delivery of products to its customers . ► supply chain are the organizations that manufacture a product and/or deliver a service. ► For most commercial and not-for-profit organizations we can distinguish between upstream supply chain activities which are equivalent to buy- side e-commerce and downstream supply chain activities which correspond to sell-side e-commerce. * 58
  59. 59. * 59
  60. 60. * 60
  61. 61. * 61
  62. 62. Using technology to support supply chain management A good example of how the introduction of information systems can be used to improve supply chain management is provided by BHP Steel (now BlueScope Steel,, an Australian firm. Its use of PC-based technology for supply chain management dates back to the 1980s and e-business represents a change of emphasis rather than a radically new approach. Chan and Swatman (2000) assess the stages in implementation of e- commerce for this company. It highlights that electronic supply chain management and indeed ‘e-business’ are well established in large companies. The authors identify three phases: * 62
  63. 63. SCM in 3 phases 1 Early implementation: 1989–93. This was a PC-based EDI purchasing system. At this stage, objectives were to (1) reduce data errors to 0, (2) reduce administration costs, (3) improve management control, (4) reduce order lead time. Benefits of this phase included rationalization of suppliers to 12 major partnerships (accounting for 60% of invoices); 80% of invoices placed electronically by 1990; 7,000 items were eliminated from the warehouse, to be sourced directly from suppliers, on demand. Shorter lead times in the day-to-day process – from 10 days to 26 hours for items supplied through a standard contract and from 42 days to 10 days for direct-purchase items. At this stage the main barriers to the implementation were technological. 2 Electronic trading gateway: 1990–4. This was again EDI-based, but involved a wider range of parties both externally (from suppliers through to customers) and internally (from marketing, sales, finance, purchasing and legal). The aim was to provide a combined upstream and downstream supply chain solution to bring benefits to all parties. The main learning from this process was the difficulty of getting customers involved – only four were involved after 4 years, although an industry-standard method for data exchange was used. This was surprising since suppliers had been enthusiastic adopters. From 1994, there was no further uptake of this system. * 63
  64. 64. SCM in 3 phases Table 6.2 shows that some of the aims and strategic approaches generated by ECR can also apply to business customers. Objective Strategy Timely, accurate, paperless information flow Revision of organization processes supported by information systems Smooth, continual product flow matched to variations See strategies below in consumption levels Optimize productivity of retail space and inventory Efficient store assortments Optimize for time and cost in the ordering process Efficient replacement Maximize efficiency of promotions. Promotions are integrated into entire supply chain planning Maximize effectiveness of new product development NPD process improved and better forward planning with (NPD) other partners * 64
  65. 65. SCM in 3 phases The move towards Internet commerce: 1996 onwards. The Internet was thought to provide a lower-cost alternative to traditional EDI for smaller suppliers and customers, through using a lower-cost value-added network. So, one objective of the project was to extend the reach of electronic communications with supply chain partners. T he second was to broaden the type of communications to include catalogue ordering, freight forwarding and customer ordering. The strategy divided transactions into three types: (1) strategic (high volume, high value, high risk) – a dedicated EDI line was considered most appropriate; (2) tactical (medium volume, value and risk) EDI or Internet EDI was used; (3) consumer transactions (low volume, value and risk) – a range of lower-cost Internet-based technologies could be used. One example of the benefits has been reducing test certificates for products from AU$3 to 30 cents. The main barriers to implementation at this stage have been business issues, i.e. convincing third parties of the benefits of integration and managing the integration process * 65
  66. 66. * 66
  67. 67. What is logistics? Logistics is a concept closely related to supply chain management. According to the Institute of Logistics and Transportation ( Logistics is the time-related positioning of resource, or the strategic management of the total supply chain. The supply chain is a sequence of events intended to satisfy a customer. It can include procurement, manufacture, distribution, and waste disposal, together with associated transport, storage and information technology. This definition of logistics is broad, reflecting its provenance.More typically, logistics is used to refer not to all supply chain activities, but specifically to the management of logistics or inbound and outbound logistics, (Figure 6.2). Logistics is essential to the efficient management of the supply chain, for example resource management and transport are integral parts of the supply chain, not only between supply chain processes, but within these processes. * 67
  68. 68. Push and pull supply chain models A change in supply chain thinking, and also in marketing communications thinking, is the move from push models of selling to pull models or to combined push–pull approaches. The push model is illustrated by a manufacturer who perhaps develops an innovative product and then identifies a suitable target market. A distribution channel is then created to push the product to the market. This situation is shown in Figure 6.7(a) where it can be characterized by the sentence ‘This is a great product, now who shall we sell it to?’ or the quip about the original Model T Ford – ‘You can have any colour, so long as it is black.’ The typical motivation for a push approach is to optimize the production process for cost and efficiency. * 68
  69. 69. Push and pull supply chain models The alternative approach consistent with ECR is the pull model, which is focused on the customer’s needs and starts with analysis of their requirements through market research and close cooperation with customers and suppliers in new product development (Figure 6.7(b)). Here the supply chain is constructed to deliver value to the customer by reducing costs and increasing service quality. Figure 6.7(b) shows how there are much closer links between the elements of the supply chain through use of technology such as EDI to minimize document transfer and rekeying. This approach can be characterized by the question ‘What do our customers demand in the ideal product and service?’. Modern car manufacturers now not only provide a choice of colour, but thousands of permutations of trim and accessories backed up by service promises such as three-year warranties. The typical motivation for a pull approach is to optimize the production process for customer response, cost and efficiency. It will be apparent that such an approach is also consistent with management thinking about the similar concept of the value chain as illustrated in the Focus on the value chain section. * 69
  70. 70. * 70
  71. 71. value chain (VC) Michael Porter’s value chain (VC) is a well-established concept for considering key activities that an organization can perform or manage with the intention of adding value for the customer as products and services move from conception to delivery to the customer (Porter, 1980). The value chain is a model that describes different value-adding activities that connect a company’s supply side with its demand side. We can identify an internal value chain within the boundaries of an organization and an external value chain where activities are performed by partners. By analyzing the different parts of the value chain managers can redesign internal and external processes to improve their efficiency and effectiveness. Benefits for the customer are created by reducing cost and adding value to customers: within each element of the value chain such as procurement, manufacture, sales and distribution; at the interface between elements of the value chain such as between sales and distribution. In equation form this is: Value = (Benefit of each VC activity – Its cost) + (Benefit of each interface between VC activities – Its cost) * 71
  72. 72. The generic concepts of value creation and value capturing ► Creating value for customers Consumer benefit Value-created is the difference between consumer benefit (or maximum willingness to pay for a product) and the cost for providing the product • Consumer benefit consists of elements such as: • Product and service • Speed of delivery • Brand • Reputation . Cost consist of: • R&D • Raw materials • Production • Marketing • Sales Capturing value While it is important for a firm to create value that is superior to the value created by its competitors, it is equally important to capture parts of the value it creates in the form of profits (or producer surplus, as it is called here). As stated above, value creation by itself does not provide any information about how the value is distributed between consumers and producers, as is shown in Exhibit 5.2. This distribution takes place through the price that a firm can charge for the product or a service. * 72
  73. 73. The Internet-impacted value chain ► ■ Display different economics. For instance, the development activity of a new software program displays very large economies of scale since the software can be replicated at negligible cost. ► ■ Provide high differentiation potential. These are activities that can greatly increase tangible and intangible consumer benefits, such as product and service quality, convenience and reputation. ► ■ Present sizable costs. These are activities that add significantly to the overall cost structure of the firm. For instance, in the case of Ducati, these might be activities related to product development and manufacturing. In the case of 12Snap, major costs are incurred for marketing. ► On an aggregate level, a company’s value chain contains the following primary and support activities (see Exhibit 5.3). To get a better understanding of the ways in which the Internet can change the value chain, we will take a closer look at how Dell has transform its value chain. ► ■ Inbound logistics consist of receiving, storing and distributing incoming goods within the company. On a more detailed level, this might include activities such as checking inventory levels and order placement. * 73
  74. 74. * 74 Operations consist of those activities necessary for the making of a product or a service. The Internet has, in many cases, drastically changed a company’s production activities. By taking orders online, companies can significantly shrink the time between order placement and productions, enabling them to start production in ‘real time’. For instance, through the close linkage between the ordering website and the production facilities, Dell can build products that match orders, thus increasing turnover and reducing inventory costs. ■ Outbound logistics consist of activities required for getting the product to the buyer, which can be done either physically or electronically (for digital goods). For example, the reduction of inbound logistics by leaving products with suppliers also reduces Dell’s efforts and expenses for outbound logistics. Complementary components, such as PC monitors, are shipped directly from the supplier to the final customer. ■ Marketing and sales activities aim at enticing customers to buy a product and to provide the means for doing so. This includes activities such as providing online catalogues and running online marketing campaigns (see also e-Business Concept 5.1 for a discussion of customer relationship management as part of online marketing activities). For example, the Internet has enabled Dell to move online most of its marketing and sales activities. Dell has thus offered customers a fast and comprehensive way to place orders, while at the same time keeping down costs (since it does not have to pay for an expensive sales force and retail outlets).
  75. 75. * 75
  76. 76. * 76
  77. 77. Restructuring the internal value chain Traditional models of the value chain (such as Figure 6.8(a)) have been re- evaluated with the advent of global electronic communications. It can be suggested that there are some key weaknesses in the traditional value chain model: ► It is most applicable to manufacturing of physical products as opposed to providing services. ► It is a one-way chain involved with pushing products to the customer (see section on Pushand pull supply chain models); it does not highlight the importance of understanding customer needs through market research and responsiveness through innovation and new product development. ► The internal value chain does not emphasize the importance of value networks * 77
  78. 78. The value stream The value stream is a concept closely related to the value chain. The difference is that it considers different types of tasks that are involved with adding value and looks at how the efficiency of these tasks can be improved. Womack and Jones (1998) define the value stream as: the set of all the specific actions required to bring a specific product through the three critical management tasks of any business: 1 the problem-solving task [the processes of new product development and production launch] 2 the information management task [the processes of order taking, scheduling to delivery] 3 the physical transformation task [the processes of transforming raw materials to finished product delivered to customers]. Tasks 2 and 3 are traditional value chain activities (Figure 6.8(a)), but task 1 is not. * 78
  79. 79. The value stream Returning to the definition of customer value from Deise et al. (2000) shown in the equation below, we can see that the lean thinking approach proposed by Womack and Jones is aimed at adding value by cutting out waste in each of these three management tasks. By reducing new product development and production times and costs, organizations can then either increase customer value by decreasing fulfillment time or, if they wish do it, by decreasing price, and/or increasing product and service quality. Clearly e- commerce plays a key role in decreasing time to market and production times and costs. Product quality × Service quality Customer value (brand perception) = ––––––––––––––––––––––––––– Price × Fulfilment time * 79
  80. 80. Value chain analysis This is an analytical framework for decomposing an organization into its individual activities and determining value added at each stage. In this way the organization can then assess how effectively resources are being used at the various points within the value chain. The relevance for information systems is that for each element in the value chain it may be possible to use IS to increase the efficiency of resource usage in that area. In addition, IS may be used between value chain activities to increase organizational efficiency. How can an organization positively impact on its value chain by investing in new or upgraded information systems? Porter and Millar (1985) propose the following five-step process. 1 Step 1. Assess the information intensity of the value chain (i.e. the level and usage of information within each value chain activity and between each level of activity). The higher the level of intensity and/or the higher the degree of reliance on good- quality information, the greater the potential impact of new information systems. * 80
  81. 81. Value chain analysis 2 Step 2.Determine the role of IS in the industry structure (for example, banking will be very different from mining). It is also important here to understand the information linkages between buyers and suppliers within the industry and how they and competitors might be affected by and react to new information technology. 3 Step 3. Identify and rank the ways in which IS might create competitive advantage (by impacting on one of the value chain activities or improving linkages between them). Highcost or critical activity areas present good targets for cost reduction and performance improvement. 4 Step 4. Investigate how IS might spawn new businesses (for example, the Sabre computerized reservation system spawned a multi-billion-dollar software company which now has higher earnings than the original core airline business). 5 Step 5. Develop a plan for taking advantage of IS. A plan must be developed which is business- driven rather than technology-driven. The plan should assign priorities to the IS investments (which of course should be subjected to an appropriate cost–benefit analysis * 81
  82. 82. Value networks Reduced time to market and increased customer responsiveness are not simply the result of reviewing the efficiency of internal processes and how information systems are deployed, but also result through consideration of how partners can be involved to outsource some processes that have traditionally been considered to be part of the internal value chain of a company. Porter’s original work considered not only the internal value chain, but also the external value chain or value network. Since the 1980s there has been a tremendous increase in outsourcing of both core value chain activities and support activities. * 82
  83. 83. Value networks Deise et al. (2000) describe value network management as: the process of effectively deciding what to outsource in a constraint-based, real-time environment based on fluctuation. * 83
  84. 84. * 84
  85. 85. Value networks Figure 6.9, which is adapted from the model of Deise et al. (2000), shows some of the partners of a value network that characterizes partners as: 1 Supply-side partners (upstream supply chain) such as suppliers, business-to-business exchanges, wholesalers and distributors. 2 Partners that fulfill primary or core value chain activities. The number of core value chain activities that will have been outsourced to third parties will vary with different companies and the degree of virtualization of the organization. In some companies the management of inbound logistics may be outsourced, in others different aspects of the manufacturing process. In the virtual organization all core activities may be outsourced. 3 Sell-side partners (downstream supply chain) such as business-to-business exchanges, wholesalers, distributors and customers (not shown, since conceived as distinct from other partners) * 85
  86. 86. Towards the virtual organization Davidow and Malone (1992) describe a virtual corporation as follows: To the outside observer, it will appear almost edgeless, with permeable and continuously changing interfaces between company, supplier and customer. From inside the firm, the view will be no less amorphous, with traditional offices, departments, and operating divisions constantly reforming according to need. Job responsibilities will regularly shift. Virtual organizations can also be viewed as a way of transforming existing organizations. Malcolm Warner is a professor of organization behaviour at the Judge Institute of Management Studies, University of Cambridge, who has defined a virtual organization, in this context, as follows: Put simply, it is an organizational form that enables companies to reduce their physical assets (large headquarters, centralized plants and so on), relying instead on small decentralized units linked by a strong communications network. In other words, the old physical constraints of the plant and office building are broken down, and activities of co-ordination and control, which used to take place face-to-face, are now handled remotely ‘over the wire’. (Warner, 2001) * 86
  87. 87. Towards the virtual organization He suggests that companies such as Accenture, British Airways, Lotus and Dell are all experimenting with different characteristics of virtual organizations. These characteristics include: Lack of physical structure: virtual organizations have little or no physical existence. Reliance on knowledge: the lack of physical facilities and contacts mean that knowledge is the key driving force of the virtual organization. Use of communications technologies: it follows that virtual organizations tend to rely on information technology. Mobile work: the reliance on communications technologies means that the traditional office or plant is no longer the only site where work is carried out. Increasingly, the office is wherever the worker is. Boundaryless and inclusive: virtual companies tend to have fuzzy boundaries. Flexible and responsive: virtual organizations can be pulled together quickly from disparate elements, used to achieve a certain business goal and then dismantled again. An alternative viewpoint on features of a virtual organization (Kraut et al., 1998) is: 1 Processes transcend the boundaries of a single firm and are not controlled by a single organizational hierarchy. 2 Production processes are flexible with different parties involved at different times. 3 Parties involved in the production of a single product are often geographically dispersed. 4 Given this dispersion, coordination is heavily dependent on telecommunications and data networks * 87
  88. 88. Options for restructuring the supply chain As part of strategy definition for e-business, managers will consider how the structure of the supply chain can be modified. These choices are not primarily based on Internet technology choices, rather they are mainly choices that have existed for many years. What Internet technology provides is a more efficient enabler and lower-cost communications within the new structures. Supply chain management options can be viewed as a continuum between internal control of the supply chain elements and external control of supply chain elements through outsourcing. The two end elements of the continuum are usually referred to as ‘vertical integration’ and ‘virtual integration’. The intermediate situation is sometimes referred to as ‘vertical disintegration’ or ‘supply chain disaggregation * 88
  89. 89. * 89
  90. 90. Benefits of e-supply chain management Given, the relative lack of adoption of e-SCM, particularly in SMEs, which opportunities are being missed that are available to adopters? E-business can be used to improve supply chain management in a number of ways. These are illustrated well by research by IDC (2004) into the challenges facing manufacturers in one sector (electronic component manufacture). This research showed that their main challenges (scored out of 5) were: Reduce order-to-delivery time (4.3) Reduce costs of manufacturing (4.1) Manage inventory more effectively (4.0) Improve demand forecasting (3.9) Reduce time to introduce new products (3.7) Improve after-market/post-sales operations (3.2 * 90
  91. 91. IS-supported upstream supply chain management The key activities of upstream supply chain management are procurement and upstream logistics. The way in which information systems can be used to support procurement in the e-business is of GREAT importance Many grocery retailers developed countries have been at the forefront of using technology to manage their upstream activities using supply chain management. RFID (radio-frequency identification microchip) RFID tags are a relatively recent innovation in e-SCM that are already widely used for logistics purposes. They can be attached to individual product items in a warehouse or in a retail location.With appropriate scanning technology they can then be used to assess stock levels – they can be read at a distance of 1 to 6 metres. * 91
  92. 92. Outbound logistics management The importance of outbound logistics relates to the expectations of offering direct sales through a web site. In a nutshell, logistics is crucial to delivering the service promise established on the web site. If a customer is informed on the web site that a book will take two days to arrive, they will not be a repeat customer if the book arrives two weeks later. A different angle on the importance of logistics and how it relates to the bottom line is illustrated by the fortunes of Amazon, which is infamous for not delivering profitability despite multi-billion-dollar sales. * 92
  93. 93. IS infrastructure for supply chain management Information systems need to deliver supply chain visibility to different parties who need to access the supply chain information of an organization, whether they be employees within the organization, suppliers, logistics service providers or customers. Information systems have a key role in providing this visibility. Since a huge volume of information defines supply chain processes for each organization, users of this information need to be able to personalize their view of the information according to their needs – customers want to see the status of their order, suppliers want to access the organization’s database to know when their customer is next likely to place a major order. Security is also important – if a company has differential pricing, it will not want customers to see price differences. * 93
  94. 94. * 94
  95. 95. * 95
  96. 96. * 96
  97. 97. * 97
  98. 98. Managing global distribution Arnold (2000) suggests action that manufacturers should follow as they enter new overseas markets enabled by the Internet. The seven actions are: 1 Select distributors. Do not let them select you. 2 Look for distributors capable of developing markets rather than those with new customer contacts. 3 Treat the local distributors as long-term partners, not temporary market entry vehicles. 4 Support market entry by committing money, managers and proven marketing ideas. 5 From the start, maintain control over marketing strategy. 6 Make sure distributors provide you with detailed market and financial performance data. 7 Build links among national distributors at the earliest opportunity * 98
  99. 99. E-procurement
  100. 100. Learning outcomes ► Identify the benefits and risks of e-procurement ► Analyze procurement methods to evaluate cost savings ► Assess different options for integration of organizations’ information systems with e-procurement suppliers. * 100
  101. 101. Management issues ► What benefits and risks are associated with e-procurement? ► Which method(s) of e-procurement should we adopt? ► What organizational and technical issues are involved in introducing e- procurement? * 101
  102. 102. How important is procurement? We estimate that for every dollar a company earns in revenue, 50 cents to 55 cents is spent on indirect goods and services – things like office supplies and computer equipment. That half dollar represents an opportunity: By driving costs out of the purchasing process, companies can increase profits without having to sell more goods. Hildebrand (2002) * 102
  103. 103. What is e-procurement? ► The electronic integration and management of all procurement activities including purchase request, authorization, ordering, delivery and payment between a purchaser and a supplier at the right price ► delivered at the right time are of the right quality of the right quantity from the right source. * 103 The 5 rights of E-procurement
  104. 104. Figure 7.1 Key procurement activities within an organization * 104
  105. 105. Figure 7.2 Electronic procurement system Source: Tranmit plc * 105
  106. 106. Types of procurement ► Production-related procurement ► Non-production related procurement How items are bought: Systematic sourcing & Spot sourcing * 106 Cost reduction Enhanced budgetary control Elimination of administrative errors Increasing buyer’s productivity Improving information management Improving the payment process Drives of e-procurement
  107. 107. Risks and impact of e-procurement ► Organizational risks ► Need to redeploy staff ► Technology risks ► Integration with existing financial systems * 107 ► Stock control system ► CD/web-based catalogue ► E-mail/workflow system ► Order-entry on web site ► Accounting systems ► ERP systems Implementing e-procurement
  108. 108. Figure 7.3 Use of different information systems for different aspects of the fulfilment cycle * 108
  109. 109. Figure 7.4 E-mail notification of requisition approval Source: Tranmit plc * 109
  110. 110. Figure 7.5 Document management software for reconciling supplier invoice with purchase order data Source: Tranmit plc * 110
  111. 111. Figure 7.6 The three main e-procurement model alternatives for buyers * 111
  112. 112. Table 7.6 Assessment of the procurement model alternatives for buyers * 112
  113. 113. Figure 7.7 Integration between e-procurement systems and catalogue data * 113
  114. 114. Figure 7.8 An online catalogue of items for purchase Source: Tranmit plc * 114
  115. 115. Figure 7.9 Ford supplier portal provided by Covisint Source: * 115
  116. 116. Figure 7.10 Supplier Route to Government Portal ( * 116
  117. 117. Government marketplace exchanges * 117
  118. 118. Table 7.7 Types of B2B marketplaces identified by Kaplan and Sawhney (2000) with examples Source: Adapted and reprinted by permission of Harvard Business Review from table on p. 99 from ‘E-hubs: the new B2B marketplaces,’ by Kaplan, S. and Sawhney, M., in Harvard Business Review, May–June 2000. Copyright © 2000 by the Harvard Business School Publishing Corporation, all rights reserved Types of marketplace * 118