Impacts of information technology to value chain in english teaching centers

Competitive advantage in either cost or differentiation is a function of a company’s value chain.. They are: more affordable, more business partners to be reached, Internet and web-based

Impacts of Information technology

to value Chain in ENGLISH TEACHING

by

TRAN THI THUY VAN

SEPTEMBER 2004

Impacts of Information technology to

A THESIS SUBMITTED TO THE HANOI SCHOOL OF BUSINESS

OF THE VIETNAM NATIONAL UNIVERSITY

BY TRAN THI THUY VAN

IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

SEPTEMBER 2004

Approval of the Hanoi School of Business

Truong Gia Binh

Dean

I certify that this thesis satisfies all the requirements as a thesis for the degree of

Master of Business Administration

President, Examination Committee

This is to certify that we have read this thesis and that in our opinion it is fully

adequate, in scope and quality, as a thesis for the degree of Master of Business

Administration

Co-Supervisor Supervisor

Examination Committee Members

(Title and Name in alphabetical

order of last name)

ABSTRACT

Impacts of Information technology to value Chain in ENGLISH TEACHING CENTERS

TRAN THI THUY VAN

MBA, Hanoi School of Business

Supervisor : Mr Roger Ford

Co-Supervisor: Mr Nguyen Viet Anh

TÓM TẮT

ẢNH HƯỞNG CỦA CÔNG NGHỆ THÔNG TIN TỚI CHUỖI GIÁ TRỊ CỦA CÁC TRUNG TÂM TIẾNG ANH

Trần Thi Thuý Vân

Hướng dẫn 1: Mr Roger Ford

Hướng dẫn 2: Mr Nguyễn Việt Anh

To My Parents

ACKNOWLEDGMENTS

I express sincere appreciation to Mr Roger Ford, Mr Nguyen Viet Anh and Mr

Ha Nguyen for their guidance and insight throughout the research Thanks go to the other faculty members, Professor Roger Ford, Mr Jubin Kapur, Ms Tran Phuong Lan, Dr Ta Ngoc Cau, Mr Meghnad Shetty for their suggestions and comments The assistance of Ms Huyen Huong, and Ms Phuong Thao is gratefully acknowledged To my parent , I offer sincere thanks for their unshakable faith in me and their willingness to endure with me the vicissitudes

of my endeavors

TABLE OF CONTENTS INTRODUCTION 1

LITERATURE REVIEW 7

2.1 COMPETITIVE ADVANTAGE 7

2.2 INFORMATION TECHNOLOGY AND COMPETITIVE ADVANTAGE 8

2.3 VALUE CHAIN 11

2.3.1 What is value chain? 11

2.3.2 Impact of Information Technology on Value Chain 20

2.4 DIFFERENTIATION 30

METHODOLOGY 44

3.1 RESEARCH PROBLEM 44

3.2 RESEARCH OBJECTIVE 44

3.3 RESEARCH METHOD 45

3.4 RESEARCH STRATEGY 45

3.5 SAMPLE SELECTION 45

3.6 DATA COLLECTION 45

3.7 DATA ANALYSIS 46

EMPIRICAL DATA PRESENTATION 47

4.1 ENGLISH TRAINING IN VIETNAM 47

4.2 CASE STUDY ONE – LANGUAGE LINK VIETNAM 49

4.2.1 Background 49

4.2.2 Information technology in Language Link 50

4.2.3 Value Chain and Information Technology 51

4.2.4 Differentiation and Information Technology 53

4.3 CASE STUDY TWO – SITC 57

4.3.1 Background 57

4.3.2 Information technology in SITC 58

4.3.3 Value Chain and Information Technology 59

4.3.4 Differentiation and Information Technology 62

4.4 CUSTOMER SAMPLE RESEARCH 66

University 68

Item 69

DATA ANALYSIS 72

5.1 Q UANLITATIVE 72

5.1.1 Information technology and Value Chain 73

5.1.2 Source of differentiation 76

5.2 Q UANTITATIVE 80

CONCLUSIONS AND IMPLICATIONS 81 6.1 FINDINGS, CONCLUSIONS AND RECOMMENDATION ON RESEARCH QUESTIONS 81 6.2 IMPLICATIONS 83

LIST OF TABLES

Table 1 – The age of the students in the Sample 66

Table 2- Places of students 67

Table 3 - The students from Universities 68

Table 4 – Student’s expense for learning English 69

Table 5 – The need for communicating English 69

LIST OF FIGURES

Figure 1 Porter’s Generic Value Chain 13

Figure 2 - The Value System (Porter) 14

Figure 3 - Virtual Value Chain 21

Figure 4 - Comparison of Transmission Mediums 25

Figure 5 - Traditional view of the value chain 26

Figure 6 - The Value Chain with the customer 27

Figure 7 - Source of Differentiation in the Value Chain 35

Figure 8 - Virtual Value Chain for Language Link Vietnam 73

Figure 9 - Source of Differentiation in the Value Chain in Language Link Vietnam 76

Figure 10 - Virtual Value Chain for SITC 74

Figure 11 - Source of Differentiation in the Value Chain in SITC 78

VITA

Ms Tran Thi Thuy Van received her B.A degree in Foreign Trade from the Vietnam National University (VNU) in July 2000 She worked in a Joint Stock Company as an accountant and a project Manager assistant from 2001 to 2002 At the period of learning full-time MBA Program in Hanoi School of business, she has participated in a number of projects at Vietnam Country Gateway Project funded by World Bank, Vietnam Competitiveness Initiative Project funded by USAID, Citibank (United States), Soil and Water Ltd (Finland)…

CHAPTER 1 INTRODUCTION 1.1 Competitive Advantage

Competitive advantage is important for companies to perform in competitive market Competitive determines the appropriateness of a firm’s activities that can contribute to its performance, such as innovations, culture, or good implementation There are two basic kinds of competitive advantage: cost leadership or differentiation Competitive advantage in either cost or differentiation is a function

of a company’s value chain

A company’s cost position reflects the collective cost of performing all its value activities relative to rivals Each value activity has cost drivers that determine the potential sources of a cost adavantage Some firms view the differentiation in physical product or marketing practices, but differentiation should be viewed from anywhere in the value chain

1.2 Competitive Advantage and Information Technology

Recently, entrepreneurs, executives, investors and industries in worldwide as well

as in Vietnam has paid much attention on E-business and E-commerce With the help of information technology, the processes and operations of businesses can be shortenned The Internet has offerred not only the advantage of low cost but also provide the smooth and linkage between different business activities Many organizations worldwide has integrate Internet technology to redesign their business processes in ways that can strengthen their competitive advantages

Businesses are incorporating electronic commerce into strategic plans, business schools are incorporating it into their curriculum, and consulting and software firms are marketing electronic commerce “solutions” So what exactly is electronic

commerce? Greenstein and Feinman define Electronic Commerce as: “the use of

electronic transmission mediums (telecommunications) to engage in the exchange, including buying and selling, of products and services requiring transportation, either

physically or digitally, from location to location (Source: Greenstein, Feinman,

2000, “Electronic Commerce: Security, Risk Management and Control” New York: The McGraw-Hill Companies, Inc.)

Electronic commerce involves all sizes of transaction bases As one would expect, electronic commerce requires the digital transmission of transaction information While transactions are conducted vie electronic devices, they may be transported using either traditional physical shipping channels, such as a ground delivery service, or digital mechanisms, such as the download of a product from the Internet

The Internet and the world wide web provide the mechanisms to foster the growth

of electronic commerce The actual growth rates and uses of the Internet indicate that electronic commerce is no passing fad, but rather a fundamental change in the way in which busnesses interact with one another and their consumers Please look

at the General Electric example In 1997, General Electric purchased approximately USD 1 billion worth of supplies using the Internet Some benefits that GE has realized due to its Internet procurement system are a 50% reduction in the purchasing cycle and a 30% reduction in processing costs General Electric Company’s 1997 Internet activity clearly demonstrate the electronic commerce can provide substantial, tangible benefits to a firm when implemented properly

Another concept is E-business It includes the exchange of information not directly

related to the actual buying and selling of goods Businesses are using electronic mechanism to distribute information and provide customer support

What benefits can business potentially gain from engaging in electronic commerce? They are: more affordable, more business partners to be reached, Internet and web-based electronic commerce can reach a more geographically dispersed customer base, procurement processing costs can be lowered, cost of purchases can be lowered, reductions in inventories, lower cycle times, better customer service and lower sales and marketing costs

Internet technology is changing the way many firm do business With the help of Information technology, especially Internet, there are two ways for businesses to gain sustainable competitive advantage One is operational effectiveness – doing the same thing your competitors do but doing them better Operational effectiveness advantages include better technologies, superior inputs, better-trained people or a more effective management structure The other way to achieve advantage is strategic positioning—doing things differently from competitors, in a way that delivers a unique type of value to customers This can mean offering a different set

of features, a different array of services, or different logistical arrangements

(Porter, 2001, “Strategy and the Internet”, Harvard Business Review, Vol, 79,

No.3 Page 63-78)

The Internet affects operational effectiveness and strategic positioning in very different ways It makes it harder for companies to sustain operational advantages, but it opens new opportunities for achieving or strengthening a distinctive strategic positioning

The Internet is the powerful tool available today for enhancing operational effectiveness By easing and speeding the exchange of real-time information, it

enables improvements throughout the entire value chain, across almost every company and industry And because it is an open platform with common standards, companies can often tap into its benefits with much less investment than was required to capitalize on past generations of information technology

However, easy access to Internet technology brings new challenges to competitive advantages Business are now looking for ways to differentiate themselves from their competitors Creating competitive advantages is vital to sustaining growth

In Vietnam, the concept of E-commerce, E-business is still new According to the Vietnamnews article on Octocber, 2003, A Mekong Project Development Facility survey concluded that only 3 percent of Vietnamese businesses used some aspect of e-commerce, 7 percent intended to use e-commerce and the remaining 90 percent had little knowledge of E-commerce According to www.vietnamwebsite.net, there are only 3,400 (5% of 70,000 businesses in Vietnam) have their own website

Businesses in Vietnam in the infancy stage of E-business will consider Internet as a kind of operational effectiveness but they should bear in their mind that operational effectivenesss is not sustainable With the lesson and experience in worldwide, Vietnamese businesses that would like to succeed must find the ways to differentiate themselves from their competitors with the help of information technology

It is clear that the trend of integrating information technology into businesses to gain competitive advantage is not advoidable not only worldwide but also in Vietnam, the economy in the infant stage of e-commerce and e-business Recently, E-commerce is only applied in Vietnam to exchange information, seek partners and introduce and advertise goods and services But in the future, those businesses that can integrate information technology into its value chain and make it become a

competitive advantage can be outperformed and can compete not only in Vietnam but also in global

1.3 Competitive Advantage and Value Chain

Competitive advantage stems from the many discrete activities a firm performance

in designing, producing, marketing, delivering and supporting its product Each of these activities contributes to a firm’s relative cost position and creates a basis for differentiation The Value Chain is an important concept to highlight the role of information technology in competition A systematic ways of examining all the activities a firm performs and how they interact is necessary for analyzing the source of competitive advantages The value chain devide a firm into its relevant activities in order to understand the behaviour of costs and the existing and potential sources of differentiation A firm gain competitive advantages by performing these activities more cheaply or better than competitors

The ultimate purpose of value chain is to analyze to identify appropriate means of differentiation for a firm so that it can provide superior value to the customers A firm, as a collection of activities, is a collection of technologies Technology can be

in every value activity in a firm and technological change can affect competition through its impact on any activities

The value chain is used to demonstrate how a value chain can be constructed for a particular firm, reflecting the specific activities it performs Differences among competitor value chain are a key source of competitive advantage It is nescessary

to define a firm’s value chain for competing in a particular industry The value chain is a basic tool for finding competitive advantage and ways to create and sustain it

Every firm including Vietnamese firms that seeks to be successful in the future is striving to implement Internet technology It is important for every type of organization to improve efficiency and be better than competitors For this reason

the purpose of this thesis is to analyze the question how companies in Vietnam

especially specific English Centers apply Information Technology into its value chain to get differentiation

Because the concept of E-commerce, E-business is still new in Vietnam, it is a broad concept and is under discussion in Vietnam, the scope of this thesis is only focusing on the impact of information technology to the value chain of English Teaching Centers

The Thesis consists of 6 Chapters:

In Chapter 1, we give a broad description and provide a discussion of issue related

to the problem area

In Chapter 2, literature review is given to provide theories relevant for the problem

area

Chapter 3 represents methodology for data collection and analysis

In Chapter 4, there is empirical data presentation, consists of background of the

companies and data collected We choose Language Link and SITC because they are big enough to apply Information technology and they are two of the first English Centers applied Information technology in some activities of their business Language Link is the company with high price service and SITC is company with premium price service

In Chapter 5, the data is analyzed and conclusions are given in Chapter 6

CHAPTER 2 LITERATURE REVIEW

2.1 COMPETITIVE ADVANTAGE

Competitive advantage describes the way a firm can choose and implement a generic strategy to achieve and sustain competitive advantage The competitive advantage can come from cost advantage or differentiation advantage and the scope

of a firm’s activities Value chain is the basic tool for diagnosing competitive advantage and finding ways to enhance it Competitive advantages is about a firm actually puts the generic strategies into practice

About cost leadership, there are various sources of cost advantage which are lower input costs, lower in-plant production costs and lower delivery costs However, this advantage can be eroded when there are rising costs Therefore, the advantage of differentiation offer superior performance The differentiation can give many dimensions that can be exploited in seeking to establish a product or service superior to its competition

Competitive advantage can arise from many sources, and show how all advantages can be connected to specific activities and the way that activities relate to each other, to supplier activities and to customer activities Advantage resting on a few activities is easier to diagnose and often easier to imitate Only the tie linkage of many activities is difficult to imitate

2.2 INFORMATION TECHNOLOGY AND COMPETITIVE

ADVANTAGE

Information revolution is sweeping through the economy No company can escape its effects Dramatic reduction in the cost of obtaining, process, and transmitting information are changing the way we do business The technology is transforming the nature of products, processes, companies, industries, and even competition itself Every company must understand the broad effects and implications of the new technology and how it can create substantial and sustainable competitive advantages

Organizations today frequently integrate Internet technology to redesign processes

in ways that strengthen their competitive advantages Before information technology, the costs for communicating, gathering information, or accomplishing transactions is high The Internet’s greatest impact has been to enable the reconfiguration of industries and businesses.Many organizations are able to integrate activities of their value chain encompassing suppliers, customers, and distribution channels within an industry or across industries With the rate of technological change in the global economy, technology and information have become as critical as capital, research and development, marketing and other previous drivers of success Companies that thrive and survive in this global marketplace will be information based Vietnamese firms that want to suceed locally as well as globally have to not ignore the importance of information technology impact

Business can gain sustainalbe competitive advantages by two ways One is operational effectiveness, and another way is to achieve advantage of strategic positioning The Internet affects operational effectiveness and strategic positioning

in very different ways It makes it harder for companies to sustain operational advantages but it gives new opportunities for achieveing or strengthening a

distintive strategic positioning Simply improving operational effectiveness does not provide a competitive advantage Companiess only gain advantages if they are able

to achieve and sustain higher levels of operational effectiveness than competitors That is an exceedingly difficult proposition even in the best of circumstances Once

a company establishes a new best practice, its rivals tend to copy it quickly Best practice competition eventually leads to competitive convergence, with many companies doing the same things in the same ways The nature of Internet applications makes it more difficult to sustain operational advantages than ever The openness of the Internet, combined with advances in software architecture, development tools, and modularity, makes it much easier for companies to design and implement applications Many companies have forgotten what they stand for and rushed to implement hot Internet applications and copy the offerings of dot-

coms (Porter, 2001, “Strategy and the Internet”, Harvard Business Review, Vol,

79, No.3 Page 63-78)

Therefore, the important concept that highlights the role of information technology

in competition is the “value chain” To gain competitive advantage over its rivals, a company must either perform these activities at a lower cost or perform them in a way that leads to differentiation and a premium price Information technology has a powerful effect on competitive advantage in either cost or differentiation The technology affects value activities themselves or allows companies to gain competitive advantage by exploiting changes in competitive scope

About lowering cost, information technology can alter a company’s costs in any part of the value chain About enhancing differentiation, The role of a company and its product in the buyer’s value chain is the key determinant of differentiation The new information technology makes it possible to customize products By bundling more information with the physical product package sold to the buyer, the technology affects a company’s ability to differentiate itself

Internet provides a better technological platform to reinforce a distintive strategy, tailoring activities and enhancing it Package software application were hard to customize, and companies were often forced to change the way they conduct activities in order to conform to the best practices in the software It is also difficult for company to connect discrete applications to one another Internet architecture, together with other improvements in software architecture and development tools, has turned IT into a far more powerful tool for strategy It is much easier to customize packaged Internet applications to a company’s unique strategic positioning By providing a common IT delivery platform across the value chain, Internet architecture and standards also make it possible to build truly integrated and customized systems that reinforce the fit among activities in the value chain

In addition, the technology also increases a company’s ability to coordinate its activities regionally, nationally and globally Internet has permitted companies to develop new and more effective days of responding to customer needs E-commerce marketers can significantly increase the number of competitive advantage options available to them by considering the opportunities offered by the dual options of combining cost leadership with differenctiation and product customisations

As all the companies come to embrace Internet technology, the Internet itself will

be neutralized as a source of advantage Basic Internet applications will become table stakes – companies will not be able to survive without them, but they will not gain any advantage from them The more robust competitive advantages will arise instead from traditional strengths such as unique products, propretary content, distinctive physical activities, superior product knowledge, and strong personal service and relationships Internet technology may be able to fortify those advantages, by tying a company’s activities together in a more distinctive system, but it is unlikely to supplant them Internet technology provides better opportunities

for companies to establish distinctive strategic positionings than did previous generations of information technology

2.3.1 What is value chain?

Value chain is the basic tool for diagnosing competitive advantage and finding ways

to enhance it The value chain disaggregateds a firm into its relevant activities in order to understand the behaviour of costs and the existing and potential sources of differentiation A firm gains competitive advantage by performing these important activities more cheaply or better than its competitors Since no two firms, even in the same industry, compete in exactly the same set of markets with exactly the same set of suppliers, the overall value chain for each firm is unique

Value chain analysis describes the activities within and around an organization, and relates them to an analysis of the competitive strength of the organization Therefore, it evaluates which value each particular activity adds to the organizations

products or services This idea was built upon the insight that an organization is more than a random compilation of machinery, equipment, people and money Only

if these things are arranged into systems and systematic activates it will become possible to produce something for which customers are willing to pay a price Porter argues that the ability to perform particular activities and to manage the linkages

between these activities is a source of competitive advantage (Michael Porter

1998 Competitive Advantage: creating and sustaining Superior Performance New York: Free Press)

Porter distinguishes between primary activities and support activities Primary activities are directly concerned with the creation or delivery of a product or service They can be grouped into five main areas: inbound logistics, operations, outbound logistics, marketing and sales, and service Each of these primary activities is linked to support activities which help to improve their effectiveness or efficiency There are four main areas of support activities: procurement, technology development (including R&D), human resource management, and infrastructure (systems for planning, finance, quality, information management etc.)

The basic model of Porters Value Chain is as follows:

Figure 2.1 Porter’s Generic Value Chain

The value chain is a part of a larger value system that incorporates all value-added activities from raw materials to components and final assembly through buyer distribution channels Suppliers have value chain (upstream value) that create and deliver the purchased inputs used in a firm’s chain Suppliers not only deliver a product but also can influence a firm’s performance in many other ways In addition, many products pass through the value chains of channels (channel value)

on their way to the buyer Channels perform additional activities that affect to the buyer, as well as influence the firm’s own activities A firm’s product eventually becomes part of its buyer’s value chain A firm can enhance its design to distribution – but also by understanding how the firm’s value activities fit into the supplier’s and customer’s value chains

The value-chain partnership is a strong and close alliance in which one company or unit forms a long-term arrangement with a key supplier or distributor for mutual advantage Value-chain partnerships are becoming extremely popular as more companies and business units outsource activities that were previously done within

the company or business unit For example, Dupont contracts out project engineering and design to Morrison Knudsen; AT&T, its credit card processing to Total System Services; Nothern Telecom, its electronic component manufacturing

to Comptronix; and Eastman Kodak, its computer support services to Businessland

Another example of a value-chain partnership is the long-term relationship between

a company or business unit with a supplier or distributor To improve the quality of parts it purchases, companies in the auto industry, for example, have decided to work more closely with fewer suppliers and to involve them more in product design decisions Such partnership are also a way for a firm to acquire new technology to use in its own products

Figure 2.2 - The Value System (Porter)

Value chain analysis enables a firm to better understand which segments, distribution channels, price points and product differentiation will yield the greatest competitive advantage It is a way of assessing competitive advantage by

determining the strategic advantages and disadvantages of the full range of activities that shape the final offering to the end user

What is the function of Value Chain

The value chain model of Porter represents that every value activities employs purchased inputs, human resources and some form of technology to perform its functions Each value activity also uses and creates information, such as buyer data and product failure statistics Value activities can also create financial assets such as inventory and accounts receivable, or liabilities such as account payable Porter distinguishes between primary activities and support activities, in which primary activities are directly concerned with the physical creation, sale and delivery of a product or service

There are five generic categories of primary activities, as shown in Figure 1,

Primary activities usually begin with inbound logistics (raw materials handling and warehousing), go through an operations process in which a product is manufactured, and continue on to outbound logistics (warehousing and distribution), marketing and sales, and finally to service (instalation, repair, and sale of parts)

Marketing and Sales

The activities associated with getting buyers to purchase the product including channel selection, advertising, promotion, selling, pricing, retail management, etc

Service

The activities that maintain and enhance the product's value, including customer support, repair services, installation, training, spare parts management, upgrading, etc

Support activities, such as procurement (purchasing), technology development (R&D), human resource management, and firm infrastructure (accounting, finance, strategic planning), ensure that the primary value-chain activities operate effectively and efficiently Each of a company’s product lines has its own distintive value chain

Human Resource Management

The activities associated with recruiting, development (education), retention and compensation of employees and managers

often reduces cost to enhances differentiation (Michael Porter 1998 Competitive

Advantage: creating and sustaining Superior Performance New York: Free Press)

Linkages are numerous, but the most obvious are those between support activities and primary activities More subtle linkages are those between primary linkages Linkages exist not only within a firm’s value chain There are also linkages between

a firm’s value chain and the value chain of suppliers and channels These linkages are similar to linkages within the firm’s value chain The way supplier or channel activities are performed affects the cost or performance of a firm’s activities The linkages between suppliers’ and channel’s value chains and a firm’s value chain provide opportunities for the firm to enhance its competitive advantage Its is often possible to benefit both the firm and suppliers or channels by influencing the configuration of suppliers’ or channels’ value chains to jointly optimise the performance of activities of by improving coordination between a firm’s and

suppliers’ or channels’ chains As with linkages within a firm’s value chain, exploiting vertical linkages requires information and modern information systems are creating many new opportunities Recent development in information technology are creating new linkages and increasing the ability to achieve old ones

Though linkages within the value chain are crucial to competitive advantage, they are often subtle and unrecognized Exploiting linkages usually require information

or information flows that allow optimisation or coordination to take place Thus, information systems are often vital to gaining competitive advantage from linkages But given the difficulty of recognizing and managing linkages, the ability to do so often yields a sustainable source of competitive advantage

These linkages are crucial for corporate success The linkages are flows of information, goods and services, as well as systems and processes for adjusting activities Their importance is best illustrated with some simple examples: Only if the Marketing & Sales function delivers sales forecasts for the next period to all other departments in time and in reliable accuracy, procurement will be able to order the necessary material for the correct date And only if procurement does a good job and forwards order information to inbound logistics, only than operations will be able to schedule production in a way that guarantees the delivery of products

in a timely and effective manner – as pre-determined by marketing

In the result, the linkages are about seamless cooperation and information flow between the value chain activities

In most industries, it is rather unusual that a single company performs all activities from product design, production of components, and final assembly to delivery to the final user by itself Most often, organizations are elements of a value system or

supply chain Hence, value chain analysis should cover the whole value system in which the organization operates

Within the whole value system, there is only a certain value of profit margin available This is the difference of the final price the customer pays and the sum of all costs incurred with the production and delivery of the product/service (e.g raw material, energy etc.) It depends on the structure of the value system, how this margin spreads across the suppliers, producers, distributors, customers, and other elements of the value system Each member of the system will use its market position and negotiating power to get a higher proportion of this margin Nevertheless, members of a value system can cooperate to improve their efficiency and to reduce their costs in order to achieve a higher total margin to the benefit of all of them (e.g by reducing stocks in a Just-In-Time system)

A typical value chain analysis can be performed in the following steps:

· Analysis of own value chain – which costs are related to every single activity The systematic examination of individual value activities can lead to a better understanding of a corporation’s strengths and weaknesses According to Porter,

“Differences among competitor value chains are a key source of competitive advantage”

· Analysis of customers value chains – how does our product fit into their value chain

· Identification of potential cost advantages in comparison with competitors

· Identification of potential value added for the customer – how can our product add value to the customers value chain (e.g lower costs or higher performance) – where does the customer see such potential

2.3.2 Impact of Information Technology on Value Chain

Nowadays, every businesses compete in two worlds, one is physical world of resources that managers can see and touch, another is a virtual world made of information The later world has created the world of electronic commerce, a new of value creation Managers must pay attention to create value in physical world and virtual world

The information technology has affected all primary and support activities in a firm

as we can see the model of Porter bellows (Michael Porter March 2001 “Strategy

and the Internet”, Harvard Business Review, Vol 79, No 3 Page 63 – 78)

Figure 2.3 - Virtual Value Chain

Firm Infrastructure

 Web-based, distributed financial and ERP systems

 Online investor relation (e.g information dissemination, broadcast conference calls)

Human Resource Management

 Self-service personnel and benefits administration

 Web-based training

 Internet-based sharing and dissemination of company information

 Electronic time and expense reporting

Technology Development

 Collaborate product design across locations and among multiple value-system participants

 Knowledge directories accessible from all parts of the organization

 Real-time access by R&D to online sales and service information

Procurement

 Internet-enabled demand planning, real-time available-to- promise/capable-to promise and fulfillments

 Other linkage of purchase, inventory, and forecasting systems with suppliers

 Automated “requisition to pay”

 Direct and indirect procurement via marketplaces, exchanges, auctions and buyer-seller matching

 Rea l-time available-to- promise and capable-to- promise information available to the sales force and channels

Outbound logistics

 Real-time transaction of orders whether initiated by

an end consumer, a sales-person, or a channel partner

 Automated customer-specific agreements and contract terms

 Customer and channel access to product development and deliver status

 Collaborative integration with customer forecasting systems

 Integrated channel management including information exchange, warranty claims, and contract management (versioning, process control)

Marketing and Sales

 Online sales channels including Web sites and marketplaces

 Real-time inside and outside access to customer information, product catalogs, dynamic pricing, inventory availability, online submission of quotes, and order entry

 Online product configurators

 tailored marketing via customer profiling

advertising

 Tailored online access

 Real-time customer feed-back through Web surveys, opt-in/opt-out marketing, and promotion response tracking

After-Sales Services

 Online support of customer service representative through e-mail response management, co- browse, chat, “call me now”, voice-over IP, and other uses of video streaming

 Customer self-service via Web sites and intelligent service request processing including updates to billing and shipping profiles

 Real-time field service access to customer account review, schematic review, parts availability and ordering, work-order update, and service parts management

The software developments allow web-based EDI systems to interface with traditional EDI systems, businesses of all sizes can now transact with one another It also expands the number of potential electronic business partners, some of which may be a substantial geographical distance away The Internet offers a greater choice of global partners to conduct electronic commerce

Procurement costs can be lowered by traditional EDI (electronic data interchange) systems by consolidating purchases, developing relationships with key suppliers, negotiating volume discounts and greater integration of the manufacturing process Internet electronic commerce offers additional benefits and potential for cost reductions over traditional EDI Procurement costs can be lowered for all companies regardless of size, due to the increased ability to transact electronically with one another Data transmission costs can be lowered There is a wider net to search for suppliers Options for partnering with other firms increase For example, small and mid-sized companies benefits because they are now able to conduct business with the larger firms that are casting the wider nets The smaller firms also have the opportunity to reduce their processing costs by using integrated electronic processing systems As mentioned earlier, GE realized a 30% reduction in the processing cost of its procurement cycle The cost of the items purchased can also

be lowered due to the ability to seek out and negotiate with greater number of suppliers GE was able to reduce its cost of purchases by 20% By 2000, GE estimates that the potential savings from its Internet procurement system will reach

$ 500 - $700 million (Source: Greenstein, Feinman, 2000, “Electronic Commerce:

Security, Risk Management and Control” New York: The McGraw-Hill Companies, Inc.)

A reduction in inventory is desirable because of the associated reductions in storage, handling, insurance, and administrative costs Internet electronic commerce can

help firms to more optimally order the inventories by electronically linking suppliers and purchasers together and allowing them to share updated production forecasts and projected inventory levels in order to allow both parties to their production and delivery schedules Businesses can also use the Internet to “unload” unwanted inventory or sell excess capacity very quickly and with extremely low marketing costs Both American Airlines and USAir determine on a weekly basis which flights have excess capacity and offer “last-minute” (actually two or three days notice) deals to Internet subscribers of this service via e-mail This strategy allows these airlines to reduce the excess capacity on these flights and generate additional revenues

The production cycle time is the time it takes a business to build a product beginning with the design phase and ending with the completed product Internet electronic commerce is enabling the reduction of the cycle time by allowing engineers and production teams to electronically share design specifications for initial approval and refinement processes In addition to reducing the design and production phases, lower cycle times also reduce the amount of fixed overhead that needs to be allocated to each unit produced, thus positively affecting the ability to pass cost savings on to the customer or to achieve higher net earnings

Customer service can be enhanced using Internet electronic commerce by helping the customer to access information before, during, and after the sale Before the sale

is made, customers can electronically retrieve product specifications, quantity, and pricing information During the product/service fulfillment cycle, customers can electronically check on the status of the order For example, Federal Express’ customers can electronically track the status of their packages without the need to speak with a human Support services for customers are also enhanced by electronic services, such as electronic notification of returned items and the ability to download and print the necessary documentation and shipping labels to return an

item for servicing Convenience and reduced processing costs result for both the buyer and seller

The omnipresent nature of the Internet allows firm to reach many customers in a very low-cost fashion Some firms are able to shift some of their sales and marketing functions to electronic processes This shift in communication mediums allows the firm to either reduce their overhead costs or better utilize their human resources to engage in building customer relations rather than performing tedious sales processing tasks

Internet is a unique infrastructure in that it is “owned” by no one The Internet is a network of networks In the Figure 4, we can compare the length of time that it took for radio, television, and personal computer use to reach 50 million people as compared to the Internet In only four years after it was opened “to the public”, the Internet was able to reach 50 million people, which is just a fraction of the time it took for radio, television and personal computers to reach the same usage rate

Figure 2.4 - Comparison of Transmission Mediums

It is clear that, electronic commerce is not just a technology, it is a way of conducting business that has the potential to impact every aspect of the firm’s value chain Implementing full-scale, innovative application of electronic commerce requires management teams to view the marketplace beyond the typical physical boundaries

If electronic commerce applications are not placed in the proper business context and the strategy aligned with the business, overall business strategy then the electronic commerce application is likely to fail Thus, new business models are necessary that integrate electronic commerce initiatives with overall business goals

Figure 2.5 - Traditional view of the value chain

The Figure 5 shows the traditional view of the value chain, but it is no longer rich enough to encompass the true relationships underlying the flows of information between a firm, its customers, and its suppliers The traditional value chain typically depicts the information system data as flowing sequentially through the processes with inputs/outputs to the supplier at the back-end stage and to the customer at the front-end stage In reality, firms engaging in electronic commerce may share information with their customers and suppliers at many stages of the value chain Figure 6 depicts a new view of the value chain with the customer set as the center of focus to a firm The firm’s information system is the “glue” that links all phases of its processes together This customer-oriented value chain enables the customer to access the firm’s (the supplier’s) information system at virtually every phase in order to assess the progress of the order A customer may link to the firm’s inventory data such as price, quantity, and availability, prior to entering into a sales contract Further, the customer may be able to electronically receive design and product specifications prior to entering into a sales contract The actual sales may be

placed electronically and a promised or expected shipping date given by the supplier’s information system to the customer Once the order is placed, the customer may be able to check the status of the order/service placed

Figure 2.6 - The Value Chain with the customer

The customers can also check the shipping status of orders placed with a supplier that have been completed and are in the shipping process The customer’s use of the supplier’s information system to help provide better customer service after the sale

is complete is another positive use For example, a customer may wish to return a defective item to its supplier The customer may be able to access the firm’s information system and request a return slip, which the customer can then print-out and use to send the item back to the supplier at the cost of the supplier The supplier benefits by knowing in advance that defective goods were sent to a customer and when to expect to receive them back These are just some of the many ways in

which customers and suppliers may advantageously share the information stored in the supplier’s information system

The customer-oriented value chain illustrated in Figure 2.6 also need to link its

procurement information system to those of the firm’s supplier The supplier needs

to access its supplier’s information systems to those of the firm’s supplier The supplier needs to access its supplier’s information system in order to best serve its own customers The supplier becomes the customer to its suppliers and should be able to interface its procurement systems with its suppliers’ information systems to receive the same types of information that it provides to its own customers

The Internet is enabling companies to fully integrate their supply chains, and this integration has a dramatic influence on the structure of participating companies to fully integrate their supply chains

Albert Angehrn developed the model called the Information, Communication,

Distribution and Transaction (ICDT) as a basis for discussing the Internet strategy

of business (Source: Greenstein, Feinman, 2000, “Electronic Commerce: Security,

Risk Management and Control” New York: The McGraw-Hill Companies, Inc.)

The model is based on four virtual spaces:

Virtual Information Space: This space is where a firm displays information about

their organization, products, or services This space is the easiest space for a business to enter and is typically the first step taken towards entering the virtual marketplace

Virtual Distribution Space This space is used to deliver the product or services

requested or purchased by the consumer For virtual delivery to occur, the products being delivered must be digital (Ex Software) or the service performed digitally