The Review and Critical Thinking Questions below have been provided for you to revise and refl ect on the content of this chapter.
Review Questions
1. What is a business or fi rm and what are the driving forces and the critical responses of a business?
2. What does the term ‘agribusiness’ encompass – why does it have negative connotations for some?
3. What are the core components of doing business?
4. What creates value for a business?
5. What do we mean by the eLandscape?
6. What is the difference between eCommerce, eBusiness and mCommerce?
Critical Thinking Questions
1. What was so innovative about Marc Andreessen’s work? What did Microsoft ‘see’ in Mosaic?
2. Why has The Peanut Van been so successful, and what business model would best describe this success?
3. Explain why Dell Corporation took it to IBM in a business sense and won.
4. What is meant by ‘technology being a business enabler’?
5. Research and discuss the issues associated with WAP and mCommerce enabled agribusiness.
29
Creating Value in the ‘E’ Agribusiness World
Recreating the old from the new
Following on from Chapter 1 where the key concepts associated with ‘a business’, an
‘electronically enabled’ business and ‘doing business’ were introduced, this chapter discusses creating value in a business by electronically enabling it. Electronically enabling a business inevitably involves costs associated with, among many things, hardware, software, training, strategy development and implementation. The critical questions are: what value will be conferred to the business by electronically enabling it and, if there is some advantage, how can it be sustained?
This chapter will look at the fundamentals of creating value in a business, in particular an agribusiness. It will also look at the drivers of the ‘Old’ and the ‘New’ Economies in relation to value creation including some of the lessons learned from the dot.com crash. The more common B2C and B2B business and procurement models will be outlined with a discussion on how these can be used in an agribusiness to generate value.
Chapter Objectives
After reading this chapter you should understand and be able to describe:
1. What competitive business advantage means
2. Why sustainable competitive advantage is so important, and the issues associated with obtaining this in agribusiness generally
3. How the eLandscape can confer added value which can confer a sustainable competitive advantage
4. The difference between the terms ‘Old’ and ‘New’ Economy and their respective drivers 5. What the dot.com hype was about and why the dot.com crash occurred
6. B2C and B2B internet business models and the applications involved 7. The critical success factors of electronic marketplaces.
Competitive Business Advantage
Unless a business has a product or service that is completely unique, there will always be competitors for any potential customers that exist for that business. Indeed, in a series of famous books on competition and competitive advantage in business, Michael Porter (1985, 1990 and 1998) states that competition is fundamental to the success or failure of a fi rm’s activities because it determines whether the product or service that a company provides is appropriate in terms of the marketplace.
Porter further goes on to outline how the development of an appropriate strategy to both deal with competition and generate competition will lead to a competitive advantage for a business in the marketplace. While competitive advantage generation and maintenance – particularly as they apply to electronically enabled business – are discussed in some detail in the next sections, this chapter in no way attempts to paraphrase Michael Porter’s work or other large bodies of work in this area. For further in-depth study, readers are advised to access other literature on the subject.
Competitive Advantage
Competitive advantage was referred to in Chapter 1 as the major component of the Resource Based View of the fi rm and is fundamentally important to the success – or otherwise – of a business. It is defi ned by Porter (1985) as:
the differential among fi rms along any comparable dimension that allows one fi rm to compete better than its rivals.
Competitive advantage in an industry can be measured by the business’s long-term return on capital relative to its competitors in that industry. A business’s competitive advantage – for example, Coke’s brand or Microsoft’s control of the personal computer operating system market – largely determines its ability to generate excess returns on capital and links the business strategy with fundamental fi nance and capital markets. In the end, it is a business’s competitive advantage that allows it to earn excess returns for its shareholders (Porter, 1985).
Without a competitive advantage, a business has limited economic reason to exist – its competitive advantage is its lifeblood and without it the organization will wither away.
How Is Competitive Advantage Created and Maintained?
Traditionally, there have been two major sources of competitive advantage: the behaviour of a business’s costs, and the business’s differentiation strategy– either for a product or components in the whole-of-business value chain (Porter, 1985).
A business has a cost advantage if the cumulative costs of undertaking the business and creating value in the business (i.e. across a product or service value chain) are less than that of its competitors. If this cost advantage is diffi cult for a competitor to replicate, then it becomes a sustainable cost advantage. Creating and maintaining a cost advantage is a major if not the major goal of most managers.
A business differentiates itself from competitors when it provides something unique (at any point in the value chain – not just at the fi nal product level) that has value to buyers over and beyond a low price. Differentiation is usually costly, the costs refl ecting the cost drivers of making the product or service unique. Costs drivers associated with differentiation include:
• Economies of scale – if these exist they will reduce costs
• Interrelationships and linked activities – sharing costs across organizations or business units within a business can reduce the costs of differentiation
• Timing – development of products or services on time and under budget can be delivered through better coordination of quotations, procurement and inventory management, when undertaken under the auspices of strategic relationships with other members of the value chain
• Knowledge – a knowledgeable workforce is a valuable commodity but will cost more to obtain and maintain.
More recently, competitive advantage has been regarded as a more complex situation than simply being defi ned by costs and differentiation. It has been suggested by Ma (2000) that there are two key aspects of competitive advantage that must be taken into account – positional advantage and kinetic advantage.
1. Positional advantage is a status-defi ning position that leads to better company performance, and which comes from a business’s unique resources, market positions, established accesses, and other traits that are relatively static in nature. It is based on the business’s status, social or economic, actual or perceived, in the eyes of customers, competitors, partners, regulators and other stakeholders. Cost structure and differentiation strategies of the business contribute to positional advantage.
2. Kinetic advantage is an action-oriented ability that allows a fi rm to function more effectively and effi ciently. Kinetic advantage typically arises from a fi rm’s knowledge, expertise, competence (Prahalad and Hamel’s 1990 core competency work picks this up particularly), or capabilities and skill in conducting business activities. It includes the company’s ability to identify market opportunities, its knowledge of customers, technical know-how and capability, its speed of action and response in the marketplace, and its effi ciency and fl exibility of business or organizational processes.
Positional and kinetic advantages often reinforce each other providing a more complete set of interactions to produce competitive advantage – particularly in today’s eLandscaped business world. With high-speed changes in the current business environment, including globalization and advances in information technology, many positional advantages traditionally banked on by leading fi rms have become less durable or irrelevant. Constantly operating at an industry frontier with a host of kinetic advantages – however temporal they may be – could prove to be a necessary task in the future in order to succeed (Ma, 2000).
Sustainable Competitive Advantage
A sustainable competitive advantage is the prolonged benefi t of implementing some unique value-creating strategy not simultaneously being implemented by any current or potential competitors, and which competitors are unable to duplicate.
However, once a business is successful, how does it remain so? In reality, the fi erce competitiveness of the current market system is good for consumers, but bad news for companies that seek to make extraordinary profi ts over long periods of time. Sustainable competitive advantage is generally derived from a combination of the following:
• A unique competitive position created by combining the fi rm’s resources – fi nancial, physical, legal, human, organizational, informational and relational – in unique and enduring ways
• Clear tradeoffs and choices vis-à-vis competitors
• Activities that are tailored to the business’s strategy
• A high degree of fi t across activities (it is the activity system, not the parts, that ensures sustainability and rivals will get little benefi t unless they successfully match the whole system)
• A high degree of operational effectiveness.
Competitive Advantage in Agribusiness
Agribusinesses are about producing food and related products – products that as humans, we cannot do without. However, at the production end of any agri-industry chain agribusinesses usually produce commodities where few, if any, unique value creating strategies are possible.
Very often, the returns on investments at this end of the chain have not met market expectations (Ginns, 2002). If businesses at the production end of agri-industry chains are not realizing full value, how does the industry sector as a whole survive?
Since the 1980s, the agribusiness sector globally has been subjected to continuous structural change as a more dynamic and demanding consumer base has thrown down the gauntlet in relation to expanded expectations (Wilkinson, 2003). Businesses at all stages in all agri- industry chains have consolidated dramatically (Heffernan et al., 1999) leaving a smaller and continually decreasing number of increasingly larger and more powerful players. Agribusiness is a heavily regulated industry sector and many of the issues that it faces are global – from environmental impacts and quarantine issues, to free trade agreements. Sustainable value creation in such a situation is a moving window that requires the participation of all parties involved in a particular agri-industry chain – and then with a keen eye on the global markets and political and economic arenas involved. Innovation and agility are the keys to success.
Electronic technologies are one of the potential tools to facilitate such value creation (Boehlje et al., 2000; Thompson et al., 2000; Leroux et al., 2001; Ng, 2005; van Hemert, 2005).
Competitive Advantage Generation in the ‘E’ World
Doing business in an electronically enabled world is producing clear changes in the competitive landscape; however, the main issues that must be confronted by electronically enabled businesses are the same as for doing business in the non ‘E’ world – and those are:
• The need to create value within the business
• The need to minimize costs and maximize profi ts
• The need to maintain a competitive edge in the marketplace.
Value Creation in the eLandscape
To remain successful in today’s internet driven marketplace, established companies have to be able to function as extended electronic business in the eLandscape. The process of creating ‘value’ in an electronically enabled world or ‘E’ world is no different than in a non- electronically enabled business environment, other than that the technologies involved in the
electronic landscape – particularly those associated with the internet as a communication and information transfer medium – have created some additional vehicles that should be taken into account (Porter, 2001). Amit and Zott (2001), working on this premise, proposed four sources of value creation for electronically enabled business (Fig. 2.1) including:
• Effi ciencies. The internet reduces information asymmetries between buyers and sellers which in turn improves the speed of information fl ows and timeliness of information availability on which decisions can be made.
• Complementarities. Companies can leverage value creation for their own products when they bundle them via the internet with complementary products from other suppliers.
• Lock-in. The ability of a business model to prompt users to engage in repeat transactions – for example, in relation to revisiting a web page and engaging in online transactions.
• Novelty. The internet offers limitless possibilities to innovate in the manner in which transactions are enabled.
Fig. 2.1. The four components of creating value in an ‘E’ enabled world (after Amit and Zott, 2001)
Lock-in, novelty and complementarity while applicable to internet-based online trading enterprises are less important value creation mechanisms for most agribusinesses which essentially remain offl ine in their business trading models other than to participate in some online marketing and information dissemination activities via a web page (Theuvsen, 2003;
Stricker et al., 2003; Fritz and Schiefer, 2003; Ng, 2005). Creating effi ciencies, however, is another matter and Bryceson and Kandampully (2004) give a more specifi c list of value- creating activities involving electronic technologies to facilitate the business processes in and across the agri-industry sector. These include:
• Ensure best practice implementation of technology to better effect traditional business strategies (Bhatt and Emdad, 2001)
• Develop an agile business strategy and supply chain that enables the business to adapt to new business pressures quickly and smoothly (Martin, 1999)
• Develop good business intelligence capability using the internet for real time market and competitor information (Allee, 2000)
• Service different customers and launch new products to address new markets that develop through the extended reach provided by the internet
• Rationalize suppliers and form new partnerships that are collaborative and ‘learn’ utilizing the internet as a 24 hours x 7 days x 365 days communication tool (White, 2000; Collins et al., 2002; Bryceson and Pritchard, 2003)
• Change delivery frequency and routes to maximize logistic effi ciencies
• Alter distribution/warehouse strategies to minimize inventory
• Electronically integrate the supply/value chains
• Improve the information fl ow (speed, timeliness, accuracy) up and down the chain.
Of these, the full electronic enablement of supply and value chains resulting in an improvement in the speed, timeliness and accuracy of the information fl ow up and down the chain is perhaps the most important and is discussed in detail in Chapter 4. It involves the complete integration of internal business enterprise resource planning processes and business systems, as well as developing good technology links to customer and vendor systems and innovative logistics systems (Boehlje et al., 2000; Chapman et al., 2002; Bryceson and Pritchard, 2003).
In agri-industries, electronically enabled supply chains can enhance established relationships amongst supply chain members as well as reducing transaction costs through the effi cient fl ow of information both up and down the chain (Tapscott et al., 2000; Bryceson, 2003). This latter outcome also enables more accurate and timely demand forecasting and supply chain management as well as providing the infrastructure for food traceability and product tracking to source (Vaxelaire, 2004), an ever increasing regulatory requirement of the food industry. See Byte Idea on the Shenzhen Agricultural Products Wholesale Markets in this chapter.
As can be seen, some of the above points are diffi cult to quantify in the traditional sense – indeed quantifying ‘value’ has become more diffi cult in the current business environment as corporate value is increasingly tied up not in physical assets but in intangible ones (Read et al., 2001; Dunne, 2004). Reconciling this with what shareholders expect as creating value is becoming a signifi cant skill requirement for senior managers.