ACCA P3 Business Analysis - 2010 - Study text - Emile Woolf Publishing
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Paper P3
Business analysis
CHAPTER
12
Information technology
solutions
Contents
1 Principles of e-business
2 The infrastructure required to support e-business
3 E-business and the supply chain
4 Marketing concepts: the 7Ps
5 E-marketing
6 Customer relationship management
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Principles of e-business
Definition of e-business
E-business and its implications for business strategy
The impact of the internet on business strategy and competition
Main business and marketplace models for delivering e-business
E-commerce and the globalisation of business
A stage model of e-business
Barriers to e-business
1 Principles of e-business
1.1 Definition of e-business
The purpose of this chapter is to look at how e-business methods might be used to
implement business strategy. There are two commonly-used terms: e-commerce and
e-business.
E-commerce can be defined as: ‘all electronically mediated information exchanges
between an organisation and its external stakeholders. E-commerce is sell-side if it is
between an organisation and its customers and is buy-side if it is between an
organisation and its suppliers’ (Chaffey: ‘E-business and E-Commerce
Management’).
E-business includes all aspects of e-commerce, but also includes work flows and
movements of information within an entity, for example between departments or
functions. Internal processes are driven by e-business methods as well as external
relationships with customers, suppliers and other external stakeholders.
Here are two broader definitions of e-business:
E-business is ‘automated business processes (both intra- and inter-firm) over
computer mediated networks’ (OECD).
E-business is ‘the exchange of information across electronic networks, at any
stage in the supply chain, whether paid or unpaid.’
E-business and information flow
E-business transactions do not necessarily involve a payment for goods or services.
Transactions with customers and suppliers might involve the transfer of
information rather than a transfer of money. For example, a major aspect of e-
marketing is concerned with providing information to customers or exchanging
information with customers or potential customers.
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It is usual to associate e-business with the internet. However, it is better to think of
the communication networks for e-business as:
the internet and corporate websites
company intranets
telecommunications networks, including mobile telephony
interactive television (especially in consumer markets).
1.2 E-business and its implications for business strategy
The objective of e-business is to increase the competitiveness and efficiency of an
entity by using electronic information exchanges to improve processes. E-business
does not simply involve automating existing processes. Processes should be
radically redesigned by e-business methods so that they become more efficient and
create added value. E-business opportunities can alter the strategic position of an
entity, and provide different strategic choices.
E-business can change the nature of the market place in which goods and
services are bought and sold. For example, it encourages the globalisation of
markets and the buying and selling of items in the internet.
E-business also changes the nature of the relationships with suppliers and
customers.
1.3 The impact of the internet on business strategy and competition
An article in Student Accountant (March 2007, ‘Strategy challenge: the internet’)
provides a very useful assessment of the impact that the internet has had on
business strategy and competitive advantage. The analysis is based on Porter’s
views on strategy.
Porter has argued that the two main factors that determine the profitability of a
business entity are the structure of the industry in which it competes, and the ability
of the entity to achieve a sustainable competitive advantage.
The internet and industry structure
The internet has led to the development of some new industries, such as online
auctions. However, it has had a much more significant impact on existing industries
and the nature of competition within those industries. (Remember that when an
industry becomes more competitive, prices are lower and profitability for all
companies in the industry is lower.)
The impact of the internet on competition in many industries can be analysed
within the framework of Porter’s Five Forces model.
Competitive rivalry with existing competitors. The internet encourages greater
competition. Companies provide a large amount of information about
themselves and their products on their websites. This makes it easier for
competitors to copy what they are doing. As a result of the stronger competition,
selling prices are depressed.
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Threat of new entrants. In many industries, the barriers to entry have been
lowered. By using the internet, new competitors can enter the market more
quickly and more cheaply. Companies are able to enter the market using the
internet to market their products or services. They do not need to employ an
expensive full-time sales force, or distribute their products through (expensive)
traditional retail networks.
Bargaining power of suppliers. Suppliers are able to use the internet to increase
the number of clients or customers for their products. As a result, the bargaining
power of suppliers is likely to increase.
Bargaining power of customers. The internet has increased the bargaining
power of customers substantially. Customers are able to obtain information
about the rival products of many different competitors, by using search engines
such as Google and visiting many different websites. ‘The reality is that
customers using the internet are finding it easier to switch suppliers, and the
openness of the internet and its standards makes it difficult for a customer to
maintain its customer network intact.’
Porter has argued (Harvard Business Review 2001) that the overall effect of e-
business decisions taken by many companies has been to make competition much
more price-driven and to reduce profitability.
Individual firms and competitive advantage
At the level of the individual firm, the internet has also had an effect on the ability
of companies to sustain competitive advantage. Competitive advantage is achieved
through operational effectiveness (reducing costs) and strategic positioning
(differentiation).
Porter has argued that the internet affects operational effectiveness, because it
allows companies to exchange information in real time across its entire value
network. However, the internet also makes it difficult for companies to use this
improved operational effectiveness as a sustainable competitive advantage.
Methods of using the internet devised by a company are fairly easy to copy.
‘Companies converge on the same applications with the same benefits –
benchmarking and copying best practice make any operational advantage
difficult to sustain.’
Porter also argues that it is possible for firms to gain sustainable competitive
advantage using the internet, but only from superior strategic positioning. They
need to link the IT platform provided by the internet to ‘critical corporate assets’
such as skilled personnel, a proprietary product or a very efficient delivery
(logistical) system. In practice, not many companies have yet done this.
1.4 Main business and marketplace models for delivering e-business
E-business is based on the exchange of information in real-time, between entities
and their suppliers, customers and potential customers. The internet has given
companies an opportunity to sell their goods or services to a larger number of
customers, and to find new suppliers. The main types of ‘model’ for delivering e-
business are probably familiar to you.
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Selling goods and services. ‘E-shopping’ is a term for consumers buying goods
or services by placing orders on a company’s website.
- When physical goods or services are purchased, the company must have a
delivery system in place that fulfils the customer’s order efficiently.
Companies use different delivery systems for goods purchased on the
internet, such as direct delivery in the company’s own vehicles (for example as
Tesco home shopping in the UK) or delivery through a parcel delivery service.
- The purchase of information, such as education packages and software
products, can be delivered directly to the customer’s computer by internet (e-
mail).
Providing electronic auctions. These are websites where customers can auction
goods for sale, and put in bids for auctioned items. eBay is perhaps the most
well-known example.
New intermediary companies. One of the problems with the internet is the
enormous number of different websites. This can make it difficult for customers
to know which website to visit where they can buy goods or services that they
are looking for, and obtain the ‘best deals’. Search engines on their own would
not be efficient in helping a customer to find a suitable holiday in Australia, for
example, or a fashionable pair of shoes. As a result, a large number of
intermediary companies have established themselves in business. Their business
is based on acting as agents for selling the (similar) products or services of a
large number of different companies, and attracting customers to their website.
Customers visiting the intermediary’s website they can select an item that meets
their requirements from the many different items on offer. An example is
lastminute.com, which sells holidays, travel, theatre tickets and similar items on
behalf of a large number of different holiday companies, travel companies,
theatres and so on.
Alliances of suppliers. In some markets, businesses have created alliances with
shared websites for selling their products to customers over a wider
geographical area. For example, companies selling residential property (such as
estate agents) can join with similar companies in other regions and towns in
order to advertise their properties to customers throughout the country, not just
in their local area.
E-procurement. As well as creating larger markets for consumer goods and
services, communications networks and computer systems have created new
opportunities for business-to-business purchasing (‘e-procurement’), by linking
up the computer systems of companies with those of their main suppliers.
Advertising. The internet has also created new opportunities for advertising and
marketing. Companies can advertise their products or services on search engines
such as Google, or on the websites of other companies. They can also use their
own websites to provide product information to customers; for example
publishers are able to display extensive information about their books.
Companies with popular websites, and companies that provide search engines,
can sell advertising space and earn revenue for their business in this way.
Marketing. Marketing opportunities are provided by the chance to send
marketing messages by e-mail to potential customers (although this form of
marketing is affected by the very large number of ‘spam’ marketing e-mails).
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Customer relationships. The internet provides opportunities for companies to
build customer relationships, for example by providing support, user forums
and FAQ (frequently asked questions) pages. The internet can also be used to
analyse customer interests and preferences, and so learn more about what
customers want and value. Customer relationship management is explained in
more detail later.
1.5 E-commerce and the globalisation of business
E-commerce has been a major factor in the globalisation of business. Geographical
distance can still be a barrier to the globalisation of markets, but e-commerce
reduces those barriers, and can even remove them.
The internet and e-mail in particular have made it much easier for suppliers to
make contact with customers in geographically-distant countries.
The internet and e-mail have also made it easier for customers to search for
suppliers in other countries of the world.
Suppliers and customers can communicate with each other much more quickly
and easily, in spite of differences in time zones.
Customers can search the internet to find suppliers who are able to provide what
they want at a competitive price. They can compare rival products or services, and
can compare prices.
Suppliers can try to attract more customers from wider geographical markets by
advertising their goods or services on their website (or other information websites
or on search engines).
The implications of globalisation of markets
An important implication of the globalisation of markets is that the size of the
market increases, but competition is more international. The main rivals are no
longer local suppliers to a domestic market, but international or global companies
competing for market share in countries around the world.
Efficiency in global markets depends on information and communication.
Companies may need to become international or global in order to compete
successfully, and this means having to establish operations in other countries of the
world, typically be setting up foreign subsidiaries. International groups need
management control, and computer networks and IS/IT systems help to provide
management with the information they require to apply suitable control to the
group.
1.6 A stage model of e-business
Companies that do not use the internet might start to develop their e-business in
stages. The following ‘stage model’ for the development of e-business might be
useful in helping the management of a company to understand their business
strategy – where it is and where it is hoping to get to. There are four broad stages of
development to a full e-business model.
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Stage Characteristics
1
Web
presence
The company sets up a website that it uses to display product
information and catalogues. There is nothing innovative in this
strategy, since most competitors will do the same or more on their
websites. Providing product information electronically is not
much more than the replacement of paper catalogues and
brochures.
2
E-commerce
The company uses its website to sell its products or services. (It
might also buy through the internet from some suppliers.) There
is no fundamental change in strategy: the company is simply
using its website to create an additional market place.
3
Integrated
e-commerce
The company now uses the internet to obtain more information
about its customers and their buying preferences. Attempts are
made to improve communications with customers, for example
by trying to establish two-way communication (‘dialogue’).
Selling on the internet is therefore linked to the analysis of
customer information, and the company uses the information to
identify ways in which value might be added to its products and
services.
4
E-business
If a company achieves this stage of e-business development, its e-
business has become closely integrated with its business strategy.
E-business might drive the business strategy, and determine the
strategic direction in which the business should be taken. E-
business is no longer an additional way of doing business: it is
fundamental to the company’s way of operating.
Example
In the UK, the Zara chain of fashion retail shops is an example of fully integrated e-
business.
This company produces and distributes new fashions within about six weeks. It
makes relatively small numbers of each garment so that inventory in shops changes
rapidly. This encourages shoppers to visit frequently to see what’s new, and it they
see something they like, they buy it there and then as it might not be in stock
tomorrow.
The design, manufacture and distribution of the goods depend fundamentally on e-
business, with fast information exchange and decision-making.
In traditional fashion retail businesses, by comparison, design and approval of new
fashion items is much slower, and new items are produced in large quantities in
order to keep down the unit costs.
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1.7 Barriers to e-business
Although many companies engage in some form of e-business, there are barriers to
setting up e-business activities and maintaining them so that they remain an
effective way of developing the business. The difficulties with e-business can
include the following.
Set-up costs. It can be fairly expensive for a small company to establish a
website for selling its products and taking payment by credit card or debit card.
For example, it will be expensive for a small company to set up a website
showing an online catalogue with photographs, keeping records of inventory
balances, and with the facility to debit customer credit cards.
Type of business. Some products and services are easier to sell on the internet
than others. For example, computer firms sell products very successfully over
the internet as their products can be perfectly specified in writing. However, it is
much more difficult to sell items of clothing. No matter how much detail about
clothing items is provided on the website or how many photographs are
provided, there are difficulties with selling goods ‘by catalogue’. Companies that
do sell clothing by internet have to budget for large amounts of sales returns.
On-going operating costs. A website has to be updated frequently, to keep it
interesting (and accurate), and it might be necessary to keep making special
offers to encourage customers to revisit the site.
Time to establish the system. It takes time to establish a website that customers
know about and want to visit.
No in-house skills. A company might not employee individuals with the
knowledge or skills to maintain a website. However, this should not be a serious
barrier to e-business, especially if the employer is prepared to give suitable
training to staff.
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The infrastructure required to support e-business
Layers of infrastructure
The internet
Intranets and extranets
Designing a website for e-commerce
2 The infrastructure required to support e-business
2.1 Layers of infrastructure
To operate e-business activities, a company needs to be able to communicate with its
customers or suppliers electronically, usually by the internet. The infrastructure
necessary to support e-business is a combination of computer hardware, software,
data files and communication networks.
Each website is located on a ‘host computer’ which gives it access to the internet.
System software requirements include a web browser and a database
management system, which are used to display and locate the information on
the website.
Content and customer information is held on data files.
The communication network is provided by the internet. In addition, many
companies operate their own intranet (or extranet).
Some companies use additional software applications, such as customer
relationship management software.
2.2 The internet
Most e-businesses use the internet. The internet is a network of computer networks.
To link to the internet you need the following.
An internet service provider (ISP), such as AOL, MSN and BTinternet. Users are
connected to the internet through their ISP, which provides e-mail facilities as
well as internet access.
A browser, such as Microsoft’s Internet Explorer.
A communication link such as ordinary telephone or ISDN. Increasingly users
are subscribing to broadband (ADSL or DSL), which provides very high
transmission speeds. Wireless technology is also increasing rapidly for
communication.
A modem to enable the computer to transmit over the communications link.
The World Wide Web (WWW) is a network of large internet computers (servers).
However the WWW is only one part of the internet, though the terms ‘World Wide
Web’ and ‘internet’ are often used interchangeably.
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A website is a presence on the internet. Each website is hosted on a computer which
has permanent access to the internet.
Each website has a unique address called a Uniform Resource Locator or URL
which allows other internet users to locate and access the information on the
website (for example, www.emilewoolfpublishing.com). Each URL has to be
registered as a domain name to ensure it is unique.
Websites designers can choose certain key words, meta tags, which summarise
or indicate what the site is about. Search engines, such as Google, can then
provide users with lists of relevant sites addresses by searching for relevant
meta tags.
The internet is based on client-server technology. Web browsers, such as Internet
Explorer, are the client applications. The server, which may be a distant computer,
holds e-mails and web pages.
Websites are usually arranged in a hierarchical pattern, starting with a home page.
The client requests information from the server, at first by specifying a URL. Once
the home page of the site is delivered to the user from the server, links on the page
can be clicked to access other pages on other sites.
Some web pages are static, always showing the same information, rather like a
printed sheet. Other web pages are dynamic, which means that they are updated in
real time. Current information for a database can be incorporated and shown on the
web page. For example, in a site which offers online ordering, it would be possible
to link to the inventory database to show up-to-date inventory balances. Linking to
a database is done through a piece of software called middleware.
All information flows for computers attached to the internet are two-way. If a
customer can access the internet, potentially the internet can access the customer’s
computer, mobile phone or television. Unauthorised access to a user’s computer
from the internet can be prevented by installing a piece of software called a firewall.
(Firewall hardware can also be installed, to improve the user’s security against
unauthorised access to his computer system from other internet users.)
Web browser
(client
software)
Regional
internet
company
Web server
Web server
Web server
Web server
Middleware
Database
Email
Web page
Web page