A company can decide to make a product or service by performing all of some of activities internally or buy a product or service by choosing to purchase needed products and services on the open market. (Jelassi and Enders, 2008 [p. 173])
Using any one of the five decision options identified by Jelassi and Enders companies can pursue their business strategy on a buy or make basis. The choices presented are: marketing transactions, long-term contracts, alliances, parent/subsidiary constellations and internal production. (p. 173)
Each is defined and discussed further below.
Market transactions are straight forward contract purchases from another business provider e.g. Company A buys raw materials, products or services from Company B.
Long-term contracts are contract purchases from another business provider over a longer agreed upon time e.g. Company A buys raw materials or services from Company B for the next three years. This may include discounted pricing for such items as products, materials, services or shipping.
Alliances tend to combine the strengths and business specialties of two or more businesses to produce products or provide services. Business alliances infer that the are generally long-term in nature. The scope of business alliances can cover broad spectrum of reasons and business strategies. Alliances may be formed for specific reasons such as enhancing research and development, marketing, logistics or product development. A full joint venture is another option. (Towards a Theory of Business Alliance Formation, Sheth, Jagdish N. and Parvatiyar, Atul, E, Business Alliance Formation, Emory University, 1993 p. 71 Retrieved October 30, 2010, www.parvatiyar.net/articles/jour8.pdf)
Parent/subsidiary constellations establishes one or more new companies that operate independently, but reports to and/or is controlled by the parent company. This structure may be wholly owned subsidiary where the parent company owns 100% of the company or joint venture and retains all rights and obligations. (Hill, Charles and Jones, Gareth, Strategic Management Theory: An Integrated Approach, (9th Ed) Cengage Learning, Florence, KY, p. 300)
Internal production is a business format that produces products and services "completely internally, without any outsourcing to external providers." Jelassi and Enders cite Proctor and Gamble and Nestle are two examples of companies that manage production, R&D, marketing and distribution in-house. (p. 175)
Companies that manage in-house or "make" their products or services need to consider the pros and cons of doing so. Jelassi and Enders identified three reasons to "make" products or services and four reasons to "buy" products and services that should be consider in developing an e-business strategy.
There are three key considerations a company needs to take into account when deciding to "make" a product or service in-house.
Confidentiality is critical to most businesses. Keeping business information about research, finances, strategy and processes confidential is important to business success. By "making" products or services, a company exerts more control over critical business information that can keep this information out of the public domain or competitor's hands. (p. 175)
Strong linkage between activities (p. 175) By making products or services in-house, companies can maintain quality control by managing processes and inputs along the value chain which can help lower costs and/or more customer benefit.
High transactions costs (p. 176) Companies must determine the cost transaction cost of working out outside suppliers in order to determine if making a product in-house is more profitable than buying the product or service. This creates a need to managing transactions costs with external sellers who are looking to sell at the maximum level. Companies must also learn more about their supplier(s) to ensure that they are legitimate business partners a process Jelassi and Enders call information asymmetry. (p. 175) Suppliers can be researched online, through references (online or traditional) and rating companies.
Reasons companies should consider for utilizing a "buy" strategy include: High economies of scale, high capital requirements, specialized know-how and higher efficiency of the open market.
High economies of scale: Buying products or services from companies that produce on a large scale can help a company take advantage of lower prices achieved by the producing company's economies of scale. Internet-based cloud computing is a good example of how a company can take advantage of economies of scale buying services and storage rather than investing in hardware and software that would have to be maintained and upgraded as in-house systems aged or broke down or as new technologies came to market. (Cloud Computing, Strickland, Jonathan, How Stuff Works, Retrieved October 29, 2010, http://communication.howstuffworks.com/cloud-computing.htm)
High capital requirements: If the production of key parts or the need for specific machinery requires large expenses in plant and equipment, companies can benefit from using an external supplier. The automotive industry uses multiple suppliers to provide key parts for the manufacturing of various lines of automobiles. These suppliers specialize in specific parts that are sold to the automobile manufacturers for specific car models or as generic parts used in all makes and models. This system allows the car manufacturer to reduce the capital costs while obtaining a lower price through a long-term contract or business alliance. Rubber is a good example of a specific component needed by the automobile manufacturers that is produced by an outside vendor. Car companies do not try to make tires using their own plant and equipment. Instead, they purchase tires from manufacturers. Because 75% of rubber is used to manufacture tires (Rubber Tires, B2B Trading Zone, Retrieved October 30, 30, 2010, http://www.industrialrubbergoods.com/rubber-tire.html), dozens of tire companies compete for the car companies' business.
Specialized know-how purchased from other companies can help a business in areas where that expertise is most needed and where it provides a greater value than developing an in-house expertise or capability for the same service or product.
New businesses can benefit at the organizational, production and delivery levels by contracting for services or products in which they are not expert. Online human resource management (HRM) providers are an example of business services companies need in order to provide payroll, benefits and legal compliance at the local, state and federal levels for businesses. Online HRM providers offer services a la carte so companies can take care of one task such as staffing, payroll, or provide a complete suite of HRM services and benefits for employees. These services often offer customized "my page" for each employee, track taxes and provide data needed for companies to file tax returns or meet other legal requirements. (Human Resource Management and Talent Management, McNamara, Carter, PhD, Authenticity Consulting, LLC, http://managementhelp.org/hr_mgmnt/hr_mgmnt.htm)
Higher efficiency of the open market allows a business to take advantage of other companies that have achieved a great level of efficiency in manufacturing goods or providing services. These companies have become efficient as a response to competitive pressures and the goal to continue adding value for their customers or potential customers, all of which contributes to lower costs. For many businesses performing the same or similar services or making parts or products internally would not be as cost effective as purchasing from an outside vendor.
Salesforce.com is a customer relationship management (CRM) software program offered under the cloud computing business model. Salesforce.com is designed to help businesses track sales and customer relationships using a powerful relational database connected to a data warehouse that allows businesses to track leads, sales and sales peoples activities in a manner all geared toward successfully managing customer relationships in a low-cost and efficient manner. (The 10 Best Customer Relationship Management (CRM) Tools, Bram,Thursday, SmartLife.com, August 3, 2009, Retrieved October 30, http://smartlifeblog.com/the-10-best-customer-relationship-management-crm-tools/)
Formulate your opinions on why a company should consider deconstructing its value chain over the Internet.
Deconstruction is justified if it adds to the value provided customers and/or creates more profits. It should lower costs, create value and increase a company's competitive advantage. This is achieved by focusing a company on individual parts of the value chain that can be exploited to create large scale advantages that increase its competitive advantage. Parts of the value chain that do not exploit competitive advantage can be outsources. (p. 184)
The Internet has provided businesses the opportunity to obtain a more transparent view of the value chain because it is easier to reveal or exposes activities or procedures that are not providing value or sufficient value. Companies should analyze their value chain and consider deconstructing it over the Internet only if they can identify the parts of the value chain that can be improved or exploited in a way that creates a competitive advantage.
Jelassi and Enders (2008) distinguish the economics of producing physical goods (things or stuff) from the economics of producing information (digital goods). (p. 183) The authors note that information can easily be create, distributed and multiplied at a very low cost while physical goods (stuff) carries a high-cost of distribution, is difficult to move and requires larger amounts of physical space.
Property management in the commercial real estate market is an example where a physical good, a structure or space, being sold requires a number of services along the value chain including: development, mortgage brokerage, investment management, real estate brokerage, property management and construction management.
The most dominate companies in the U.S. property market are full-service firms that provide all of the services mentioned above. These full-service real estate firms provide services to corporate clients and are very involved with almost all of their corporate clients' real estate decisions.
These full-service firms serve corporate clients that occupy large amounts of building space but are highly outsourced in terms of real estate, doing virtually nothing real estate-oriented in house. The greatest leverage in the value chain is found in a) companies that own and operate real estate, and b) firms that either invest in them or manage property for them.(An Analysis of U.S. Real Estate Value Chain with Environmental Metrics, Lowe, Marcy and Geriffi, Gary, Duke University, Center on Globalization, Governance and Competitiveness, April 22, 2008, Retrieved from http://www.cggc.duke.edu/pdfs/RealEstate/CGGC_EDFRealEstateFinalReport_04-22-08.pdf p. 16)
The theory of deconstructing the value chain or unbundling it does come with limitations. Jelassi and Enders noted that if parts of the value chain which provide competitive advantages are compromised to the point of creating an opportunity for competitors, then businesses would be risking market differentiation and increased price competition. (p.185)
Businesses may also have to evolve into or reintegrate processes or services they had eliminated in previous value chain strategies as the impact on business is determined. Tesco, which originally accepted phone, fax and Internet orders in its tesco.com business model. However phone and fax orders became laborious and often were inaccurate so Tesco automated its delivery service and established the Internet as its only ordering channel. Tesco also expanded the original in-store picking model to include fulfillment hubs and warehouses for tesco.com stores only. (p. 304-505)
Ultimately, I think the decision to deconstruct the value chain is a business decision that should be decided by the value created for the customer and increases in profit. In most cases, the opportunity should be analyzed to see if it is a worthwhile opportunity. IT services are almost always strong candidates for outsourcing based on the ability to find IT specialists who can handle more corporate computer needs.
Explain the online/offline channel conflict matrix and illustrate it through specific examples.
Businesses must have a global perspective of the traditional or current sales channels that includes an analysis of what customers are being served by each channel. This information will help determine what the potential impact of an expansion into online channel distribution would have on current sales and potential sales.
The business may find out that there is not a channel conflict, instead, expanding to an online channel could draw new customers to its product offering.
Jelassi and Enders offer an analytical tool to help identify channel conflicts and to help determine how to deal with these conflicts. (p.190)
A four part channel conflict matrix looks at four channels: traditional retailer, mail order, Internet and other.
The level of risk of channel conflict is measured as high and low on the y axis of the grid. High and low measurement is used on the x axis of the grid to determine relative importance of the threatened channel.
Each quadrant provides direction to the business analysts:
Quadrant 1 with its High/High rating for both risk of conflict and the importance of the threatened channel so the best course of action for the business would be to address this channel conflict.
In a study on channel market conflicts, Bengtsson (2007) reviewed the Jelassi and Enders channel marketing conflict matrix and offered a series of possible solutions for resolving channel conflicts that need to be addressed based on their high/high rating in quadrant 1.
Channel conflicts can be resolved or avoided in the number of ways. Coughlan (2006) offers eleven ways to resolve channel conflicts.
Do not offer a lower price on the suppliers site than the customer can find on channel partner sites.
Divert the fulfillment of website sales to channel partners
Provide information about products and services but do not take orders.
Encourage channel partner's to advertise on supplier's website.
Use the suppliers website to promote channel partners
Limit the online offering to a subset of products not a full line.
Use a unique brand name for products sold on the web site.
Offer products on the website that are in their early life cycle.
Communicate the firm's website distribution strategy to internal and external audiences so constituents can see the role the website is expected to play.
Work to coordinate the elements of the web distribution strategy - payments, fulfillment, rules of engagement, roles and responsibilities.
Appeal to the subordinate roles of meeting the customer's needs with the best service possible. (Channel based conflicts when adding an Internet based channel in an existing marketing channel system, Bengtsson, David (2007) Lulea University of Technology, Retrieved October 29, 2010, http://epubl.ltu.se/1402-1617/2007/237/LTU-EX-07237-SE.pdf p. 17)
In 2008, IBM issued a seven page corporate guideline on how channel conflicts would be handled with IBM as the ultimate arbiter of any conflict.
In support of the IBM Business Partner Charter, these Principles of Engagement describe how the IBM Systems and Technology Group (STG) Sales Teams and IBM Business Partners should work together in the United States. The objective of this document is to enhance the IBM STG/Business Partner relationship by promoting an environment of trust and understanding, and to create a foundation for IBM Business Partners to team with IBM STG sales teams, particularly in the Business Systems (Large Enterprise (LE), Mid-Market (MM), and Competitive) segments where IBM is committed to lead with IBM Business Partners to drive mutual growth. (Principles of Engagement: IBM and IBM Business Partners, Working Together for Mutual Success, IBM System x, 2008, SearchITChannels.com, Retrieved, October 30, 2010, http://searchitchannel.techtarget.com/news/article/0,289142,sid96_gci1326455_mem1,00.html)
IBM's principles of engagement follow Jelassi and Enders (2007) suggestion that Quadrant 1 issues be addressed (high risk and high important of threatened channel) to avoid channel conflict.
IBM's approach was to spell out what happens when midmarket deals go through channel partners and when they go direct. About 100 named accounts will go through IBM and the rest will be for partners, although there are several exceptions that aren't always clearly spelled out. (IBM 2008 pp. 1-7)
Compare the advantages and drawbacks of e-purchasing systems.
There are three electronic business-to-business (B2B) markets where companies buy and sell products and services (Jelassi and Enders 2008 [p.195].
Industrial markets sell raw materials needed to produce products. Major industries in this space include: agriculture, manufacturing, construction and energy (electricity, coal, natural gas and alternative sources).
Reseller markets where buyers are middle men, who purchase products or services to market and sell them.
Government markets are where procurement officers from government agencies or the Department of Defense buy goods and services needed to run government agencies or equip the U.S. military. (p. 195)
Sellers in B2B ecommerce markets need to understand 1) who is buying their products or services, 2) what type of purchases and 3) size is the purchase and how much information is needed to make the purchasing decision. (p. 195-196)
The government B2B provides a good example of the players in this space because who is buying, what of purchases and how much information regulated under the Federal Acquisition Regulations (FAR), a system that provides significant transparency for the contracting process. Purchasing by contract is controlled by one of two types of authorized purchasers, procurement or contracting officer. Smaller purchases can be handled by a government employee given and authorized government credit card/purchasing card. (Contracting Methods, How Government Contracting Works, SBA.gov, Retrieved on October 31, 2010, http://www.sba.gov/contractingopportunities/owners/basics/govtbuys/index.html)
There are two ways to get government contracts. 1) Central Contractor Registration (CCR) a database that Federal agencies use to learn about prospective vendors. Agencies can search for companies based on any number of factors, including abilities, size, location, experience, and ownership. 2) Sellers can identify federal contracting opportunities through online sites like FedBizOpps.gov. Federal agencies use this site to communicate their buying requirements to potential suppliers. (https://www.fbo.gov/)
Whether a business is looking to utilize online procurement in any of the three market spaces, the most frequently cited advantages for doing so include:
1) Higher transparency - Internet-based procurement affords buyers the opportunity to easily do research on and obtain access to information about products and producers, and track and trace the supply chain.
2) Reduce risk of maverick spend. Monitoring of purchases through a dedicated online system helps reduce spending outside of contractual agreements or company policies. Again, the Internet brings transparency and greater business controls.
3) Price reductions through online negotiations. This can include online auctions or discounters. In the federal space http://www.fedbid.com/ is a reverse auction site that works with vendors wanting to sell to the federal government.
4) Process optimization. The procurement process is faster and more accurate when manual transactions are eliminated by fully automated online procurement systems like www.fedbizops.gov. (p.196)
Technology combined with the Internet also brings changes that can lead to disadvantages for an organization pursuing an online procurement strategy. Jelassi and Enders identified three common disadvantages:
Organization risk: When procurement becomes decentralized, procurement departments may lose some of their importance or increase its workload monitoring purchases from a large number of authorized purchasers.
The University of Virginia uses a decentralized procurement structure. Procurement Services has oversight of all Purchasing Units authorized to buy goods and services. Procurement Services sets buying limits and conditions, and oversees purchases when conditions are not met. This has created the need for strict definitions and responsibilities for authorized purchasers in each of the 300 departments that have purchasing authority. (Decentralized Procurement, Purchasing Units and Delivery Locations, University of Virginia, January 6, 2009, Retrieved on October 31, 2010, http://www.procurement.virginia.edu/pagepuc_dlc)
Technology risk: This risk involves the implantation of an e-procurement system because of the commitment to a specific technology and the risk of the site going out of business. eProcurement software companies tout the return on investment they provide to companies and the growing demand for eprocurement systems as a way to mitigate a business' risk. eProcurement is also offered as SAAS (software as a service), which can help reduce a company's investment and risk. (http://www.eprocurementsoftware.org/)
Supplier resistance: Transparency is not always a good thing for suppliers who are able to manage different pricing and service schemes with various clients. eProcurement could also impact distribution and labor agreements.
Author Thomas Friedman in his book "The World is Flat" noted how technology is one of the factors that is evening the playing field and creating a "flat" world where nations are becoming more specialized in their manufacturing base and service bases. (Competing supply chains are the future, Financial Times, p. 197) Friedman noted that easy access to the Asian market is another factor that is creating today's "flat" world.
Li & Fung a 100 year old Chinese sourcing company is a good example of today's flat world. The company began in 1906. In the 1980's it was participating in a flat world, although this concept did not have a name at that time. By 2006, Li & Fung had become the world's largest sourcing company accounting for USD 8 billion in garments and consumer goods for some of the best known brands in the world, yet it doesn't own a single factor. (Competing flat out, Competing in a flat world: building enterprises for a borderless world, Victor Kwok-King Fung, William Fung, Yoram Wind, Wharton School of Publishing - Pearson Education, 2008, p.xix)
Give the trade-offs that companies need to make when choosing between different types of e-procurement solutions.
Because e-procurement systems cover various elements of the supply chain, companies are forced to make trade-offs in choosing a system or go all in with an integrated e-procurement system or ERP system.
Legacy e-business systems can be integrated with new technologies or a new system could be built or acquired that could completely integrate all supply chain functions. New systems are expensive and can have a corporate impact requiring additional employee training and buy-in. (p. 203)
Six different systems are introduced by Jelassi and Enders (2008) but only the integrated e-procurement system addresses all of five parts of the supply chain. (p. 202)
Stock control system
CD/Web-based catalogue
Email or database-based workflow system
Order entry on website
Accounting systems
Integrated e-procurement system (p. 202)
The major trade offs for these systems include: cost and business need. Using an e-procurement system that does not cover all elements of the supply chain which is the case for 5 out of 6 of the e-procurement systems listed above, means trade-offs in efficiency and costs that could impact a company's overall business strategy.
