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07
Feb 12

The Real Cost of Outsourcing

 

INTRODUCTION

When it comes to the figures of investing in outsourcing, statistics can give you an overall cost of official bills. Actually, you would be surprised to find out that the final sum up will leave your budget short with almost 65% more than estimated. This is an estimated figure according to our calculations revealed in this white paper.

For quite some time, there had been claims from offshore vendors that IT work that would cost $100 an hour in the United States can be done for $20 an hour in India or China. If those figures sound too good to be true, that’s because they are.

The real thing is: no one saves 80% by shipping IT work to another country. In order to find out the hidden costs of outsourcing, you should pay attention to all the figures highlighted on the following pages.

TABLE OF CONTENTS

Introduction

Cost of Selecting the Vendor

Cost of Transition Cost of Managing an Offshore Contract

Let’s sum it up

Conclusion

Introduction

In this white paper, we will explore the total cost of outsourcing by uncovering the hidden figures that boost up your bill. There are areas where you will have to invest more than you thought in the beginning, issues where things like poor processes and productivity can eat away potential savings, and places where you can end up spending just as much as you would without outsourcing.

The Cost of Selecting a Vendor (1-10%)

With any outsourced service, the expense of selecting a service provider can vary from 0.2 % to 2 % in addition to the annual cost of the deal. These selection costs include documenting requirements, sending out RFPs and evaluating the responses, and negotiating a contract. A project leader may be working full time on this, with others chipping in, and all of this represents an opportunity cost. There are also thelegal fees. Some companies hire an outsourcing adviser for about the same cost as doing it themselves. To top it off, the entire process can take from six months to a year, depending on the nature of the relationship.

Even when there is an existing tie between the customer and offshore vendors, the expensive and lengthy step of vendor selection is a must-do for successful outsourcing.

At this stage, travel expenses enter the picture as well. A trip overseas helps CIOs get comfortable with their choice.

Estimation: Expect to spend an additional 1 to 10 % on vendor selection and initial travel costs.

Choose the best sourcing model

According to a study released by Gartner, many CIOs are still focused on short-term savings rather than longterm business success when establishing outsourcing relationships – and that it’s costing them in the long run.

Cost of Selecting the Vendor

· Putting together the RFQ/RFP

· Distributing the RFQ/RFP and

collecting the feedback

· Analyzing and short listing

· Due Diligence

· Management Sponsorship

· Decision to Outsource

In order to address these issues, the organization must know that they can choose from among eight basic sourcing models to best exploit established or future capacity, whether the organization gets its services from internal staff, external staff or through a partnership. You must take each of the following models into account before rushing to choose one vendor or another, or even before taking the decision to outsource.

8 SOURCING MODELS

o Internal delivery: The current status of most organizations’ IT or process operations

o Shared service or captive center: A centralized – onshore or offshore – service organization delivering IT services or business processes for an organization, also known as an “insourcing” organization

o Full outsourcing: A single contract with one provider for the full scope of services

o Joint venture: A separate service company built and co-owned with an external service provider (or other client organizations in case of consortium), which is expected to provide management and expertise

o Best-of-breed consortium: A group of external service providers, with a lead provider established for a large contract

o Brand service company: A way to share IT services (and often non-IT services and processes) to leverage the market, selectively outsource parts of the services and, in some cases, provide services to the market

o Selective outsourcing: Separate outsourcing contracts for selected IT functions or business processes, using a best-of-breed tactical approach and competitive deals

o Prime contractor: Provides management and integration of multiple service providers to derive a single or global solution or service In some sourcing arrangements – including multisourcing, transformational relationships and project work – an organization may want to consider additional options to get the services it needs. Specialists suggest several sourcing options sit below the sourcing models.

· The sourcing of technical or business skills

· The sourcing of a project or a part of it

According to a survey of 945 IT professionals, more than 50% of the respondents said they expected to see significant cost savings by outsourcing. Fewer organizations said their objective in outsourcing was to make companies more competitive in the market.

Gartner Inc., 2006

· The sourcing of management

· The sourcing of an IT service

· The sourcing of a business process

· The sourcing of a business solution etc.

Organizations can choose from these sourcing options based on their tolerance for risk and their willingness to accept or transfer management responsibility for the delivery of services.

Selecting an External Service Provider requires personnel resources and access to data, key processes and procedures, generally for a short period of time. These resources are crucial to maintaining the schedule and meeting objectives. Develop and follow a formal, specific timeline for each step in the process. This timeline provides rigor, reduces costs, helps maintain enthusiasm, and provides for an overall coordination of the organizational and External Service Provider personnel who manage the process.

Too many organizations, however, focus only on selecting the lowest-cost source. Organizations must institutionalize an effective and efficient process that enables the source selection team to make the best value selection (which is often not the lowest cost selection).

Cost benchmarking to the current market?

If the price (regarding the in-scope, requested services) is not appealing enough for the client, a typical vendor reaction is to offer fewer services, reducing the scope. The offer will include only those services for which the vendor can provide the best results, and it will simply leave the rest – by default – under the client’s

responsibility.

This causes two major problems for the client:

o The responsibility issue: The client must manage the overall service, being responsible by default for

everything that will not be done by the vendor (i.e., not clearly agreed in the contract).

o The cost issue: The client will incur all costs associated in both doing everything that will not be delivered by the vendor (i.e., not clearly agreed in the contract) and managing on top of that the services delivered, the contract and the vendor relationship.

- Supplier delivery commitments

- Is cost/quality appropriate for services delivered, or distorted by supplier issues?

- Does outsourcing compare favorably against in-house service delivery?

- Are internal contract management costs and time appropriate?

The Cost of Transition (2-3%)

The transition period is perhaps the most expensive stage of an offshore endeavor. It takes from three months to a full year to completely hand the work over to an offshore partner. If company executives aren’t aware that there will be no savings- but rather significant expenses-during this period, they are in for a nasty surprise.

Costs of transition are typically bundled into the cost of the overall outsourcing deal. However, in the case of complex BPO involving migration to new IT platforms and systems, which is more than labor arbitrage, Gartner sees separate contracts drawn up to cover these costs. Best practice is for a single comprehensive plan of activities to be created and used as the master plan for the entire transition. The greater the complexity, the higher the transition cost. Costs retained by the client must also be factored into the business case when contemplating an outsourcing deal.

CIOs must bring a certain number of offshore developers to their headquarters to analyze the echnology and architecture before those developers can head back to their home country to begin the actual work.

Cost of Transition

· Transition project management

· Third-party consultant oversight (if outside verification and validation is needed)

· Communications (resources to write, manage and facilitate, as well as the potential use of public relations firms to communicate outsourcing deal/transition messages to the public)

· Human capital management (can include severance, outplacement, retention bonuses, “re-skilling” and hiring costs)

· Legal fees (interpretation of the contract, third-party contracts, established vendor contracts if an interface is needed with the new provider)

· Technical costs (development/ integration costs to new interfaces, porting of code to new platforms)

And CIOs must pay the prevailing home country hourly rate to offshore employees on temporary visas, so obviously there’s no savings during that period of time, which can take months. And the offshore employees have to work in parallel with similarly costly in-house employees for much of this time. Basically, it’s costing the company double the price for each employee assigned to the outsourcing arrangement (the offshore worker and the in-house trainer). In addition, neither the offshore nor in-house employee is producing anything during this training period.

During the transition, the offshore partner must put infrastructure in place. While the offshore partner incurs that expense, the customer should monitor the process carefully. Often it can take longer than expected.

Estimation: Expect to spend an additional 2 % to 3 % on transition costs.

Hidden Costs of Transition:

The Cost of Layoffs – Laying off employees as a result of your offshore contract poses other sometimes unanticipated costs. To begin with, you have to pay many of those workers severance and retention onuses.

Layoffs can also cause major morale problems among in-house “survivors,” in some cases leading to disaffection and work slowdowns. Companies with experience in offshoring factor productivity dips and potential legal action from laid-off employees into the cost-benefit analysis.

%Estimation: Expect to pay an extra 3 % to 5 % on layoffs and related costs.

The Cultural Cost - One of the biggest impediments to offshore savings is productivity. You simply cannot take a person in your home country and easily replace him/her with one offshore worker. One reason for that is the home country workers’ comfort level with speaking up and offering suggestions.

Another productivity killer is high turnover at offshore vendors. Attrition rates climb as high as 35 % in India, according to the National Association of Software and Service Companies. Turnover can cost an additional 1 % to 2 %.

Finally, communication issues can slow things to a halt. Language and other cultural differences can cost an extra 2 % to 5 %.

%Estimation: Expect to spend an extra 3 % to 27 % on productivity lags.

The Cost of Ramp-up (ensuring Quality, processes and procedures)

Well-defined and accepted internal software development and maintenance processes are also key to making an offshore situation work. If a company doesn’t create solid in-house processes, the vendor will have to put more people onsite to compensate for your inadequacies, and they’ll spend all of your savings.

The ability to write clear specifications is also critical to achieving offshore savings. Creating a great spec package is costly and time-consuming. On a 1,000 man-hour project for example, the staff will spend 100 hours to create a spec package.

At the other end of the process is quality assurance (QA) testing, an area which must become more robust in an offshore arrangement.

%Estimation: Expect to spend an extra 1 % to 10 % on improving software development processes.

The Cost of Managing an Offshore Contract (6-10%)

Managing the actual offshore relationship is also a major additional cost. There’s a significant amount of work in invoicing, in auditing, in ensuring cost centers are charged correctly, in making sure time is properly recorded.

Each project manager oversees the effort. He audits the time sheets from the vendor and rolls the figure into an invoice, which then has to be audited against the overall project, which is then funneled to finance for payment.

Sometimes, managing the offshore vendor is such a big task that you have to assign someone to handle it on a half-time basis. The individual must make sure projects move forward, and develop and analyze vendor proposals against the RFPs when it comes time to bid out new work.

% Estimation: Expect to pay an additional 6 % to 10 % on managing your offshore contract.

Now let’s sum it up

What we skipped in mentioning so far, are the well-known standard costs of outsourcing that every company will provide you. That is because we wanted to emphasize exactly on the “tricky” hidden costs that will give you a more realistic view on how much will outsourcing bite from you budget.

The IT research company, Gartner, provides us with the following standard figures in %age of what you must specify in the contract about payment.

Furthermore we add another table with what we have outlined on the previous pages. Therefore you can see that the real costs you pay for outsourcing is somewhere between 13-65% higher than you think in the beginning.

Conclusion

The estimation of costs it’s a crucial stage in deciding whether, how and what to outsource. You must take into consideration every single aspect that might boost your bill.

And what’s more important, instead of focusing on low cost when choosing an outsourcing partner, you will gain more by looking at the bigger picture, and scrutinizing if the firm has the necessary resources and the ability to deliver. The firm should be a part of the strategic decisions taken by the parent company and commitments should based on long-term returns that benefit the business as a whole rather than just saving on short-term costs.

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03
Feb 12

Dell Online (Case Study)

Background (General Facts from Case Study)

Dell is a computer corporation recognized for manufacturing computer systems through parts assemble. In 1983, Michael Dell saw an opportunity in using IBM compatible computers for a new assembly line that can be sold to local businesses. The idea as explained by Michael Dell, in an interview with Joan Magretta[1], is that in the early days of computers’ manufacturing, companies had to be able to produce every part of the system. As the industry matured, companies started to focus on single parts and to become specialized in creating items that can be assembled with other parts to prepare a computer. As a result, Dell understood that to have a competitive edge in the market, they needed to focus on activities that drive sales instead of putting capital in producing items that other manufactures are already creating.

In the 1990’s, the computer market revolved around desktops, notebooks, and network servers. Dell competed with high-end machines from IBM, HP, and Compaq with a product line that provided value-priced systems for consumers and highly reliable networked systems for business. In the late 90’s, around 40% of households owned a pc in the US. On the contrary, from the business side, around 80% of the companies still had old server and desktop machines. Management had to approve purchasing orders, which resulted in only 2.2% of servers’ sale in comparison to the total purchases for desktop PCs in 1996.

In order for Dell to achieve $7.8 billion from sales in the late 90’s, it had to skip over the traditional channels of using retail or value-added resellers (VARs) to sell directly to the consumers . The “direct-model “or as Michael Dell comments on how his new employees call it “The model” is not that all powerful system. It is simply a way for Dell to cut on the standard supply chain cycle and deliver goods directly from the manufacturer to the customer. They created partnerships with several suppliers such as Sony, Intel, and others to deliver goods effectively at the time of the order to Dell’s plant where the assembly took place. The delivery and shipment were outsourced through a dedicated service that also insured delivering the monitors directly from the supplier at the same time. Mr. Dell talks about how suppliers are benefiting from the fact that Dell buys more items from the suppliers keeping no inventory and only requesting faster delivery upon orders.

In 1996, Dell capitalized on the growing number of customers who are using the Internet and launched its online store at dell.com. The online venture then proved to be the most appropriate sales channel that matched the supply chain direct model implemented by Dell.

In its path to compete in the market, Dell had to provide additional services such as DellPlus that enabled Dell to install commercial software packages, DellWare which provided hardware and software from other vendors, and after sales and on-site support services. These actions, as described by Michael Dell, required establishing more partnerships, which Mr. Dell describes as a process of “trial and error”. The integration with partners was changing as the technology is evolving and many venders go volatile while others remain sold. Furthermore, looking for an IT company to build the online store brought in very few players, which made Dell accept the overhead of developing the portal in-house.

Enterprise Architecture Issues

Supply Chain Management: The purchase and number of transactions that Dell took in required a properly configured and concise business process.
In-sourcing: To meet the demand of the market some parts of the process required the services of other companies that can be in partner with Dell.
Quality Assurance: The computer industry is a very dynamic one, which makes quality products stand out when faced with technology-oriented consumers.
Business Automation: As Dell advanced into online markets, its sales staff feared from losing their jobs in favor of automated sales transactions.
Dynamic Industry: The technology industry requires closely monitoring consumers’ trend to maintain a low gap between the point of demand and the point of supply.

Analysis

Supply Chain Management

Supply Chain Management (SCM) aims at integrating all corporate activities to improve relationships at all levels (internal operations, supplier networks, and distribution channel) to meet the competitive edge and satisfy the customer (Al-Mashari and Zairi 2000)[2]. In order to build an effective and complete business process that supports SCM, information among all business partners need to be shared. Information sharing through the Internet reduce the gap for business-to-business (B2B) commerce by enabling seamless integration with enterprise processes among partner corporations (Archer 2006)[3].

Dell developed its internal business process by creating production cells that start assembly at the point of order. It also established an internal information system to make the details of the products under production electronically available to all parties within the chain. To manage the supply of computer parts, Dell maintained close relationships with their suppliers and logistics providers to make their vendors manage the inventory system while Dell focused on product assembly (Kumar and Craig 2007)[4]. In addition, Dell used enterprise technology to make their database and methodologies available to the supplier to understand how Dell works. On the consumer side, orders made through the phone or online through dell.com produced a tracking code that the consumer can use to track the status of his or her order at any time through the phone or on Dell’s website.

In sourcing

Organizations worldwide are benefiting from the specialized services offered by various companies. In the shipping and transport arena, companies Like UPS (United Parcel Service) and DHL stand out as masters in their industry. UPS and DHL have established offices and transportation vehicles all across the world. They provide business services through in-sourcing which enables them to be part of the internal business process of companies (Marcum 2007)[5]. To a company like Toshiba for example, after-sales support service would require shipping the damaged computer to and from the consumer’s side. For that, UPS would say, “Look, instead of us picking up the machine from your customers, bringing it to our hub, then flying it from our hub to your repair facility and then flying it back to our hub and then from our hub to your customer’s house, let’s cut out all the middle steps. We, UPS, will pick it up, repair it, and send it right to your customer” (Friedman 2006)[6].

Dell understands that it need not compete unless it would get the advantage in the market. Michael Dell says that one should evaluate the competition field and pick the best one. In that context, after-sales services were contracted with firms who are specialized in that field and can be contacted directly through the integrated supply system to fulfill the requests of the consumers. Furthermore, shipping is handled through multiple shippers to deliver systems to consumers or to resellers across the world. In addition, Dell has saved the overhead cost of monitors’ delivery by requesting shippers to deliver from the monitor’s supplier directly to the consumer at the same time.

Quality Assurance

In a competitive arena, companies seek to have an advantage through means that are not necessarily related to price. Constraints against outsourcing due to excessive decentralization within organizations can have a negative impact on the value chain process. Combing various options and being open to diversification would support in increasing the speed-to-market and enhancing the quality of products (Ernst 2000)[7].

Dell has an operational facility in Penang Malaysia, which places Dell at a central position near to where most suppliers actually have their factories. Orders for goods come directly to Penang center through the integrated suppliers’ logistic centers (SLCs) chain[8]. The Penang center sends emails to suppliers requesting the parts that will be assembled based on the customer’s order. The entire model was efficient enough to require no more than 36 hours from order to shipping. In terms of quality of service, Dell has won numerous awards for highest quality. In spite of that, it continues to find means to increase the efficiency of its products. Michael Dell suggested that reducing the human interaction with hard drives during assembly would decrease its failure rate. As a result, the reduction of the number of “touches” dropped the failure rate to 20%.

Business Automation

The general attitude from individuals and employees within organizations is that automation through information systems complicate their internal processes, and might result in cutting down the number of staff (Khatibi, V.Thyagarajan and Seetharaman 2003)[9]. There are several psychological and behavioral problems associated with reluctance to change, which appear to impede the growth of E-commerce. On the other hand, retailers no longer think their web sites are simply an added benefit for their customers since the ROI (Return on Investment) percentages from online websites have far outweighed their bricks-and-mortar counterparts (Casey 2004)[10]. For that reason, the staff involved in the traditional sales process requires training to embrace new technologies and to learn how they can benefit from it.

For Dell online store the response from the consumers was huge, however, at first the sales representatives feared that the online website would reduce the number of sale deals they closed. To overcome this, Dell introduced the cost saving model showing how the online store would support sales representative close more deals and at the same time would produce cost effective results that would have a positive ROI on the business.

Dynamic Industry

Customer relations management (CRM) is a very vital competency that was born from the amount of transactional sales deals through call centers. The process of understanding customers goes through the initial phase of collecting data then analyzing trends and eventually building a knowledge base that will drive the profitable relationship (Liew 2008)[11]. Organizations’ use of CRM models is an attempt to get firsthand knowledge that would improve marketing effectiveness, bring more personalization, and build brands among other objectives based on the nature of the business (Anderson, Jolly and Fairhurst 2007)[12].

Michael Dell model is based on keeping no inventory, in order for Dell to maintain that they focused on segmenting their customers into scalable businesses that can be analyzed for their level of demand. Sales executives at Dell used communication skills to elicit information from customers that would further support the demand forecast initiatives at the company. In addition, Dell sent surveys to customers to further understand the satisfaction level with the services provided by Dell and modify its product line and services accordingly. Furthermore, Michael Dell discussed how regional meetings in various countries invited potential customers to further enrich the relationship and give room for comments and feedback about Dell’s services. On top of all that, Dell strived to provide information for its customers to help them make proper choices for their IT requirements and gain privileged information about new and upcoming technologies. Dell invested in developing a web portal in the form of “Premier Pages” for high-end customers and another for small to medium businesses at Dellmarketplace.com[13]. Both sites aim at providing information to customers and establishing a single point of access for customers’ IT service requirements.

Conclusions

Dell is simply a success story; it shows how one can gain market advantage by simply understanding what brings value to customers. No one, even Michael Dell himself when he started, thought that people would enjoy customizing their PC orders and wait patiently as the order makes its way back to their homes. Some studies talk about how people challenged the initial delivery estimates provided by Dell to see if they were met.

The level of expansion Dell strived to achieve brought in problems as with any growing business. However, by adapting techniques such as In-sourcing and mutual benefit partnerships it reduced its potential staff from 80,000 to only 15,000. Dell also was aware of factors that would hinder its supply chain. For example, they maintained a multiple list of shippers as not to be affected by unexpected delays and organizational issues. In addition, they understood the importance of developing their own enterprise systems in-house to control all the variables and maintain their business processes.

This is one of the best case studies in the IT industry. I believe the level of commitment Dell showed in the model he created is inspiring. On the editorial side, I believe more highlights on the internal infrastructure of Dell’s network would have helped in building an understanding of how the supply chain actually worked. Did they use CRM modules, ERP, SCM, or a combination of all? How did Dell secure its information link with its suppliers, were all of them mature enough when it came to Information systems?

Recommendations

Organizations should focus on value adding activities like establishing online portals for their customers.
Businesses should conduct frequent surveys to measure the level of service they provide and work on enhancing their products.
Organizations should decentralize and enable expansion through global techniques such as out-sourcing and in-sourcing.
Building internal enterprise information systems is the most effective methodology for information and knowledge sharing.
Establishing multiple touch points with customers, strengthen the relationship and increases satisfaction levels.
Meeting global quality standards is the only way to get an advantage in a competitive arena.
Internal organization assessment and training is vital to maintain the high spirit of employees and increase their productivity.
Management support and funding is a key element in the success of any information system implementation.

References

Joan Magretta , “The Power of Virtual Integration: An Interview with Dell Computer’s Michael Dell.” Harvard Business Review 76, no. 2 (Mar/Apr 1998): 72-84, 13, 2.
Majed Al-Mashari and Mohamed Zairi, “Supply-chain re-engineering using enterprise resource planning (ERP) systems: an analysis of a SAP R/3 implementation case.” International Journal of Physical Distribution & Logistics Management 30, no. 3/4 (2000): 296-313
Norman P. Archer, “Supply chains and the enterprise” Journal of Enterprise Information 19, no. 3 (2006): 241-245, 242
Sameer Kumar and Sarah Craig, “Dell, Inc.’s closed loop supply chain for computer assembly plants.” Information Knowledge Systems Management 6, no. 3 (2007): 197-214,18.
Marcum, Jennifer. “In-Source or Outsource?” BioProcess International, June 2007
Thomas L. Friedman, The World Is Flat (New York: Farrar, Straus and Giroux, 2006), 168.
Dieter Ernst, “Inter-Organizational Knowledge Outsourcing: What Permits Small Taiwanese Firms to Compete in the Computer Industry?” Asia Pacific Journal of Management (Springer Netherlands) 17, no. 2 (August 2000): 223-255, 248
Friedman, The World is Flat, 516
Ali Khatibi, V.Thyagarajan, and A. Seetharaman, “E-commerce in Malaysia: Perceived Benefits and Barriers.” Vikalpa: The Journal for Decision Makers 28, no. 3 (Jul-Sep 2003): 77-82, 6.
Bernadette Casey, “Online Monday blacker than in-store Friday.” DSN Retailing Today, December 13, 2004: 13-13,0.
Chor-Beng Anthony Liew, “Strategic integration of knowledge management and customer relationship management.” Journal of Knowledge Management 12, no. 4 (2008): 131-146.
Anderson, Joan L., Laura D. Jolly, and Ann E. Fairhurst. “Customer relationship management in retailing: A content analysis of retail trade journals.” Journal of Retailing & Consumer Services 14, no. 6 (November 2007): 394-399, 6.
Alorie Gilbert, “Dell Online Marketplace Targets Small Businesses.” Electronic Buyers’ News, October 2, 2000: 58, 0.

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02
Feb 12

Capital T – Ma e Mira Remake by.TrimBeatz (FLS 9)

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Jan 12

Sustaining Competitive Advantage

A competitive advantage could simply be defined as the advantage or ability a firm has over its rivals in the industry; or the ability a firm has to outperform its industry rivals.

A firm is said to have a competitive advantage when it has the capabilities or means to push out its rivals in striving for the favour of customers. This applies internationally or locally as well as to both services and products.Thus, a sustainable competitive advantage is the persistence the firm applies despite efforts by competitors or potential entrants to copy or overtake it. Sustainability therefore, requires that strategic assets are not easily available to others and imperfectly mobile. This will be considered later.

Porter (1990) states that, though not all nations are in the forefront of competition, the home nation which shapes the competitive advantage is the starting point for a firm’s competitive advantage and also from which it must be sustained. However, in whatever field of endeavor, competitive advantage creation must be a choice of management and it must really fit to achieve results. It must be noted here that competitive advantage can normally be traced to one of three roots:

Superior resources, superior skills and superior positions.

Competitive strategy is one of the ways in which a business relates to its environment by competing with other firms who are also trying to adapt within the operating environment. It is with this aspect- the competitive strategy which if appropriately chosen and implemented appropriately give the firm a competitive advantage over its rivals.

It must be noted here that the prescriptive view of strategic planning emphasizes the importance of the organizational environment as a source of threats and opportunities and the need for effective responses by the organization if survival was to be assured and the success achieved. The response is later formulated into plan which formulates major decisions about entry into new markets or development of new products and services guided by set goals. Under the influence of Porter’s writings in the 1980s the emphasis shifted from the plan to the selection of an appropriate generic strategy to position the business unit in its competitive environment. Porter, arguing that the environment poses threats and brings opportunities than with trends and events, suggested that the environment could be analyzed using the five forces analysis to identify the issues which affect the level of competition in an industry; after which a strategy is formulated to combat it.

The resultant strategy, which he referred to as generic, distinguished some strategic options the firm can possess:

Cost leadership: the business could position itself as offering a low cost product as a standard price i.e. cost leadership strategy. Costs are reduced at every element of the value chain. Producers can exploit the benefits of a bigger margin than the competitors. Toyota is a good example of an organization that produces quality cars at low price coupled with a brand and marketing skills to use a premium pricing policy.

It could offer a product that was different from that offered by rivals. I.e. differentiation. This allows companies to make prices less sensitive and focus on value that generates a comparatively higher price and a better margin. Even though additional costs will be incurred pursuing differentiation, it is possible that this will be offset by the increased revenue generated by the sales.

By focusing on a small but well-defined part of the market, for instance a particular buying group or product area or geographical area. Also known as niche, this is usually suitable for a small company i.e. focus strategy.

Generic Competitive strategy, usually used after competitive analysis or as a response to competitors advantage, is defined as the basis on which a strategic business unit (SBU) might achieve or counter competitive advantage in its market. (Johnson and Scholes, 5th Edition.)

Building on Porter’s (1980) generic competitive strategies, Bowman et al argues that organizations achieve competitive advantage by providing their customers with what they want, or need better or more effectively than competitors and making it difficult for competitors to imitate. This was later developed into five generic strategies which would be used in this discussion. Thus, the generic competitive strategies are the fundamental activities on which an SBU seeks to achieve a lasting advantageous position in its environment and gaining the favor of stakeholders by meeting the expectations of buyers, users or other stakeholders

The following are Bowman’s five-generic competitive strategy options and examples of organizations who applied them to gain competitive advantage: no frills strategy, low price strategy, hybrid strategy, focused differentiation strategy and added value or differentiation strategy.

In brief, a no frills strategy combines a low price, low perceived added value and targets a price-sensitive market. No frills strategy is now a popular strategy with low-cos airlines Easy Jet and Ryanair seeking to enter the airline industry to compete with likes of Virgin and is a determinant in the market. This, therefore, affords the firm the needed competitive edge over its competitors who charge higher price. This strategy is a success because there could possibly be a segment of the market that overlooks the low quality of the commodity provided it fulfills the same purpose.

To obtain the competitive advantage using no fills strategy revenues must increase and the product must really be price-sensitive. Easy Jet frills strategy seems to be going on well as a result of the cost savings techniques they are using. For instance no ticketing, no ticket agents, no in-flight food or drink for customers as well as the short-haul flight. Now, almost all supermarkets in the UK use no frills strategy by introducing own brands the price of which have been reduced to attract customers in order to gain a competitive advantage.

The next generic strategy is the low price strategy. This strategy pursues a lower price than pertains in the market whilst trying to maintain similar value of product or service as those offered by competitor alike. There is the potential of price war among competitors and in the long run consumers are likely to lose as the firms might not be able to sustain the lower-price-good-value strategy. Notwithstanding the price war and low margins, there are some suggested ways in which a low-priced strategy can bring about a firms competitive advantage. The market segment must be low-price sensitive, and also the SBU has a cost advantage over its competitors.

However, in practice, the lower price strategy usually brought about by lowering operational cost alone does not give the firm the competitive advantage if the firm is not able to sustain it in the long-term as there are now more firms entering the market because of low or no entry barriers like small capital requirements and also how efficient the staff might be.

Hybrid competitive strategy seeks to achieve differentiation and a price lower than that of competitors simultaneously. This is not an easy strategy to pursue because to differentiate a product or service involves some money and increases cost the very thing the low price seeks to reduce. This strategy is fit for the DIY industry as the likes of Robert Dyas are not able to stand the competition. The success of this is dependent on providing unique more efficient products or services to consumers whilst at the same time operating at a lower cost to be able to lower its price below the industry level. The success of this strategy could further be enhanced if the firm has economies of scale and can increase volume of sales more than its competitors, thereby, reducing its base cost as a result. Asda’s George brand is an example of a generic hybrid strategy in a SBU.

Another strategy is differentiation strategy. This seeks to provide products or services completely different from those of its competitors by adding features valued by consumers. The main objective of using this is to either maintain the market share or increase market share relative to its competitors. A clear example of this is aircraft manufacturer Airbus’s wider fuselages, cockpits designed for use in more than one aircraft and electrical rather than mechanical flight controls.

Those features have helped Airbus win customers like New York-based Jet blue; although Jet Blue is staffed with former employees from Boeing. (Fortune, Europe Edition 22 November 17th 2003; pp34) This strategy could be used to achieve a competitive advantage which is its ultimate aim by the firm investing more in R&D, unique designs and features. The marketing-based approaches in terms of good marketing communication (example advertising the products or services) as well as the brand power to win the loyalty of consumers. (Example Airbus)

The fifth generic competitive strategy is the focused differentiation strategy which seeks to provide high perceived value; justifying a substantial price premium usually to a selected market, segment. It is usually adopted to counter or to compete others in seemingly similar segment. This could therefore be argued that focused differentiation is just an extension of any of the four strategies so far considered depending on the competitors in this new segment which is usually middle to high income earners. A convincing example is the introduction of Lexus in 1989 by Toyota to compete with other luxury brands of BMW and Mercedes Benz new series.

For the focused differentiation strategy to be used to obtain a competitive advantage over competitors in the industry, the business unit must find ways to make the production more efficient to be able to pass on the savings to customers. The business unit must identify new segments and must also be prepared to aggressively create new market segment where it is believed first movers get huge advantage. Again Toyota prides itself in this by being the first to introduce a brand,scion,specifically for young buyers in January, 2003 which was a success and the introduction of hybrids in 1997 selling 127,000 far more than Honda.( Hybrid uses two engines and is environmentally friendly.) (Fortune, Europe Edition, Number 24 December 22 2003; pp57).

The essence of the various strategies discussed so far is to create or add value to the products or services in order to give improved and or enough satisfaction to the customer so that the firm will gain a competitive advantage over its rivals. However, it is one thing for a firm to gain a competitive advantage and another to sustain the competitive advantage so gained. So when a firm is able to get a competitive advantage over its competitors, it becomes expedient to try to sustain this advantage.

Some of the ways to sustain the competitive advantage is by what is described as isolating mechanism. This is the application of forces like barriers of imitation which limit the extent to which a competitive advantage can be duplicated or matched or even possibly scrapped through the resource creation activities of other firms. Though similar in principle to the barrier of entry force, whereas the entry barriers protect profitability of an entire industry, isolating mechanisms sustain the competitive advantage of a single firm. For example legal barriers like trademarks, patents or intellectual property rights as in Microsoft’s case.

It could also be for the mere fact that the leading firm makes it difficult for the competitor to catch up with the firm’s technology because it entered the market earlier and it continues to research and might be able to move to a superior position by the time its competitors catch up. This is known as the early mover advantage. Because the business unit has entered the market earlier, the past success in the market is believed to sustain the firm.

Nevertheless, no matter how discrete the strategy adopted to gain the sustainable competitive advantage or enough satisfaction that the customer may get as well as the mechanisms put in place to sustain the competitive edge, simple economics has proved that man’s needs are insatiable and with the information technology age, there is an improved dynamism in business that products and services can become obsolete before they even reach the next user.

The question is can the firm continue to create more economic value than its competitors now than then?

Now with the advent of information systems and technology, this traditional way of competitive advantage or competitive edge has, therefore, taken a different turn. Information gathering and I mean a competitive information gathering in deed can to some large extent make a difference to a firm’s position in an industry and for that matter affect its competitive advantage one way or the other.

A good and recent example is Asda installing radio frequency identification (RFID) system, a device which could be used to scan bar codes of incoming goods which could save Asda $8.35 billion annually through improvement in its supply chain management. Fortune, Wal-Mart keeps the change, November 10,2003pp 23.

Firms can either use their own database or an informational gathering software to track its operations and get the required information like inventory, customers, and trends of competitors’ performance and about the fast moving products to formulate their strategies or form what is known as information partnerships for the purpose of sharing information to gain competitive or strategic advantage; and even link their systems with some competitors to achieve synergies.

This is becoming important as a result of the fact that competition in the business world today is not only within a particular industry one operates but can also be cross-competition with people in other related industry like universities and publishers competing due to forward and backward integrations. Baxter Healthcare International is known to offer medical supplies from its competitors and office supplies through its electronic ordering channel to its customers. By doing this the firm increases its customer base as well as loyalty of its customers is enhanced.

At this juncture, the statement that “there is no such thing as a sustainable competitive advantage” can be considered in relation to the circumstances that happened in Sears, which used to be USA’s largest retailer until Wal-mart overtook it after a diversification strategy went bust in spite of the fact that it (Sears) has been heavily computerized with more expenditure going into information technology and networking than all other non-computer firms in the United states apart from Boeing. So why couldn’t this huge amount spent in computers and networking been able to give them the competitive edge over its rivals? Is it due to the fact that the hardware alone is not sufficient to provide the information needed unless it is integrated with the appropriate software? Sears did exactly that.

Trying to reinvent itself, Sears started to explore almost all strategies including low pricing strategy, delayering, improved marketing ploys as well as embarking on a $4billion five-year store renovation to make the stores more attractive. All to no avail.

Then Sears noticed that, its merchandise buyers do not have reliable information on precisely what customers were buying at each store. Management was relying on 18 separate systems that often gave conflicting and redundant pricing information. They could only view a division’s daily performance. This was not good for a firm of Sears’s stature. Sears later tightened its grips over the business once again by building a larger database involving the consolidation of information on transaction records,90 million households,31million Sears’ card users, their credit status, and other related data.

The database houses the company’s Strategic Performance Reporting System (SPRS).Now Sears’ 1,000 buyers and managers know what hot-selling merchandise to replenish right away. This competitive information gathering to some extent helped turn around Sears. Its store sales started rising and planned to join partnership with AOL to boost its online business by targeting AOL’s 21 million customers by developing content for AOL on subjects such as how to build a deck, tips on home decorating and other home improvement topics; and also move its suppliers to an electronic ordering system similar to that described for Baxter Healthcare, by linking its computerized ordering system directly to that of each supplier to eliminate paperwork completely for an improved flow of goods into its stores.

As previously discussed, if a firm can keep or maintain its lead on creating value, leveraging strategic assets for example access to efficient distribution channels, maintain market position and may be low cost advantage then it can be said to have a sustainable competitive advantage. This is absolutely not possible in this dynamic business world. The most difficult part of this is that the firm must create more economic value than its competitors every now and then. Will its competitors be looking on without doing anything?

Microsoft for example is spending billions of dollars to develop its own search engine that will be incorporated in both its online service MSN and its new operating system due in 2006 to combat Google’s dominance in the search engine industry. (Fortune, 22 December 2003pp 17).

In my own opinion based on the discussions above, if really sustainable competitive advantage is the persistence of a firm’s ability to outperform its industry, then suffice it to say that, as much as gathering and use of competitive information as illustrated in the Sears’ story above can give a firm a (sustainable) competitive advantage, it is really difficult if not impossible to sustain any competitive advantage for a very long time. This is so because of the rate of technological changes, changes in business strategies, and the fact that customers’ loyalty can wane and affect sales leading to a fall in market share and thus competitive advantage. Boeing was overtaken by Airbus in the aviation industry at some time. Sears’ leadership was taken away by Wal-mart.

In spite of the availability of choice of the five generic strategies, it is supposed that the onus of their success rests with management and how the technology and the information gathered are blended for use. This is so because a careful monitoring and evaluation constantly and the right identification and proper timing of a particular segment are keys to the success of these strategies due to market dynamism.

REFERENCE

Can Sears reinvent it? A case study taken from London South Bank University IS.

Davenport, T.H; Prusak, L. (1998) Working Knowledge: How Organizations Manage What They Know. Havard Business School Press, Boston, Ma.

Fortune, December 13,2004, pp59

http://informationr.net/ir/8-1/paper144.html

Laudon, K.C; Laudon, J.P. (2004) Management Information Systems: managing the digital firm, 8th edition, USA: Pearson Prentice Hall.

Scholes, K.and Johnson, G (1999) Exploring corporate strategy, 5th Edition. London: F.T Prentice Hall.

Sheila,C.Main Article: Knowledge Management, issue 18,2004

Yogesh, M. B. The Company, – What Really is Knowledge Management? Crossing the Chasm of Hope. Gartner Group Inc.,October 1996

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Jan 12

Who Invented Google?

The search engine was invented by Larry Page and Sergey Brin. To mention about who invented Google, it started when two computer science students thought that they might enhance the search technology of the internet available during the 1990s. After they graduated it took them some time to transform their idea into the Google.

The name Google was used after a googol, the name for figure 1 followed by 100 zeros. The number was found by Edward Kasner and James Newman in the book Mathematics and the Imagination. For Larry and Sergey, the name Google simply represents the enormous amount of unlimited information that a search engine should accommodate.

Larry Page and Sergey Brin met at the Stanford University as graduates of computer science in the year 1995. During the year 1996, they began working together on writing the program to build up a search engine. Initially it was dubbed BackRub, being named for its ability to perform back link analysis. They were trying to find better ways for internet scanning and send targeted information for a search query. Later on they eventually found a viable mathematical method that assessed page links to assist the most relevant results to be delivered.

Motivated by the rage reviews received about the BackRub, Larry and Sergey started working on Google instead. They operated out of their dormitory rooms and even built a network server using used, cheap and borrowed PCs. They maximized the credit cards limits to purchase terabytes of disks at discounted prices. In the process they tried to gain license for the search engine technology, but to no avail after realizing nobody was interested in their product at such early stage of establishment. However they decided not to give up on Google and tried seeking more financial assistance, made improvements on the product and advertisement to public themselves.

In September 1998, having capital support from some ventures, Larry and Sergey launched the Google Inc. from the Menlo Park garage in California. During that time, Google.com was already answering more than 10, 000 queries a day. It stood out among other search engine companies as it relied more on the search results rather than the web content. People who visited the webpage basically can come to two choices, either to enter some terms to be searched or to hit the “I’m Feeling Lucky” button, which would lead users to the most popular results. The search was quick, results were really helpful and internet users were getting more excited to use the Google.

Thus on September 21st, 1999, Google has officially had the beta test status removed from its title. Hence Larry Page and Sergey Brin were listed as the persons who invented Google.

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