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Business Systems - Operations ManagementSession 7 Enterprise Resource Planning
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Business Systems Business Systems ––Operations ManagementOperations Management
Facilitator:Facilitator:Dr. Jonathan FarrellDr. Jonathan Farrell
Session 7 - Enterprise Resource Planning
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This EveningThis Evening’’s Programs Program
• Enterprise Resources Planning (ERP)• The origins of ERP (MRP, MRP II)• Case Study – Dalrymple Bay Coal Terminal (refer to the Folder
of Readings) • OPT (Optimised Production Technology) principles• ERP Systems (web-integrated ERP, supply chain ERP, the
Internet, etc.)
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Printing your Digital PhotosPrinting your Digital Photos
• What was the cheapest price?• What was the most expensive price?• What was the reason, if any, for variation?• Was there any perceived difference in quality?• What about “traditional” methods e.g.
– The local Chemist shop– A Photo print shop?– Mail order?
• What lessons can be learned?
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Pricing Pricing -- 4 x 6 prints4 x 6 prints
Chemist shop – 0.15 to 0.45
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0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
PhotoM
ax
Megap
ixels
Chemist
Shop
Austw
ide
Harvey
Norm
an
Snapfi
sh - U
S
FujiColo
ur
Michae
ls
Photol
ab
Print@
Kodak
Frogprin
t
Fotofast
Micros
oft/Kod
ak
The Edg
e
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Some DefinitionsSome Definitions
Supply Chain:Supply Chain: The linked set of resources and processes that begins with the sourcing of raw material and extends through the delivery of end items to the final customer. It includes vendors, manufacturing facilities, logistics providers, internal distribution centres, distributors, wholesalers and all other entities that lead up to final customer acceptance.
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Some Definitions (cont.)Some Definitions (cont.)
Supply Chain Management:Supply Chain Management: The coordinated set of techniques to plan and execute all steps in an organisation’s network used to acquire raw materials from vendors, transform them into finished goods, and deliver both goods and services to customers. It includes chain-wide information sharing, planning, resource synchronisation and performance measurements.
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Some Definitions (cont.)Some Definitions (cont.)
Logistics:Logistics: The linked set of resources used in moving and storing material at the required location and time, both external (vendors, customers, distribution centres and transportation providers) and internal (production, material movement and storage).
Value Chain:Value Chain: The linked set of activities within a supply chain that actively add value to the product or service
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The Value ChainThe Value Chain
Firm Infrastructure
Human Resource Management
Technology Development
Procurement
InboundLogistics Operations Outbound
LogisticsMarketing
& Sales Service
Primary Activities
Support Activities
Margin
Margin
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Measures of Supply Chain PerformanceMeasures of Supply Chain Performance
External:External: Customer SatisfactionCustomer Satisfaction
Supplier SatisfactionSupplier Satisfaction
Internal:Internal: Factory or Service Delivery System Factory or Service Delivery System EfficiencyEfficiency
Inventory LevelsInventory Levels
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Formulas for Measuring Formulas for Measuring SupplySupply--Chain PerformanceChain Performance
• One of the most commonly used measures in all of operations management is “Inventory Turnover”
• In situations where distribution inventory is dominant, “Weeks of Supply” is preferred and measures how many weeks’ worth of inventory is in the system at a particular time
valueinventory aggregateAverage
soldgoodsofCost turnoverInventory =
weeks52soldgoodsofCost
valueinventory aggregateAveragesupplyofWeeks ⎟⎟
⎠
⎞⎜⎜⎝
⎛=
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Example of Supply Chain PerformanceExample of Supply Chain Performance
An organisation announces their cost of goods sold for the year was $160m and their inventory is $35m. They normally have an inventory turnover ratio of 10. How does this year compare?
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Example of Measuring Example of Measuring Supply Chain Performance (Cont.)Supply Chain Performance (Cont.)
= $160/$35= 4.57
Since the company’s normal inventory turnover ration is 10, a drop to 4.57 means that the inventory is not turning over as quickly as it had in the past. Without knowing the industry average of turns for this company it is not possible to comment on how they are competitively doing in the industry, but they now have more inventory relative to their cost of goods sold than before.
= $160/$35= 4.57
Since the company’s normal inventory turnover ration is 10, a drop to 4.57 means that the inventory is not turning over as quickly as it had in the past. Without knowing the industry average of turns for this company it is not possible to comment on how they are competitively doing in the industry, but they now have more inventory relative to their cost of goods sold than before.
valueinventory aggregateAveragesoldgoodsofCost
turnoverInventory =
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Types of Supply ChainsTypes of Supply Chains
EfficientEfficient Designed to minimise costDesigned to minimise cost
Maintain high utilization of resourcesMaintain high utilization of resources
Minimize inventoryMinimize inventory
Suppliers chosen on costSuppliers chosen on cost
ResponsiveResponsive Designed to minimise lead timesDesigned to minimise lead times
Responsive to unpredictable demandResponsive to unpredictable demand
Excess capacity Excess capacity
High buffer stocks / modulesHigh buffer stocks / modules
Suppliers chosen on speed / flexibilitySuppliers chosen on speed / flexibility
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Matching the Supply Chain Matching the Supply Chain to the Product or Serviceto the Product or Service
Efficient Supply Efficient Supply ChainChain
Responsive Responsive Supply ChainSupply Chain
Functional ProductsFunctional Products Innovative ProductsInnovative Products
Mismatch
Mismatch Match
Match
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The meaning of MRPThe meaning of MRP
MRP
Deciding the volume and timing of materials flow in dependent demand conditions
Demand for products and services
The The operationoperation’’s s customerscustomers
Supply of products and services
The The operationoperation’’s s resourcesresources
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The Process of MRPThe Process of MRP
Explode the master production schedule.
Identify what parts and assemblies are required.
Check whether the required parts and assemblies are available.
For every part or assembly that is required, but not available, identify when work needs to be started for it to be made available by its due date
Generate the appropriate works and purchase orders.
Repeat the process for the next level of the bill of materials.
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Customer orders
Master production schedule
Forecast demand
Bill of materials
Inventory records
Purchase orders
Materials plans
Works orders
Material requirements
planning
Material Requirements Planning (MRP)Material Requirements Planning (MRP)
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Master Production Schedule (MPS)Master Production Schedule (MPS)
Forecast demand
R & D demand
Promotion requirements
etc.
Known orders
Master production schedule
Sister plant demand
Key capacity
constraints
Spares demand
Safety stock requirements
Inventory levels
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The concept ofThe concept of MRP IIMRP II
Marketing Finance
Design Operations
Central database
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ERP integrates the information that reconciles the organisation and supply of an operation’s products and
services with the demand for them
Operations resources Customer requirements
DemandSupplyThe informational ability to deliver
products/servicesThe operation The
market
Enterprise Resource PlanningEnterprise Resource Planning
Required time, quantity and quality
of products and services
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ERP ERP -- What is it?What is it?
– ERP is a generic term used to describe a comprehensive information system designed to integrate all the business processes found in an enterprise.
– Efficiency and productivity are improved through the integration of information and the removal of duplicate information and processes.
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The Development of ERPThe Development of ERP
Material Requirements
Planning (MRP)
Manufacturing Resource Planning (MRP II)
Enterprise Resource Planning (ERP)
Web-integrated Enterprise Resource Planning (Collaborative Commerce,
c-commerce)
Increasing integration of information systems
Incr
easi
ng im
pact
on
the
who
le s
uppl
y ne
twor
k
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Sales/Distribution and Manufacturing Sales/Distribution and Manufacturing Features of ERPFeatures of ERP
• Real-time Available to Promise & scheduling.• Multi-national and multi-site distribution• Integration with financial module• MRP or Kanban logic• Configurable BOM (by order)• Engineering change control (date oriented)• Backflush for raw and in-process stocking locations• Interactive planning function• Operations splitting and overlapping
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Managing Enterprise SystemsManaging Enterprise Systems
Customers Suppliers Managers and Stakeholders
Employees
Human resource
management applications
Reporting applications
Sales force and customer service
reps
Central
database
Service applications
Sales and delivery
applications
Back office administration and
workers
Financial applications
Manufacturing applications
Inventory and supply
applications
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Underpinning the Supply Chain with an Underpinning the Supply Chain with an Effective ArchitectureEffective Architecture
• Many organisations use a combination of ERP systems and best of breed technology.
• Given the scope of business functions within internal supply chains, and the need to integrate processes and provide visibility and across the extended supply network, the information technology requirements are extremely complex.
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Underpinning the Supply Chain with an Underpinning the Supply Chain with an Effective Architecture (cont.)Effective Architecture (cont.)
• The market for Collaboration tools is still relatively new, withmany immature products.
• No vendor alone is offering a complete solution • A combination of several tools and vendors provide the best
options at present.
• The first step is for any organisation is to “put its own house in order”.
• Streamline processes and technology across all of the supply chain functions, from sales to planning to manufacturing.
• Develop a clear vision across all the components of the Supply Chain Model and the relationships that are required to integrate all of the components
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Internal IntegrationInternal Integration
• Every organisation will continue to have functional, geographic and organisational silos in some form or fashion.
• However, there are different strategic imperatives and processes that are required across the supply network functions .
• The way that each organisational node interacts with the rest of the organisation, and the way that information is managed across the organisation needs to be optimised.
• The first step in this process is to ensure that the organisation has synchronised the internal IT Architecture.
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Internal Integration (cont.)Internal Integration (cont.)
• Historically, organisations have focused on data warehouses, integrated business reporting, and ERP implementations.
• Some organisations invested large amounts of money on complex ERP systems:
• In most instances the ERP implementations solved a number of problems, but focused predominately on the core transactional processes.
• The ERP implementations often included interfaces to legacy systems or best of breed solutions to provide additional functionality outside of the processes enabled within these coresystems.
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The Bullwhip Effect The Bullwhip Effect O
rder
Q
uan t
ity
Time
Retailer’s Orders
Ord
e r
Qua
n tity
Time
Wholesaler’s Orders
Ord
e r
Qua
n tity
Time
Manufacturer’s Orders
The magnification of variability in orders in the supply-chainThe magnification of variability in orders in the supply-chain
A lot of retailers each with little variability in their orders….
A lot of retailers each with little variability in their orders….
…can lead to greater variability for a fewer number of wholesalers, and…
…can lead to greater variability for a fewer number of wholesalers, and…
…can lead to even greater variability for a single manufacturer.
…can lead to even greater variability for a single manufacturer.
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Reducing the Bullwhip EffectReducing the Bullwhip Effect
1. Increase Operational Effectiveness1. Increase Operational Effectiveness
-- Reduce information flow times e.g. EDIReduce information flow times e.g. EDI
-- Reduce economies of scale (e.g. fixed costs of ordering)Reduce economies of scale (e.g. fixed costs of ordering)
-- Purchase in batches of 1 Purchase in batches of 1
2. Information Sharing2. Information Sharing
-- Share consumption information upstreamShare consumption information upstream
-- Share availability information downstreamShare availability information downstream
3. Channel Alignment3. Channel Alignment
-- CoCo--ordinate replenishment decisionsordinate replenishment decisions
-- Partnership Partnership See also pp 467 – 475 of Slack et al
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Case Study Case Study ––Dalrymple Bay Coal Terminal Dalrymple Bay Coal Terminal
(DBCT)(DBCT)
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Dalrymple Bay Coal Terminal Dalrymple Bay Coal Terminal ––Some QuestionsSome Questions
• What do you see are the challenges facing DBCT management in 1999 / 2000 (the timeframe of this case study)?
• What areas of opportunity can you identify for optimising DBCT’scoal supply chain?
• If you were the external consultant asked to “carry out a strategic review of DBCT’s IT”, what recommendations would you give?
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Where is DBCT Now?Where is DBCT Now?
• ERP system was implemented (JD Edwards Operations, Supply, Finance, HR, Payroll)
• Sophisticated Scheduling System (Minetrak from Comlabs) implemented – Planning, Production & Scheduling
• IT Infrastructure substantially upgraded (LAN 10Mb to 100Mb, VLAN installed, Pentium 4 Servers and desktops, etc.)
• Capital Works - Stage 6 of the Terminal completed in 2003 ($115m) – taking capacity to 55.5 mtpa
• First quarter of 2004 saw an unprecedented boom in demand for coal exports. Further expansion was undertaken taking capacity to 60 mtpa – more is needed.
• April 2005 – Approval given to increase capacity by 25% over the next 4 years
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Optimised Production Technology (OPT)Optimised Production Technology (OPT)-- GoldrattGoldratt’’s Theory of Constraintss Theory of Constraints
ConstraintsConstraints = anything that limits performance - the weakest links
ThroughputThroughput = the rate at which the system generates money through sales
Throughput speedThroughput speed = how long it takes the product to get through the manufacturing process
OPTIMUM PRODUCT MIX : focus on constraint(s)
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GoldrattGoldratt’’ss Theory of ConstraintsTheory of Constraints
• Bottlenecks govern both throughput and inventory in the system.
• Do not balance capacities, balance the flows.
Theory of Constraints:Theory of Constraints:• Identify the system constraints (bottlenecks).• Decide how to eliminate the system constraints.• Subordinate everything else to that decision.• Eliminate the system constraints.• Go back to Step 1.
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GoldrattGoldratt’’ss Rules of Production SchedulingRules of Production Scheduling
1. Balance material flow rather than the capacity
2. Utilisation of a non-bottleneck is not determined by its own resource, but by some other system constraint
3. Utilisation, and full employment of a resource, are not synonymous
4. An hour lost on a bottleneck resource, is an hour lost on all the system
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GoldrattGoldratt’’ss Rules of Production Scheduling Rules of Production Scheduling (cont.)(cont.)
5. An hour saved on a non-bottleneck resource is just a mirage
6. Bottlenecks govern both system throughput and inventory accumulation
7. Transfer batch need not be equal in size to process batch
8. Lot sizes should be variable, not fixed
9. Planning schedules should be established by considering all constraints of the system. Delays are often a function of the scheduling, and cannot necessarily always be predetermined
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CommentsComments
• 100% use of all resources?– not necessary; only for constraint!
• Averaging utilisation?– not an optimal solution: constraint sets the
pace.
• Performance measures as policy constraints
• The “Drum, Buffer, Rope” concept is used to explain the planning & control approach
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Information TechnologyInformation Technology
1. Information flows
2. Information intensity - how much do we need?
3. Information and competitive advantage - M Porter
4. Information and industry structure
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TaskF
TaskE
TaskD
TaskA
TaskB
TaskC
Rawmaterialsinventory
Work inprocess inventory
Finishedgoods
inventory
Control
InputsInputsOutputOutput
goods or service movementgoods or service movementInformation flowInformation flow
The Information Flow
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Information Intensity MatrixInformation Intensity Matrix
Information intensity of the value chain
Information content of the producthigh
low high
low
Oil refineryOil refinery BankingBanking
CementCement SoftwareSoftware
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ITIT’’s Relevance in the Value Chains Relevance in the Value Chain
• Inbound logistics• Operations• Outbound logistics• Marketing• Service
• Company infrastructure• Human resources• Systems & technology• Procurement
Primary activities
Support activities
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IT Creating Competitive AdvantageIT Creating Competitive Advantage
• Lowering costsProduct expenses e.g. inventory controlSales expenses e.g. e-commerce
• Enhancing differentiatione.g. customisation
• Changing competitive scopee.g. global co-ordination
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ITIT’’s Impact on Industry Structures Impact on Industry Structure
Suppliers
New entrants
Buyers
Substitutes
Industrycompetitors
Intensityof rivalry
Bargaining powerof suppliers
Bargaining powerof buyers
Threat ofnew entrants
Threat ofsubstitutes
M. PorterM. Porter
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ITIT’’s Impact on Industry Structures Impact on Industry Structure
• How does IT change the balance of power in supplier relationships?
• How does IT change the balance of power in customer relationships?
• How does IT impact on barriers to entry?
• How does IT impact on the rivalry within the industry?
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Electronic CommerceElectronic Commerce
Electronic Commerce:Electronic Commerce: ““The use of The use of computer applications communicating computer applications communicating over networks to allow buyers and sellers over networks to allow buyers and sellers to complete a transaction or part of a to complete a transaction or part of a transactiontransaction””
EE--Operations (eOperations (e--Ops):Ops): ““the application of the application of the Internet and its attendant technologies the Internet and its attendant technologies to the field of operations managementto the field of operations management””
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The InternetThe Internet
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The InternetThe Internet
0100200300400500600700800900
10001100
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
million users worldwide
Source:Source: Internet World Stats Internet World Stats -- http://http://www.internetworldstats.com/stats.htmwww.internetworldstats.com/stats.htm
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The Context of EThe Context of E--Ops Ops
Business ModelBusiness Model
“How do we make our money?”
OperationsOperations
“How do we manage production of the product or service?”
Information System ArchitectureInformation System Architecture
“The set of tools used to support processes.”
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WebWeb--Based Business ModelsBased Business Models
Three broad types:Three broad types:
1.1. InformationalInformational
2.2. ValueValue--AddingAdding
3.3. TransactionalTransactional
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WebWeb--BasedBased Business Models Business Models ––InformationalInformational
• The web site provides information about a topic, product or service
• No fees are charged• No restrictions are placed on access• Examples:
– vendors providing product / service information, – non-profit organisations, associations, community-
based groups, etc.
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WebWeb--Based Business Models Based Business Models ––ValueValue--AddingAdding
• The web site provides services / information which complements (adds value to) other products and / or services provided by the organisation
• This could include: – Parcel tracking by a courier– Order tracking– Membership information e.g. Qantas Frequent Flyer– Software / hardware support for an IT vendor– Access to news & related information– Keeping track of investment portfolio
• Access is usually restricted to paying customers
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WebWeb--Based Business Models Based Business Models ––TransactionalTransactional
• Products & services are offered for sale on the web page.
• They may be delivered by traditional means e.g. overnight delivery
• Or they could be delivered electronically e.g. software / information download
• Examples:– Qantas & Virgin – airline ticket purchase– Harvard Business Review Online – purchase
articles– Most Banks – banking transactions
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WebWeb--BasedBased Business ModelsBusiness Models
Model
Example
Marketplace
eBay
Aggregator
Amazon
Alliance
AOL
Value Chain
Dell Computers
Distributive Network
UPS
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shopfront(front-end engagement)
internal business processes
( silos?)
backendsystems / processes supply
chain
some IT systemsome IT system
B2B B2B trading trading
B2B B2B trading trading
website
or
is this….a bolt-on?how far back does it reach?
TTo o IIntegrate, or not?ntegrate, or not?
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•• Doing old things in new waysDoing old things in new ways•• Doing away with some old Doing away with some old
things altogetherthings altogether•• New routes to marketNew routes to market•• Entirely new marketsEntirely new markets•• Entirely new products and Entirely new products and
servicesservices•• Wider reachWider reach
•• Working smarterWorking smarter•• Better serviceBetter service•• Mass customisationMass customisation•• New aNew allianceslliances•• Shortening supply chainsShortening supply chains•• Going directGoing direct
ItIt’’s really about s really about rere--engineering engineering the the company to take advantage of a company to take advantage of a new new
technologytechnology
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Competitive advantage is the gap between cost and priceCompetitive advantage is the gap between cost and price
This gap can be influenced by:1. Operational effectiveness (focus on cost)
2. Strategic positioning (focus on distinctive competencies)
The Internet and Competitive The Internet and Competitive AdvantageAdvantage
Porter, Michael E.. (2001), Porter, Michael E.. (2001), ““Strategy and the InternetStrategy and the Internet””, , Harvard Business ReviewHarvard Business Review, 79(3), pp62, 79(3), pp62--7878
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The Internet The Internet –– A Strategic ViewA Strategic View
Positive:Positive: Enables reconfiguration of existing industries that have been constrained by high costs of communication, gathering information or making transactions, e.g. distance learning, catalogue retailers
Negative:Negative: Buyers power increased Reduced need for infrastructureReduced barriers to entryThe internet is an open system Easy to switch suppliers using the internetmore competition due to expanded geographic marketInternet strategies reduce variable costs, leading to price competition.Although sales can be expanded, it is at the expense of profite.g Car retailing
Porter, Michael E.. (2001), Porter, Michael E.. (2001), ““Strategy and the InternetStrategy and the Internet””, , Harvard Business ReviewHarvard Business Review, 79(3), pp63, 79(3), pp63--7878
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TThe he FFutureuture
• The Internet rarely nullifies sources of competitive advantage in an industry, e.g. unique products, proprietary content, superior service etc
• The Internet itself will be neutralised as a source of advantage
• Buyers will value a combination of on-line and personal services
• Procurement will be a combination of traditional channels for customised items and the web for commodities
Porter, Michael E.. (2001), Porter, Michael E.. (2001), ““Strategy and the InternetStrategy and the Internet””, , Harvard Business ReviewHarvard Business Review, 79(3), pp63, 79(3), pp63--7878
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The Future (cont.)The Future (cont.)
• Successful companies will find creative ways to combine traditional and web technologies
• The “new economy” is merely the “old economy” with access to new technology
• The established companies and dot-coms will progressively merge
• The fundamentals of competition remain the same
• Shift thinking from “e-business” to “business”