Bargaining Power Of Suppliers

This report serves a number of major purposes. First of all, it seeks to understand the development of Information Systems IS/ Information Technology IT theory. Secondly, it narrows the scope to enterprise value chain to evaluate the current practice in this area. Finally, it seeks to evaluate and analyze the future of the companies studied in relation to IS/ IT.

1.2 Definition of Key Concepts

The terms “e-business” and “e-commerce” are often used interchangeably but they do not mean the same thing. E-commerce means using IT to buy and sell goods and services. E-business is a broader term, covering not just goods and services exchanges, but also all forms of business conducted using electronic transmission of data and information.

E-business began when customers and suppliers recognized the advantages of exchanging documents such as purchase orders and invoices electronically, rather than through the postal service. This electronic data interchange EDI could speed ordering and fulfillment dramatically. The advent of the internet allowed businesses, organizations, and individuals to publish World Wide Web pages and communicate to broader audiences.

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At first, web pages were mirrors of paper documents. But as they increased in sophistication, users recognized that there were things that they could do with Web pages that were not possible with paper media. As internet usage and Web development evolved, managers learned to take advantage of the internet’s unique nature in many ways. For example, retailers realized changing the price of an item required a few key strokes on the internet versus reprinting promotional materials and price lists in an offline environment. The transparency of the internet, or the ability for mass instantaneous sharing of information also created an almost perfectly efficient marketplace for goods and services.

The next stage in the evolution of e-business was to distribute its use throughout an organization. This came in the form of intranets. Businesses created these internal internets to allow employees to communicate with one another and exchange information. Once enterprises mastered internal communication through their intranets, they turned outwards. The link to customers occurred early on. The rest of the supply chain linkage took place in the next stage of the evolution as businesses began expanding on their connection to suppliers, customers and distributors. These included adding supply chain management and customer relationship management functionality. Portals allowed customers and suppliers to link more closely with an enterprise.

The current state of e-business is really c-business where the “c” stands for collaborative. In c-business, the boundaries among enterprises become blurred. Businesses up and down the supply chain work together to achieve objectives that maximize profitability for all of them.

1.3 Overview of the Report

Section 1: Introduction

Objective of the report

Definition of key concepts

Overview of the report

Section 2: Review of Literature

2.1 Literature review

2.2 General theory

2.3 Research area

2.4 Rationale

2.5 Importance of research area

2.6 Example of e-business application

Section 3: Case Analysis

3.1 Case Study 1

3.2 Case Study 2

3.3 Case Study 3

Section 4: Evaluation of the Cases

4.1 Comparison

4.2 Recommendation

Section 5

Executive Summary

SECTION 2: REVIEW OF LITERATURE

2.1 Literature Review

IT/ IS has been used by companies for over forty years. Initially, their usage was primitive by today’s standards, but over time, improvements in computer technology have rendered IS/ IT to be an integral part of the business. Yet, the study of IS/ IT in relation to management is a somewhat recent discipline.

Initial research on IT/ IS tended to be more descriptive than empirical since the basic models that are currently used were not yet formulated. These research papers also tended to be overly optimistic about the future of IT/ IS in terms of the benefits they bring to business enterprises. Later on, research in the area took on a more balanced tone as the limitations of IS/ IT were also highlighted. It has also during this time than various strategic management models were incorporated into the framework for IS/ IT.

2.2 General Theory

Now let us examine three theories that relate to e-business.

2.2.1 Porter’s Five Forces

According to Michael Porter (1990), an industry is influenced by five major forces and he developed this idea into a comprehensive model. Termed the Five Forces Model, it has greatly influenced strategic management thinking for the past two decades. These five forces are the bargaining power of buyers, the bargaining power of suppliers, the new entrants, the threat of substitutes, and rivalry.

Bargaining Power of Buyers

The bargaining power of buyers refers to the influence consumers have on an industry. Generally, if consumers have very high bargaining power, there are many suppliers competing for a very limited number of buyers (Porter, 1990). As a result, it is the buyer who will dictate the price of goods and services. Buyers have greater power when there are few of them and they command a significant market share, or when they purchase a sizeable proportion of the goods produced in an industry (David, 2009). Also, buyers are powerful when they can threaten to buy products from rival firms. This is called backward integration (Griffin, 2001). On the other hand, buyers are weak if manufacturers threaten forward integration in which the manufacturers take over the distribution and retailing channels (Eitman et al, 2007). Buyers are also in a weak position if there is great difficulty in switching to alternative products and switching costs are high.

Bargaining Power of Suppliers

The second force is the bargaining power of suppliers (Porter, 1990). All companies that manufacture goods need to obtain raw materials from external parties or suppliers. Hence, it is imperative that companies establish good relationships with their suppliers so as to get favourable prices and a steady supply of raw material. Yet, the supplier-manufacturer relationship is rarely one of equals (Griffin, 2001). Normally, one party has the upper hand. Suppliers have greater bargaining power if there are few of them so they can dictate terms to the customers who are at their mercy (David, 2009).

Threat of New Entrants

The third force is the threat of new entrants (Porter, 1990). New entrants to a market can seriously affect the market share of existing members and this is a constant source of anxiety for companies. In an ideal free market system, a company can enter and exit a market with the greatest ease and that profits will be nominal. However, in the real world, there are numerous barriers to entry, some of which are the result of economics, while others are the outcome of government intervention (Rugman and Hodgetts, 1995).

Threat of Substitutes

The fourth is the threat of substitutes, which refers to products in other industries (Porter, 1990). If the costs of the products in a particular industry are too high, customers might switch to products in other industries. Price is not the only variable but changes in technology have the potential to make users flock to rivals (David, 2009).

Rivalry Among Firms

The final force in Porter’s framework is rivalry among firms (Porter, 1990). Rivalry is very high when there are a large number of firms in a saturated market, high fixed costs, high storage costs and low switching costs (Barney, 2007).

According to Porter, an enterprise can adopt one of four strategies to deal with the five forces in its industry. They are cost leadership, differentiation, cost focus and focused differentiation. IT can assist a firm in achieving these strategies. For example, to attain low cost, the company can adopt production engineering systems whereas to achieve differentiation, it can use computer aided design.

2.2.2 Value Chain

The value chain is defined as a sequence of activities that should contribute more to the ultimate value of the product than to its costs. Products produced by an organization rely on different activities of the organization and use different resources along the value chain depending on their specifications. Essentially, all products flow through the value chain, which begins with research, development and engineering and then moves through manufacturing and continues on to customers.

The company’s value chain is used to identify opportunities that give competitive advantage. Basically, there are two broad categories of a firm’s activities. They are primary activities, consisting of the creation, marketing and delivery of products and support activities which provide support for primary activities. IT is used to transform the way value activities are conducted and to improve linkages throughout the value chain to give the company greater flexibility. According to Porter and Miller 1985, IT plays a strategic role in an industry that has high information intensity in the product and value chain itself.

2.2.3 Scott Morton’s Model

Morton improvises and refines Porter’s model. Morton asserts that the five forces that influence an organization’s objectives are its structure, management processes, individuals and roles, technology and strategy. These in turn contribute to five levels of IT-induced reconfiguration. At the lower degree of business transformation, they are termed evolutionary levels. At the lowest level, there is localized exploitation in which the main objectives are domestic effectiveness and efficiency. At level two, there is internal integration between different applications and systems. Cooperation and coordination enhance efficiency and effectiveness here. At a higher degree of business transformation, they are termed revolutionary levels. Level three involves business process redesign which consists of a rigorous change in the company value chain. Level four concerns business network redesign for the reconfiguration of the tasks and scopes of the enterprise network involved in the creation and delivery of products and services. The final and highest level is business scope redefinition in which there is a migration of functions across the company’s borders that ultimately change the very nature of the business.

2.3 Research Area

This paper focuses on the enterprise value chain of three very different companies. They are Tupperware, Toyota and Facebook.

2.4 Rationale

The rationale for the selection of these three companies is to explain how e-business is applied to different industries. Tupperware is a well known manufacturer of high quality plastic containers, Toyota is the world’s largest car maker and Facebook is the biggest online social network site on earth. They are all very different businesses, yet they share one thing in common – the usage of e-business in their value chain. The degree of success each business experiences through e-business vis-à-vis their value chain will be discussed in the analysis section.

2.5 Importance of Research Area

E-business has become an integral part of the modern corporation and is a means of achieving competitive advantage. Besides that, it also creates opportunities for many third party services. For these reasons, it is vital to critically examine what exactly e-business can do for an enterprise. To demonstrate, the following SWOT analysis is done:

2.5.1 Strengths

Around the clock business operation

Convenient, fast and effective

Global outreach

Lower operation cost

Lower initial investment

2.5.2 Weaknesses

No direct interaction between buyer and seller

Low customer penetration

2.5.3 Opportunities

The number of people using the internet is increasing daily

Over time, people will grow accustomed to doing transactions online

2.5.4 Threats

Considerable risks such as privacy issues, security concerns, transaction processing and business policy issues.

2.6 Examples of e-business Applications

There are many examples of e-business applications, the most common being EDI which is the computer-to-computer exchange of business documents. Another example is in collaborative commerce. For example, airlines have partnered to create Orbitz, an online travel service that searches the partner airline database for flights. The site also allows users to purchase hotel rooms, rent cars and other services.

SECTION 3: CASE ANALYSIS

3.1 Case Study 1: Tupperware

Tupperware is a multi-billion dollar United States based manufacturer of plastic food storage containers that has a presence in over 100 countries worldwide. Recently, the company altered its distribution model to a multilevel compensation structure. This inevitably increased the volume of paperwork faced by multilevel sales consultants who found less time to do actual sales. In addition, the order entry system was insufficient to cope with peak sales demands.

To overcome these problems, the company implemented MyTupperware which is a web-based order management system. The first problem was solved because the task of entering orders was shifted from distributors to sales consultants. The second problem was solved because the integrated and streamlined communications between the relevant parties and provided better support in the promotion and sales of products.

3.2 Case Study 2: Toyota

From its humble beginnings in Japan, Toyota Motors emerged as the world’s largest and most profitable car maker in April 2007. It accomplished this major feat through unparalleled excellence in its production process, and indeed throughout its entire value chain.

Central to this success was the Toyota Production System TPS. Initially, Toyota faced the same problems as other automobile makers including slow product design time, uneven quality of production, wastage and obsolescence. These factors hampered the company’s ability to achieve competitive advantage.

Consequently, Toyota critically examined its strengths weaknesses, though not in the way Western companies do. Toyota adopted the Japanese approach of kaizen, which is a philosophy of continuous improvement by eliminating wastage. By harnessing the power of IS/ IT in its e-business, the company created the TPS as a means to achieve competitive advantage. Consequently, the company achieved tremendous success and its manufacturing process was deemed the ‘gold standard’ in quality manufacturing at low cost.

Unfortunately, this was not to last. In the last two years, Toyota suffered its worst catastrophe in years. Cars produced by its U.S. plant suffered from faulty brakes and there were defects in cars produced by other plants. Consequently, the company made a massive recall, which seriously eroded the reputation of the company. Perhaps the company overextended itself or was lulled into a false sense of complacency. Regardless, the much vaunted TPS has come under scrutiny as people question how a system that was deemed close to perfection could cause such egregious errors. It remains to be seen how Toyota will remedy the situation.

3.3 Case Study 3: Facebook

By now, the story of Facebook’s founding is well known, thanks to a number of books and the Hollywood movie “The Social Network”. A Harvard student named Mark Zuckerberg founded the site in 2004 as an online social network for Harvard students before establishing it as a company. Though there are other online social network sites, the secret to Facebook’s success lies not just in the features it provides, but the clear user interface which makes it appealing and easy to use. From its humble origins, Facebook has now over 500 million users and has been valued at US50 billion.

While the company is phenomenally successful, it is constantly plagued by issues concerning its privacy. Since Facebook’s business model is such that it does not charge users for the services it provides, its source of revenue comes from advertising and data mining. This has led to repeated concerns about the violation of users’ privacy by selling their personal information to advertising companies who publicly share such private information. In addition, there are concerns that users’ private information is accessible to the public with very dangerous consequences like identity theft.

One major error that Facebook made was its Beacon advertising service which informed users when their friends made purchases and were involved in other activities outside of Facebook. Users did not agree to share this information and this caused a public backlash and the company had to rescind the service.

Similarly, when Facebook launched its news feed feature, users baulked at the infringement of privacy. They did not want Facebook to post updates whenever they updated their profile, added friends or changed their settings. However, Zuckerberg addressed this problem much better by making a public apology and explaining the merits of this system. While some users were still resistant, the explanation won over many and today, the news feed is one of Facebook’s most popular services and is emulated by other online social network sites.

A third problem Facebook has is the handling of users’ personal information when they want to delete their profiles. Unlike other network sites, Facebook made it almost impossible for users to delete their accounts and copies of their personal information were stored indefinitely. This caused a backlash and Facebook has since made it much easier for users to delete their accounts.

SECTION 4: EVALUATION OF CASES

Case

Security

Ease of using site

Transparency

Effectiveness of e-business

Case 1

High

Average

Low

Highly effective

Case 2

High

Average

Moderate

Highly effective

Case 3

Moderate

Easy

High

Highly effective

4.1 Comparison

Overall, it appears that of the three, Facebook has been the most successful in applying e-business since its entire business model is based on it. The other two are examples of traditional firms that employ e-business to improve their value chain. Tupperware uses the least extensive form of e-business as it is confined to its sales and after sales services rather than the manufacturing process. Toyota uses e-business extensively throughout its value chain as can be seen in the TPS. However, recent developments indicate that its e-business application may not be as successful as was previously thought. Hence, Facebook is the most successful of the three in harnessing e-business to gain competitive advantage though it must be reminded here that the company still struggles with some security issues.

4.2 Recommendation

It is recommended that Tupperware uses e-business more extensively throughout its value chain to include the planning and design and manufacturing process. Toyota should reevaluate its TPS to identify weaknesses in the current system and improve them. Facebook on the other hand should use e-business to gather more feedback from its customers about its services, particularly privacy issues and take them seriously.