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Influence of an ERP system on the value chain process of multinational enterprises (mnes)

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par Bosombo Folo Ralph
University of Johannesburg - Master in business administration (MBA) 2007

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Chapter 2: Linking strategy with information technology through a value chain approach

In this chapter, the literature review is based on the relationship between technology and strategy, and the competitiveness impact of IT on the enterprise. Included is a discussion of the technical, strategic planning model (value chain approach) to evaluate Axapta software. The definition of and debate on the concept of the value chain are also highlighted, followed by a discussion of the impact of IT in the value chain, the role of value chain integration and the relationship between e-business and ERP for value chain extension benefits.

Chapter 3: An overview of ERP systems

In this chapter, the discussion is based on the definition and analyses of the ERP system concept as a value chain system, its background, as well as its benefits, characteristics, advantages and disadvantages. The discussion of the general model of an ERP system will be highlighted and its roles, global architecture and configuration under an MNE strategy will also be discussed. In addition to the assessment of the strategic supply chain factors for the evaluation of ERP software considered before adoption, matters related to the methodology and the success and failure of an ERP system implementation project within an organisation are also discussed.

Chapter 4: A case study of ERP systems - Axapta Microsoft software solution

In this chapter, a case study regarding Axapta Microsoft software solution is discussed according to the generics, modules and architecture of the software.


Chapter 5: Research methodology

This chapter focuses on the research hypotheses formulated and it provides a detailed discussion of the research type, methodology and design of this study, including data-gathering methods and procedures used. It also explains how the methodology of this research was conducted to gather the data.

Chapter 6: Research findings and interpretation of data analysis

This chapter is dedicated to presenting the research results of the collected qualitative and quantitative data related to the ERP system Axapta Microsoft and SAP software. It includes the results in different tables, graphs and explanations of the primary data collected in order to complement the relevant literature, which reinforces the findings of this study.

Chapter 7: Conclusions and recommendations

A conclusion is reached addressing the research objectives and the finding of this study, followed by a display of the methodical approach formulated by the researcher to assess ERP software before acquisition and implementation.



2.1 Introduction

It is the objective of this chapter to analyse the strategic importance of information system (IS), linking it with strategy. It is for this reason that the value chain, as a strategic planning tool, will also be evaluated. This enables the researcher to measure the effectiveness of an ERP system, i.e. Axapta Microsoft software, as a strategic IT tool for MNEs.

2.2 The interdependence of technology and strategy

Burgelman, Maidique and Wheelwright (2001:6) explain the development of connecting technology and strategy as follows: "During the 1980s, strategic management scholars began to recognise technology as an important element of business definition and competitive strategy." Abell in Burgelman et al., (2001:6) identifies technology as one of three principal dimensions of business definition, noting that "technology adds a dynamic character to the task of business definition, as technology more or less rapidly displaces another over time". Furthermore, Porter (in Burgelman et al., 2001:6) observes that technology is among the most prominent factors that determine the rules of competition. Friar and Horwitch (in Burgelman et al., 2001:6) explain the growing prominence of technology as the result of historical forces that encompass the disenchantment with strategic planning, the success of high-technology organisations in emerging industries and the surge of Japanese competition. This is in addition to the recognition of the competitive significance of manufacturing.

The four elements that constitute the substantive dimensions of technology in strategy, as explained by Burgelman et al., (2001:36), are as follows: (1) The deployment of technology, which can be positioned in terms of differentiation (perceived value or quality), delivered cost and to gain technology-based competitive advantage; (2) the use of technology, which can be seen more broadly in the various activities comprised by the organisation's value chain; (3) the organisation's resource commitment to various areas of technology; and (4) the organisation's use of organisation design and management techniques to manage the technology function. Johnson and Scholes (2002:10-16) define strategy as the direction and scope of an organisation over the long term, which achieves advantage for the organisation through its configuration of resources within a changing


environment and to fulfil stakeholder expectations. Strategic management therefore includes an understanding of the strategic position of an organisation and strategic choices for the future in an effort to turn strategy into actions.

Turban, McLean and Wetherbe (2004a: 6) state that IT supports strategic management through:

· Innovative applications that provide direct strategic advantage to organisations;

· The changes in processes: where IT supports changes in business processes that translate to strategic advantage;

· The competitive weapon: where IS itself is recognised as a competitive weapon;

· The links with business partners: where IT links a company with its business partners effectively and efficiently;

· Cost reductions: where IT enables companies to reduce costs;

· The relationships with suppliers and customers: where IT can be used to lock in suppliers and customers, or to build in switching costs;

· New products: where IS enables an organisation to leverage its investment in IT to create new products that are in demand in the marketplace; and

· Competitive intelligence: where IT provides competitive (business) intelligence by collecting and analysing information about products, markets, competitors and environmental changes.

Therefore it can be concluded that IT helps businesses to pursue the following four basic competitive strategies: (1) Developing new market niches; (2) Locking in customers and suppliers by raising the cost of switching; (3) Providing unique products and services; and (4) Helping organisations in the provision of products and services at a lower cost by reducing production and distribution costs.

2.3 The role IT plays within strategy

Dewett and Jones (2001:313-14) mention that an IS includes many different varieties of software platforms and databases. These encompass organisation-wide systems designed to manage all major functions of the organisation provided by companies such as SAP, PeopleSoft, JD Edwards, to name only a few. In addition, more general-purpose database products are found, targeted with


specific uses such as the products offered by Oracle and Microsoft. Thus, the result is IT encompassing a broad array of communication media and devices, which link IS and people. Typical ISs include voicemail, e-mail, voice conferencing, video conferencing, the Internet, GroupWare and corporate intranets, car phones, fax machines and personal digital assistants. Therefore as IS and IT are often inextricably linked and, since it has become conventional to do so, for the rest of this study both IT and IS will be referred to jointly as IT. A study done by Ward and Griffiths (in Corboy, 2002:7) stipulates that the reason IT could be used for gaining competitive advantage is its status of:

· Linking the organisation to the customers and suppliers, through electronic data interchange (EDI), websites, wide area networks (WANs) and extranets;

· Creating effective integration of the use of information in a value-adding process, e.g. data mining, data warehousing and ERP systems;

· Enabling the organisation to develop, produce, market and distribute new products or services, e.g. computer aided design (CAD) and CRM; and

· Giving senior management information to help them to develop and implement strategy through knowledge management, for instance.

IT plays a vital role in improving co-ordination, collaboration and information sharing, both inside and across organisational boundaries. It allows more effective management of task interdependence and facilitates the creation of integrated management information, while simultaneously offering new possibilities for MNEs.

The generic IT capabilities and their impact on organisations, highlighted by Siriginidi (2000:376), are:

· Transactional capabilities, which transform unstructured processes into structured transactions;

· Geographical capabilities, which transfer information rapidly and with ease across large distances, thus making the processes independent of geography;

· Automation, which replaces or reduces human labour in processes;


· Analytical capabilities, which introduce complex analytical methods to enlarge the scope of analysis;

· Informational capabilities, which bring vast amounts of detailed information into the process;

· Sequential capabilities, which enable changes in the sequence of tasks in a process, often allowing multiple tasks to be performed concurrently;

· Knowledge management, which allows collection, dissemination of knowledge and expertise to improve the process;

· Tracking, which allows detailed tracing of task status, inputs and outputs; and

· Disintermediation, which connects two parties, internal or external, within a process that would otherwise communicate through intermediaries.

According to Dewett and Jones (2001:314), the findings of Huber's study suggest that IT is a variable that can be used to enhance the quality and timeliness of organisational intelligence and decision-making, thus promoting organisational performance. However, Huber's research extends the role and use of IT into the organisation in the strategic manner of efficiency and innovation. This captures many of the specific benefits and the examination of organisational functioning by describing the impact of IT on a broader array of organisational characteristics from the use of IT to its theory, which treats several organisational characteristics. The research further introduces theory, which treats several organisations as dependent variables, with IT positioned as the independent variable. Indeed, an ERP system is the IS tool and expression of the inseparability of business and IT. It is not possible to think of ERP implementation without a sophisticated IT infrastructure (Gupta, in McAdam & Galloway, 2005:281).

2.4 The importance of a strategic IT plan within an organisation

According to Bakehouse and Doyle (2002:1), the planning of an IT strategy is a decision-making process. Such a crucial process should be undertaken carefully, systematically and an understanding of the business context.

A study conducted by Peppard in Corboy (2002:6) revealed that the meanings of having a strategic
IT plan within an organisation are seen as establishing entry barriers, affecting the cost of switching
operation, differentiating products/services, limiting access to distribution channels, ensuring


competitive pricing, decreasing supply cost, increasing cost efficiency, using information as a product and building closer relationships with suppliers and customers. In addition, the study conducted by Earl (in Corboy, 2002:3) provides a useful list of reasons as to why an organisation should have a strategic IT plan:

· High costs are involved and it is critical to the success of many organisations.

· IT is now used as part of the commercial strategy in the battle for competitive advantage.

· IT is required by the economic context (from a macro-economic point of view).

· IT affects all levels of management and the detailed technical issues in it are important.

· IT has meant a revolution in the way information is created and presented to management.

· IT involves many stakeholders, not just management.

· IT requires effective management, as this can make a real difference to successfully using it.

2.5 The value chain and IT, linked to strategic management

The value chain can be helpful in understanding how value is created or lost. It describes the activities within and around an organisation, which together create a product or service. It is the cost of these value-adding activities that determines whether or not products or services are developed, which in turn underpins competitiveness (Johnson & Scholes, 2002:117).

According to Corboy (2002:6), the value chain model can be used to assess the impact of IT on the elements of an organisation's individual value chain and how it is integrated with other value-adding activities. Thus, a value chain can be used to evaluate a company's process and competencies and investigate whether IT supports add value, while simultaneously enabling managers to assess the information intensity and role of IT. Turban, King, Lee and Viehland (2004b: 11) state that the value chain is the series of value-adding activities that an organisation performs to achieve its goals at various stages of the production process categorises the generic value-adding activities of an organisation and also the primary activities supported by the secondary activities. Furthermore, it analyses the forces that influence a company's competitive position, which assist management in crafting a strategy aimed at establishing a sustained competitive advantage.

In an effort to establish such a position, Turban et al., (2004a: 16) suggest that a company needs to


develop a strategy of performing activities differently than a competitor through:

· Cost leadership strategies: Produce products and/or services at the lowest cost in the industry;

· Differentiation strategies: Offer different products, services, or product features;

· Niche strategies: Select a narrow-scope segment (niche market) and be the best in quality, speed, or cost in that market;

· Growth strategies: Increase market shares, acquire more customers, or sell more products;

· Alliance strategies: Work with business partners in partnerships, alliances, joint ventures, or virtual companies;

· Customer-orientation strategy: Concentrate on making customers happy;

· Innovation strategies: Introduce new products and services, put new features in existing products and services, or develop new ways to produce them;

· Operational effectiveness strategies: Improve the manner in which internal business processes are executed so that an organisation performs similar activities better than rivals;

· Time strategies: Treat time as a resource, then manage it and use it to the organisation's advantage;

· Lock-in customer or supplier strategies: Encourage customers or suppliers to stay with you rather than going to competitors;

· The entry-barriers strategy: Create barriers to entry; and

· Increase switching cost strategies: Discourage customers or suppliers from going to competitors for economic reasons.

All this will motivate organisations to perform activities differently than a competitor while linking those activities to the value chain. The value chain is a series or «chain» of basic activities that adds marginal increments of value to an organisation's products or services. IT plays a strategic role in those activities that add the most value to the organisation. Does Axapta software support strategic management within the MNE? Has Microsoft positioned Axapta competitively, which will assist MNE management to craft a strategy aimed at establishing a sustained competitive strategy? These issues will be discussed further in chapter 6 in relation to the hypotheses formulated in chapter 1.


2.6 Definition of the value chain concept

The initial purpose of the value chain was to analyse the internal operations of an organisation, in order to increase its efficiency, effectiveness and competitiveness. However, nowadays it extends to the company analysis, by systematically evaluating a company's key processes and core competencies in order to eliminate any activities that do not add value (Turban et al., 2004a: 20).

In a study done by Walters and Lancaster (1999:646-47) different scholars and researchers described the value chain analysis concept as follows:

1. O' Sullivand and Geringer remind us of the purpose of value chain analysis by explaining that the organisation has limited access to resources, and the purpose of the value chain is to ensure that the resources of the organisation work in a co-ordinated way to take full advantage of market-based opportunities. In addition the analysis should identify the optimal configuration of both the macro- and micro-business systems that will maximise value expectations. Thus, the conceptual concerns of the supply chain and the value chain begin to converge.

2. Brow pursues a conventional approach to the value chain by introducing two additional perspectives to the debate by putting the emphasis on the links or relationships between activities in the value chain and the organisation's competitive scope as a source of competitive advantage. Brow mentions that links and relationships between buyers, suppliers and intermediaries can lower cost or enhance differentiation. The competitive scope may concern the range of products or customer types (segment scope), the regional coverage (geographic scope), or its activities across a range of related industries (its industry scope).

3. Porter proposed the value chain as a means by which business actions that transforms inputs could be identified (i.e. value chain stages). Furthermore, from its study the proposition formulates suggested that those stages in the value chain can be explored for interrelationships and common characteristics. This could lead to the opportunities for cost reduction and differentiation.

Porter provides a detailed view of the value chain and its efficacy and states that its purpose at either macro or micro level is to:

· Identify relationships and interdependence between stages for both systems within the organisation;


· Identify meaningful differentiation characteristics, which are unique, or exclusive, to the organisation;

· Identify costs and cost profiles within the organisation together with cost advantages that could exist, and identify the business actions (stages) which transform inputs;

· Choose its competitive positioning market segments, customer applications/end-uses and the technologies; and

· Identify alternative value chain delivery structures (i.e. interrelationships internally and between business units) within the industry delivery structure.

Therefore, according to Porter (1990:40), both macro- and micro-business systems should consider the value creation process, more recently in the interests of shareholders, suppliers and employees (together with those of the community) included in a broader view of stakeholder interests and value. In addition, Porter (1990:40) explains the concept of the value chain in competition as follows:

"Competitive advantage grows out of the way organisations organise and perform discrete activities. The operations of any organisation can be divided into a series of activities such as salespeople making sales calls, service technicians performing repairs, scientists in the laboratory designing products or processes and treasurers raising capital. Organisations create value for their buyers through performing these activities. The ultimate value an organisation creates is measured by the amount buyers are willing to pay for its product or service. An organisation is profitable if this value exceeds the collective cost of performing all of the required activities. Organisations gain competitive advantage from conceiving of new ways to conduct activities, employing new procedures, new technologies, or different inputs. An organisation's value chain is an interdependent system or network of activities, connected by linkages. Linkages occur when the way in which one activity is performed affects the cost or effectiveness of other activities. Linkages also require activities to be co-ordinated. Gaining competitive advantage requires that an organisation's value chain is managing as a system rather than a collection of separate parts. Competitive advantage is a function of either comparable buyer value more efficiently than competitors (low cost), or performing activities at comparable cost but in unique ways that create more buyer value than competitors and, hence, command a premium price."


Thompson and Strickland (1987:115) stress that the primary analytical tool of strategic cost analysis is a value chain, which must identify the separate activities, functions and business processes performed in designing, producing, marketing, delivering and supporting a product or service. The chain starts with raw materials supply and continues on through parts and components production, manufacturing and assembly, wholesale distribution and retailing to the ultimate end-user of the product or service. Johnson and Scholes (2002:160) describe in a simplistic way the value chain as the activities within and around an organisation, which together create a product or service.

In a study done by Walters and Lancaster (2000:160), Brown offered a succinct definition of the value chain as follows: " The value chain is a tool to disaggregate a business into strategically relevant activities. This enables identification of the source of competitive advantage by performing these activities more cheaply or better than its competitors. Its value chain is part of a larger stream of activities carried out by another member of the channel-suppliers, distributors and customers." The three important perspectives that emerged from the study of Walters and Lancaster relating to the value chain are:

· Firstly that it emphasises the relationship between activities in the value chain;

· Secondly, the need for the first to result in competitive advantage; and

· Thirdly, to identify the role of information to evaluate the nature of opportunities offered, identify optional methods for competing and co-ordinate the value chain's activities towards successful implementation of the value strategy.

2.7 Different graphic representations of the value chain

2.7.1 Porter's value chain

The Porter's value chain model categorises nine generic value-adding activities of an organisation (Johnson & Scholes, 2002:160), as shown in figure 2.1 below. The model constitutes two broad types of categories: primary and support activities.

The primary activities are those activities involved in the physical creation of the product or service, its delivery and marketing to the buyer and its support after sale. The support activities merely provide the infrastructure that allows the primary activities to take place on an ongoing basis. The five main areas of primary activities are:


· Inbound logistics, which are the activities concerned with receiving, storing and distributing the inputs to the product or service. They include materials handling, stock control and transport, etc.

· Operations, which transform these various inputs into the final product or service: machining, packaging, assembly, testing, etc.

· Outbound logistics, which collect, store and distribute the product to customers. For tangible products this would be warehousing, materials handling, transport, etc. In case of services, they may be more concerned with arrangements for bringing customers to the service if it is a fixed location.

· Marketing and sales, which provide the means of making consumer/users aware of the product or service and enabling them to purchase it. This typically includes sales administration. In public services, it will be communication networks, which help users to access a particular service.

· Service, which includes all those activities that enhance or maintain the value of a product or service, such as installation, repair, training and spares.

Figure 2.1: Porter's value chain model

Secondary activities


Primary activities Primary activities

Upstream value activities Downstream value activities


(raw materials,
handling and

(machining, assembling, testing)


Firm infrastructure

(general management, accounting, finance, strategic planning)

(purchasing of raw materials, machines, supplies

Human resource management
(recruiting, training, development)

Technology development

(R&D, product and process improvement)

and distribution
of finished



(Advertising, promotion, pricing, channel relations)

Marketing and

(Installation, repairs, parts, etc.)


Source: Adapted from Turban et al., (2004a: 11).


The element of primary activities can be broken down to form a particular activity. Those primary activities, which occur before outbound logistics, are commonly referred to as upstream value activities, while those that occur after outbound logistics are called downstream value activities.

The upstream logistics are more important for buyers, while downstream logistics are more important for the marketers of the organisation's products. Each of these groups of primary activities is linked to support activities. Support activities help to improve the effectiveness or efficiency of primary activities and are divided into four areas:

· Procurement, which refers to the processes for acquiring the various resource inputs to the primary activities. As such, it occurs in many parts of the organisation.

· Technology development, where all value activities have a «technology», even if it is just know-how. The key technologies may be concerned directly with the product (e.g. R&D, product design) or with processes (e.g. process development) or with a particular resource (e.g. raw materials improvement). This area is fundamental to the innovative capacity of the organisation.

· Human resource management, which is a particularly important area, which transcends all primary activities. It is concerned with those activities involved in recruiting, managing, training, developing and rewarding people within the organisation.

· Infrastructure, which the system that plans the finance, quality control and information management.

In most industries it is rare for a single organisation to undertake all of the value activities in-house from the design to the delivery of the final product or service to the final consumer (Johnson & Scholes, 2002:160). However, although the names that attribute processes to each activity differ, the organisations perform activities more or less in the same way. In the study of Walters and Lancaster (2000:162-3), Sutton reminds us of «the totality surrounding one organisation as the value chain». Each step can only be justified if it creates more value to the end-user than it consumes as cost. An individual organisation's competitive position depends on the effectiveness of the chain as an entity, not just its own position as a link in the value chain.

2.7.2 The customer-centric value chain

Highly competitive markets and abundant information have placed the customer at the centre of the


business universe. In this new environment, successful business are those that employ customer-centric thinking to identify customer priorities and construct business designs to match them (Slywotzky & Morrison, 1997:17). Slywotzky and Morrison (1997:28-29) comment that in «the old economic order, the focus was on the immediate customer. Today, business no longer has the luxury of thinking about just the immediate customer. To find and keep customers, the perspective has to be radically expanded. In a value migration world, the vision must include two, three, or even four customers along the value chain. For example, a component supplier must understand the economic motivations of the manufacturer who buys the components, the distributors who take the manufacturer's products to sell, and the end-user».

According to Slywotzky and Morrison (1997:20), the traditional value chain begins with the company's core competencies, its assets. It then moves to inputs and other raw materials, to an offering, to the channels, and then finally to the customer, as shown in figure 2.2 below.

Figure 2.2: The traditional value chain


Inputs, Raw


Channels The Customer

Source: Adapted from Slywotzky and Morrison (1997:20).

Therefore Slywotzky and Morrison use a "customer-centric" approach to propose a modern value chain, as shown in figure 2.3, in which the customer is the first link to all that follows. The approach therefore changes the traditional value chain in that it takes on a customer-driven perspective. Slywotzky and Morrison (1997:20-7) state that an organisation's value chain must merge with those of other value chain members. Figure 2.3 below takes an industry perspective of this value chain where IT provides a co-ordinating function.

As is evident in the customer-centric value chain, the task of management is to identify the


customer needs and priorities of the channels that can satisfy those needs and priorities, the services and products best suited to flow through those channels, the inputs and raw materials required in creating the products and services and the assets and core competencies essential to the inputs and raw materials.

Figure 2.3: The customer-centric value chain

Value criteria Security




Economy Reliability



Value added

Costs added


Value Value offer Inputs, raw

Attributes Channels materials

Assets and core

Source: Adapted from Slywotzky and Morrison in Walters and Lancaster (1999:648).

2.7.3 Scott's value chain

Scott (1998:87) notes that all organisations, whether industrial or services, have a value chain. Each part needs a strategy to ensure that it drives value creation for the whole organisation. For a piece of the value chain to have a strategy means that it must be clear on what capabilities the organisation requires to deliver effective market impact.

Walters and Lancaster (1999:648) explain Scott's value chain by taking a strategic management view and using the value chain concept to identify the tasks necessary to deliver a product or service to the market. Therefore, Scott's approach to the value chain combines segmentation and value chain analysis, followed by suggesting a number of questions such as: In which areas of the value chain does the organisation have to be outstanding to succeed in each customer segment? What skills or competencies are necessary to deliver an outstanding result in those areas of the value chain? Are they the same for each segment or do they differ radically? According to Scott (1998:17), in order to segment an organisation or a product based on competencies it is necessary to


understand the value chain of the company. The core elements of Scott's value chain shown in figure 2.4 comprises seven areas: (1) operational strategy; (2) marketing sales and service strategy; (3) innovation strategy; (4) financial strategy; (5) human resource strategy; (6) information technology strategy; and (7) lobbying position with government. In the Scott value chain, coordination across the value chain is essential, which did not occur in the traditional value chain.

Figure 2.4: An alternative view of the value chain drivers

· Application rates

· Staff turnover

· Labour productivity

· Hierarchy/layers

· Accountability

· Remuneration ratios

· Ownership

· Bonusing

· Speed of promotion

· Training/revenue

· Internet comms

· Space/employee

· Cost

· Unionisation

· Leverage

· Cost of debt

· Debt maturity

· Investor relations

· Dividend policy

· Cost structure

· Cash flow

· Internal controls

· Acquisitions


Human resource


Purchasing and

Supplier Process

· Relationship

· Material inventory costs

· Unit input

· R&D training/revenue

· Patents/100 Employees

· New product launches

· Position on innovation curve

Core Production Process

· Unit costs - Utilisation

- Scale


· Quality - Scrap rate

- Rework

· Timeliness - Cycle time -Throughput time

· Flexibility - Changeover time

· Exposure to regulatory change

· Lobbying capability



Sales and service


· Speed to market

· Finished goods

· Unit distribution Cost



· Customer targeting

· Customer loyalty
- Churn

· Customer acquisition

· Customer yield


· Unprompted

· Price premium

· IT spend/revenue

· Communications

· Knowledge sharing

· Value chain integration

· Channel complexity

· Channel control

· Trade relationships

· Market responsiveness

· Customer churn

Source: Adapted from Scott (1998:87-222).

Scott's study of the value chain emphasised primarily the relationship between the company's value


chain and its strategic business units (SBUs). Furthermore, according to Scott (1998:88), certain parts of the value chain are likely to be common to all its SBUs. These include human resources, IT and large parts of its financial and selling functions. Therefore Scott concludes that the information requirements of individual SBUs might differ and require specific services. In a market/customerfocused business, the core elements of the business should be capable of developing specific service inputs to ensure competitive advantage.

2.7.4 Walters and Lancaster's value chain

The value opportunities are distinguished by understanding customers' priorities and producing, communicating and delivering the identified value. This suggests that the value chain must be an analytical and a facilitating concept (Walters & Lancaster, 2000:161-165). However, strategy must be considered as the value-creating system itself in which members work together to create value. Normann and Ramirez (1998:29) note that offering goods and/or services is the result of a complex set of value-creating activities involving different actors working together at different times and locations to produce them for and with a customer. Walters and Lancaster (2000:162) point out that the key strategic task is the reconfiguration of the value chain roles and relationships in order to «mobilise the creation of value in new forms and by new players». They further state that the underlying goal is to "create an ever improving fit between competencies and customer". To understand how this may be achieved, two models are required. The first is a model of the value chain itself and the second is one describing the value chain structures and processes.

According to Walters and Lancaster (2000:162-3), the value chain depicted in figure 2.5 combines the two models. Topics and subcomponents describe the notion of customer value, comprising customer value criteria less their acquisition costs. In order for the value chain to be successful it is essential that the individual objectives of all stakeholders as well as those of customers be met. It is important to note that value production and co-ordination are created by identifying and understanding customer benefits and costs, and the combinations of organisational knowledge and learning, together with organisational structures that facilitate response and delivery. Essentially it requires the management of information and relationships. An important influence is the impact of the value and cost drivers, which in turn are the important strategic and operational relationship criteria influencing value delivery and cost structures. A depiction of components of the value chain is displayed in figure 2.5 below. "Corporate value" is a value chain perspective of profitability and


cash flow objectives, "knowledge" refers to market-based intelligence developed for strategic and operational use within the value chain and "information management" components include market identification, time, accuracy, relevance and control aspects. Walters and Lancaster (2000:162) claim that relationship management comprises the obvious co-ordination activities together with coproduction (upstream and downstream within the value chain), co-destiny (the promotion of interdependence), cost management (to achieve optimal value chain costs for the value added throughout) and cost transparency (the notion that effective co-operation and co-ordination are only achievable if visibility exists).

Figure 2.5: The value chain components model

Key success factors

Value proposition

'Corporate value'

· Profitability

· Productivity

· Cash flow

· 'Knowledge'

Information management

· Identification

· Time

· Accuracy

· Relevance

· Control


strategy and

Organizational structure and


· Knowledge

· Learning

· Partnerships

Value production
and coordination

Operation structure and management


· Time to market

· Service

· Quality

· Risk

· Cost management

· Reputation

Relationship management

· Coordination

· Coproduction

· Codestiny

· Cost management

· Cost transparency

· Sourcing and procurement

· Production processes

· Flexibility


· Order management

· Delivery

· Reliability

· Availability



Customer value criteria

· Security

· Performance

· Aesthetics

· Convenience

· Economy

· Reputation


Customer value added = Results produced for the customer and the process quality


Price to the customer and the cost of acquiring the product service

Customer acquisition costs

· Specification

· Search

· Transactions

· Installation

· Operations

· Maintenance

· Disposal

Source: Adapted from Walters and Lancaster (2000:163).

In his influential book Competitive advantage, Porter (1985) depicts the relationships between actors in a productive system in terms that are uni-directional and sequential in nature. In Porter's value chain notion, economic actor A sells (or passes on) the output of his work to actor B, who 'adds' value to it, and sells or passes it on to actor C, who adds value to it, and sells or passes it on to actor D, and so on until it is sold to the end-consumer. However, with microprocessor technologies, economic actors are increasingly engaged in sequential and simultaneous activity relations with other economic actors. Thus, Normann and Ramirez (1998:viii) assert that provider-customer


relationships should be conceived not as one-way transactions but reciprocal constellations in which the parties «help each other and help each other to help each other». In addition, Walters and Lancaster (2000:162) argue that the organisational structure management is concerned with ensuring that maximum use is made of knowledge generated in the value chain and partnerships, which lead to effective learning.

Therefore Walters and Lancaster (2000:163) conclude that the activities and topics influence the production and co-ordination of value delivery through the impact of the value/cost drivers. Not surprisingly, the value/cost drivers influence organisational and operations structure and their management. As figure 2.5 infers, both production and logistics are important components of the operations structure, which is the other input into value production and co-ordination. The impact of globalisation (for procurement and marketing purposes) has made the value chain a more useful approach to identifying and evaluating business opportunities. The view of value chain structure and process mentioned by Walters and Lancaster in figure 2.6 below becomes important because it incorporate the expansion of the role of the value chain by means which the relationship and information management activities become more effective by identifying value chain constraints.

Figure 2.6: Value chain structure and process

Value Chain Management

Supply Chain Management

Relationship Management

Customers' Value criteria

less Customers' Costs of Acquisition

Product - Service Attributions

Value Delivery

Value Communication

Value production Assets & core

- inputs Value Competencies Value

- processes Proposition - required Objectives and strategy

- available

· Security

· Performance

· Aesthetics

· Convenience

· Economy

· Reliability

· Specification

· Search

· Transactions

· Operation

· Maintenance

· Disposal

· Core product

· Tangible product

· Augmentation

· Extended product

· Marketing logistics

· Transaction channels

· Physical distribution channels

· Benefits available

· Competitive advantage (s)

· Acquisition

· Times to market

· Service

· Quality

· Risk

· Costs

· Partnerships

· Materials management

· Target


· Internal

· value drivers

· activities

· costs

· External

· value attributes to be delivered

· ' relative value '

· Key success

· Skills

· Ressources

· 'Corporate value'

· Profitability

· Productivity

· Cash flow

· Knowledge

· Performance

Information Management

Source: Adapted from Walters and Lancaster (2000:163)


Sutton (in Walters & Lancaster, 2000:162-3) proposes the market mechanism as a means to coordinate activities. It is suggested that the term "market co-ordination" be used for the situation in which specialisation is separate and where the value chain comprises a series of sequential individual activities under individual ownership. An alternative model is one in which more than one organisation"... seeks to combine two or more stages under single control and rely upon internal management to ensure co-ordination". Sutton uses the conventional term "vertical integration" for this structure. An organisation may also act as a contractor to co-ordinate the other links in the value chain but relies on external agreements rather than internal management.

The vertical co-ordination comprises individual organisations having specific objectives but shared purpose (customer satisfaction) within the value chain. According to Sutton (in Walters & Lancaster, 2000:162-3), vertical integration has alternative structural options, namely breadth and depth. Breadth occurs in companies that rely on co-ordination of some activities while assuming ownership of others.

Sutton (in Walters & Lancaster, 2000:162-3) suggests differentiation as breadth being the extent of co-ordination with vertical integration and depth the activities that are combined into one activity, given that the value chain is concerned with value maximisation and cost optimisation. Therefore, the availability of economies of scale and scope is important. These relate to the ability to specialise and gain cost advantages and/or to offer a limited range of specialist products and/or services that have significant impact on customer costs, for which much of the fixed costs are shared.

2.7.5 Value nets

A traditional supply chain is designed to meet customer demand with a fixed product line, relatively undifferentiated, one-size-fits-all output and average service for average customers. In contrast a value net forms itself around its customers, who are at the centre. It captures their real choices in real time and transmits them digitally to other net participants.


Table 2.1: Key business design differences

Old supply chain New value net

· One size fits all

· Arm's-length and sequential

· Rigid, inflexible

· Slow, static

· Analogue



· Customer-aligned

· Collaborative and systemic

· Agile, scalable

· Fast-flow

· Digital


Source: Adapted from Bovet & Martha (2000:6).

According to Bovet and Martha (2000:2), a value net views every customer as unique. It allows customers to choose the product/service attributes they value most. The traditional supply chain manufactures products and pushes them through distribution channels in the hope that someone will buy them. In contrast, a value net begins with customers, allowing them to self-design products and builds to satisfy actual demand. Thus, Bovet and Martha (2000:2) describe a value net as a business design that uses digital supply chain concepts to achieve both superior customer satisfaction and company profitability. It is a fast, flexible system that is aligned with and driven by new customer choice mechanisms. Therefore a value net is not what the term `supply chain' conjures up. It is no longer just about supply, it is about creating value for customers, the company and its suppliers. Nor is it a sequential, rigid chain.

2.7.6 The e-business value chain

The e-business processes enable efficient and effective collaboration between organisations, directly or through so-called e-marketplaces. This means that responsibilities are shared between organisational units of the collaborating organisations. The improvement of SCM and CRM processes are key to enabling the organisation value chains (Kirchmer, 2004:25).

When the Porter value chain is considered and e-business technologies are placed into the
framework, it gives an insight into the reach of these technologies into the value activities. The


major enabler is the Internet and that is why the resulting processes are called e-business processes, connected to entire networks of processes across various organisations. Thus, the e-business value chain model by Hooft and Stegwee (2001:49) in figure 2.7 below, is used to illustrate that e-business can reach all activities of the organisation, and that some applications cover multiple value activities. In this model, the linkages already exist between activities; some of these linkages have been integrated by using e-business technologies, ultimately providing a fully integrated e-business process. By analysing the e-business value chain model, it helps the organisation lower the costs and increase the value of activities.

Figure 2.7: The e-business value chain

Source: Adapted from Hooft & Stegwee (2001:49).

Porter (in Diana & Judith, 2003:242) examines the Internet as it applies to the value chain as shown in figure 2.8 below. In this depiction, Porter employed his well-known value chain model to examine Web-based initiatives. Consequently, the focus is on strategy as it relates to the value chain. The model therefore suggests the dimensions of operations, technology, logistics and marketing as being potentially strengthened by the adoption of e-commerce strategies.


Figure 2.8: Prominent applications of the Internet in the value chain

Dissemination throughout the company of real-time inbound and in-progress inventory data

Firm Infrastructure

· Web-based, distributed financial and ERP systems

· Online investor relations (e.g., information dissemination, broadcast conference calls)

Human Resource Management

· Self-service personnel and benefits administration

· Web-based training

· Internet-based sharing and dissemination of company information

· Electronic time and expense reporting

Technology Development

· Collaborative product design across locations and among multiple value-system participants

· Knowledge directories accessible from all parts of the organization

· Real-time access by R&D to online sales and service information


· Internet-enabled demand planning, real-time available-to-promise/capable-to promise and fulfillment

· Other linking of purchase, inventory, and forecasting system with suppliers

· Automated " requisition to pay"

· Direct and indirect procurement via marketplaces, exchanges, auctions and buyer-seller matching

Real-time integrated scheduling, shipping, warehouse management,

demand management and planning, and advanced planning and scheduling across the company and its suppliers

Inbound Logistics

Web-distributed supply chain management

Integrated information exchange, scheduling, and decision making in in-house plants, contract assemblers and components suppliers

Real-time availableto-promise and capable-to-promise information available to the salesforce and channels


Real-time transaction of orders whether initiated by an end consumer, a salesperson, or a channel partner

Automate customer-specific agreements and contract terms

Customer and channel access to product development and delivery status

Collaborative integration with customer forecasting systems

Integrated channel management including information exchange, warranty claims, and contract management

Outbound Logistics

Real-time inside and outside access to customer information, product catalogs, dynamic pricing, inventory availability, online submission of quotes, and order entry

Online sales channels including Web sites and marketplaces

Online product configurators

Customer-tailored marketing via customer profiling

Push advertising

Tailored online access

Real-time customer feed-back through Web surveys, opt-in/- out marketing, and promotion response tracking

Marketing and sales

Customer self-service via Web sites and intelligent service request processing including updates to billing and shipping profiles

Real-time field service access to customer account review, schematic review, parts availability and ordering, work-order




parts manage-


Online support of customer service representative Through e-mail response management, billing integration, co-browse, chat, " call me now," voice-over IP, and uses of video streaming

After-Sales Service

Source: Adapted from Porter in Diana & Judith (2003:242).

For effective value chain reconfiguration, the process of reconfiguring is necessary to an organisation's survival in a changing environment (Normann & Ramirez, 1998:99). Thus, having an offering code that enhances fit for potential value-creating activities between supplier and customer is necessary. This is where the concept of leverage comes in.

According to Normann and Ramirez (1998:59), leverage explores and exploits opportunities based
on better utilisation of the joint resources of both parties, as well as those of subcontractors, partners
or other suppliers as appropriate. Therefore, leveraging can take the form of relieving and/or


enabling the customer. Both concepts concern the configuration of activities as they are manifested in the relationship linking customer and supplier; that is, in the offering.

2.8 ERP system and e-business: An evolving relationship for value chain extension

In the 1990s, software developers developed ERP software, a fuller "suite" of applications capable of linking all internal transactions. Since then the use of ERP software has exploded, and some advocates claim that it is the ultimate solution to information management. While traditional production management information systems have focused on the movement of information within an organisation, Web-based technology facilitates movement of information from business to business (B2B) and from business to consumer (B2C), as well as from consumer to business (Balls et al., 2000:2-3).

According to Balls et al., (2000:2-3), research groups such as Forrester, Gartner and AMR all project incredible growth for e-business in the first five years of the new century. Some analysts in Balls et al., (2000:2-6) comment that in their rush to become an e-business, most organisations have decided against implementing an ERP system. Balls et al., (2000: 4-6) have discovered that some client companies are building e-business applications while largely ignoring ERP development, hoping someone, someday will integrate the back end. As a result, companies whose e-business applications have no order-fulfilment and order-status capabilities either lack data or need to recreate it.

E-business simply does not work without clean internal processes and data. The choice, though, is not between developing e-business solutions or implementing ERP. Clearly, both are necessary. According to Balls et al., (2000:4-6), making ERP work most effectively in an e-business environment means shedding old notions of ERP. One such notion is whether ERP will always look the same. Balls et al., (2000:2-3) assert that ERP software in the next few years will certainly not look like ERP software designed in the 1990s. The delivery of ERP functionality will also change. For instance, a software vendor that today focuses on one front-end e-business application may in the future build into its products a transaction engine component that can then be attached to other organisations' front-ends. The other option is that ERP vendors will successfully make products more flexible and less difficult to implement, and they will either add e-business functionality or make their systems more compatible with third-party front-end e-business products. Why is this a


challenge for ERP vendors? Organisations use ERP software to enable processes that confer a competitive edge. Consequently, e-business is forcing ERP vendors to rethink their products' role within the enterprise. All are in some way looking to broaden ERP functionality to incorporate front-end technology and create trading communities through portals and joint ventures with Web-based technology and other vendors.

For many organisations, ERP itself may be delivered over the Web through business application outsourcing undertaken by application service providers. In the future, it is clear that companies will work together in extended value chains. Those that are able to plug their internal IS into the information chain that parallels the physical goods value chain will prosper; those that are not will fail. Successful organisations will be part of a networked team of business partners dedicated to delivering customer value. Very few (if any) organisations will be able to compete single-handedly against such a team. The technology to "team" is available today, and strong teams are already beginning to form. In short, together, e-business technologies (the Internet, the Web, a host of e-enabling technologies) and ERP systems will provide companies with new options for raising profitability and creating substantial competitive advantage (Balls et al., 2000:7). Balls et al., (2000:7) realise that properly implementing e-business and ERP technologies in harmony truly creates a situation where synergism is created. Web-based technology puts life and breath into ERP technology that is large, technologically cumbersome and does not always easily reveal its value. While ERP organises information within the organisation, e-business disseminates that information far and wide. ERP and e-business technologies supercharge each other. The purpose of these new technologies (ERP and e-business) is to enable the extended value chain.

2.9 The value chain selected and customised for the purpose of this study

This study involves Porter's value chain, Walters and Lancaster's value chain, the e-business value chain, the Scott value chain and the customer-centric value chain as discussed at the beginning of this chapter. The reasons for selecting these value chains respectively are given below.

· Porter's value chain model

Porter's value chain model is one of the foundation concepts on which most ERP systems are built.
Even though IT has revolutionised it, the concept remains an important tool for evaluation.
Therefore for this study the model will be applied by comparing the generic modules and functions


of Porter's value chain with Axapta Microsoft software modules and configuration as motivated in chapter 1.

· Walters and Lancaster's value chain model

Walters and Lancaster (2000:178) point out that identification of customer value criteria and an understanding of the key success factors are necessary for creating both competitive advantage and resultant success. Therefore value propositions become the means by which the customer understands the value offer (typically made explicit as a series of product/service attributes) and by which the value chain components assist in the formulation, evaluation and decision on their value-adding contributions in organisations. Walters and Lancaster (2000:178) view strategy as the value-creating system itself in which members work together to create value. Therefore, a key strategic task in the reconfiguration of value chain roles falls under relationships in order to "mobilise the creation of value in new forms and by new players". The model will be applied in this study to test Axapta Microsoft software value chains in its roles, relationships and leveraging mechanisms for the creation of value and its cost drivers for MNE users.

· The e-business value chain model

With regard to the challenge of e-business in the value chain system, it is the objective of this study to determine if Axapta attributes have been incorporated in e-business mechanisms, which could extend the value chain of an MNE. For its reason this model will be applied to indicate the possibility of its use or otherwise.

· The customer-centric value chain

"The value of any product or service is the result of its ability to meet a customer's priorities" (Slywotzky & Morrison, 1997:23). Customer-centric thinking begins first with the customer and then moves, ultimately, to the assets and core competencies. It literally reverses the value chain so that the customer is the first link in the chain and everything else follows (Slywotzky & Morrison, 1997:21). Thus, the customer-centric value chain will be applied in order to analyse the Axapta Microsoft software, to determine if it has been formulated according to the customer-centric philosophy.


· Scott's value chain

There is now an increasing shift away from this departmental view of competencies to managing the value chain holistically. The SBUs that do well in a particular segment will ensure that the entire value chain works to support their differentiating attributes. It is the ability of an organisation to integrate all its departmental skills behind a single goal that gives it decisive advantage over the competition (Scott, 1998:89). Thus, the value chain model will be applied to analyse Axapta Microsoft software capability in its relationship between a company's value and its SBUs.

The question can be asked whether Axapta software is based on the value chain model and, if it is a value net with a leverage capability, whether it has an impact on the effectiveness of an MNE's value chain in fulfilling its requirements. The value chain models selected for this study, as evaluative tools, will attempt to answer the above questions. This will be debated further as part of the findings of this study in chapter 6, where results will be put in relation to some of the hypotheses and objectives formulated in chapter 1.

2.10 The value chain's system through ERP integration

«The value chain's system integration is the process by which multiple organisations with a shared market channel collaboratively plan, implement, and manage (electronically as well as physically) the flow of goods, services, and information along the entire chain in a manner that increases customer-perceived value» (Balls et al., 2000-12). ERP systems facilitate this integration, and as a structured approach, they optimise an organisation's internal value chain.

According to Balls et al., (2000:82-4), a highly integrated value chain creates greater value for the end-customer by delivering products and services more efficiently and effectively. Within the industry the group of organisations that carry out each step in creating and delivering products is called the supply chain. Therefore the supply chain transforms into an integrated value chain when it:

· Extends the chain all the way from sub-suppliers to customers;

· Integrates the back-office operations with those of the front office;

· Becomes highly customer-centric, focusing on demand generation and customer service;

· Is proactively designed by chain members to compete as an «extended organisation»; and


É Seeks to optimise the value added by information and utility enhancing services.

The tangible benefits of system integration are inventory reduction, personnel reduction, productivity improvement, order management improvement, financial-close cycle improvements, IT cost reduction, procurement cost reduction and revenue/profit increase, etc. On the other hand, the intangible benefits are information visibility, new/improved processes, customer responsiveness, standardisation, flexibility, globalisation and business performance. Consequently, value chain integration allows real-time synchronisation of supply and demand and enables support of an organisation in its efforts to become part of an extended organisation, beyond electronic supply chain management. This pushes MNEs to develop collaborative business systems and processes that can span across multiple organisation boundaries.

2.11 The impact of IT in the value chain system

In his introduction of the value chain theory, Porter makes no reference of IT as a backbone to support the mechanism behind the process. However, later Porter and Millar (1985:150) acknowledge the importance of IT by mentioning that this technology «is transforming the nature of products, processes, companies, industries, and even competition itself. Until recently, most managers treated IT as a support service and delegated it to electronic data processing departments. Now, however, every company must understand the broad effects and implications of IT and how it can create substantial and sustainable competitive advantages».

The revolution of IT, especially computers, came to change the traditional value chain. In the study of Walters and Lancaster (1999:646), Brow comments that the changes in and convergence of information and communication technologies are the significant issues to highlight. Brow illustrates changes in value chain structure by arguing that the role of outsourcing has become more important in order to achieve the effectiveness of the value delivery. Brow further emphasises the role and impact of information management as an important feature that provides a co-ordinating activity. In addition, Evans and Wurster (1997:71) write that: «the changing economies of IT threaten to undermine the established value chains in many sectors of the economy, requiring virtually every company to rethink its strategy - not incrementally, but fundamentally». Evans and Wurster refer to this phenomenon as the "deconstruction of the value chain". Ghosh (1998:130) refers to it as


"pirating of the value chain" and explains that companies are forced to risk the relationships in their physical chains in order to compete in the electronic channel.

IT is spreading through the value chain system and it is performing optimisation and control functions as well as judgmental executive functions (Porter & Millar, 1985:151). Indeed, IT has had a revolutionary effect on competitive scope in the way in which it facilitates local, regional, national and international operations and co-operation. Truly the role and impact of an ERP system as an integrative and a strategic IT tool challenges the way businesses used to operate, and consequently supports the value chain operation to act efficiently and globally for MNEs to gain competitive advantage. With regard to the above view, the question is: Is Axapta software a value chain system with IT mechanisms, which facilitate the integration and the co-ordination of other ERP system applications? This question will be answered in chapter 6.

2.12 Conclusion

«A business is profitable if the value it creates exceeds the cost of performing the value activities» (Porter & Miller, 1985:152). Therefore, an organisation succeeds by ensuring that the entire process necessary to deliver a good or service is attuned to achieving the single goal of competitive positioning in the market. This requires co-ordination across the entire value chain, even if certain pieces of it are more critical than others (Scott, 1998:89). Thus, assert Day, Georges, Rebstein and David (1997:33), the attractiveness of a certain industry or product market depends upon how the economic value created for certain customers is shared throughout the value chain.

The analyses of the value chain concept in this chapter have focused on the assessment of the different value chains, and the linkage of all activities within them for competitive advantage. A competitive advantage requirement is that a viable number of buyers end up preferring the organisation's product offering because of its perceived «superior value». Superior value is nearly always created in either one of two ways: (1) by offering buyers a "standard" product at a lower price, or (2) by using some differentiating technique to provide a "better" product that more than offsets the higher price it usually carriers (Thompson & Strickland, 1987:134). In this study, it was determined that:

· IT plays a key role in the value chain in terms of the co-ordination of the different activities to create a product and the delivery of the service in an efficient manner to satisfy customers.


· The value chain approach could indeed help to measure the strength of an organisation's value
chain system, as well as of a product's value chain, using ERP software, i.e. Axapta Microsoft.

· The ERP system is based on the value chain concept, which supports the observation that it is a value chain system too. Unfortunately, most ERP architecture of the past did not incorporate IT as one of its core competencies. Therefore current ERP systems must be incorporated with IT mechanisms, such as e-business technologies, to facilitate integration and relationship within the value chain system.

· Based on the qualitative study of the ERP concept, an ERP system as a value chain system becomes an evaluative tool and IT instrument to evaluate ERP software (i.e. Axapta, SAP, Oracle, Aruba and others) attribute and specification integrative status in its relationships to support activities, strengths and ERP modules and applications.

The analysis of an organisation's value chain through a formal value chain model, as introduced in this chapter, highlights the linkages between the organisation's primary activities and support activities, isolating both efficient and inefficient activities. By capitalising on the efficient linkages and improving inefficient ones, organisations can increase efficiency, lower costs and create value. Therefore, the surplus value created through the achievement of efficiency translates directly into competitive advantage for organisations pursuing a cost leadership strategy. In addition, through the use of value chain analysis, organisations can identify the attributes of products and/or services which customer's desire, resulting in the creation of offerings that address these customer needs and desires. Organisations are successful in differentiating their products and/or services when they have a competitive advantage, which in turn, creates value and, hopefully, profit for the organisation (Porter, 1998: 40).

However, the theories behind the value chain make the concept impossible to be universally applicable owing to differing organisation structures and objectives, which means that the value chain system must be configured and applied differentially to every type of MNE. The value chain architecture is therefore a unique tool, which is crafted for every type of organisation, especially for MNEs where the architecture is very complex because of the broad operation at different sites.

In chapter 6, the value chain theory assessed in this chapter will indicate whether the Axapta


software value chain architecture, configuration and business functional activities fulfil the requirements and help MNEs to craft their value chain. It will be determined whether Axapta software as a value chain system and the ERP system do in fact meet the requirements of a general global ERP system model and the MNEs' value chain system for competitive advantage.

The next two chapters will be dedicated to ERP systems as an associate value chain system in order to show how it relates technically to the value chain configuration and architecture, since most ERP system software is built upon it.


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