Subject: Strategic Analysis & Leadership

CGA Md. Wahid Murad FCA, FCGA

Question for Softco (BD) Limited

The Softco (BD) Limited (SL) is a small manufacturing company based in Chottogram. It manufactures replacement
components for machinery used in the construction industry. Much of the machinery used by SL's customers is quite old so
components are no longer available from the original manufacturers, most of which are large multinational companies.

The business model is very traditional. The sales manager receives orders by telephone or fax and if the required
component has been supplied before, the sales manager checks the price list and informs the customer. SL holds very low
levels of finished goods inventory of only of the most popular components.

If the component has not been made before, an SL engineer obtains the original component drawings (from SL archives or
the original manufacturer, produces detailed engineering drawings, a list of materials required, and an estimate of the labor
hours needed. The estimate is passed to a costing clerk in the accounts department who calculates the likely product cost
(labor, materials and overheads), adds a 'mark-up' of 40%, and advises the sales manager of the price. If the customer
accepts the price, an order is passed to the production department, which schedules and completes the work. If the actual
cost of production is significantly different from that estimated, the price list is amended to reflect the actual manufacturing
cost.

Occasionally a component cannot be traced back to an original manufacturer. When this happens, the engineer produces a
customized component by dismantling the original and producing the relevant engineering drawings himself. Customized
components such as these currently account for about 10% of SL's business.

When an order is fulfilled, the component and invoice are delivered to the customer. Most customers pay within 30 days,
by cash or cheque. SL does not have a problem with bad debts. An increasing proportion of SL's business is now transacted
in BDT.

SL prides itself on customer service and receives lots of repeat business. SL grew significantly for a number of years as a
result of 'word of mouth' recommendations but has not experienced growth for the last two years, although turnover and
profit have remained stable.

SL uses only very basic Information Systems (IS), and reports its performance using a simple comparison between budget
and actual, which is produced using a spreadsheet package. SL's accounting system is not automated; and transactions are
recorded in traditional ledgers.

The sales manager of SL has noticed increasing customer demand for online ordering and a growing trend towards
business-to-business (B2B) e-commerce. To make e-commerce possible, SL's accounting system will also have to be
computerized
.
The sales manager believes that e-commerce should lead to an increase in the company's turnover by 10% each year for the
foreseeable future, and also that any increase in indirect costs as a result of this higher volume of business will be fully
offset by a reduction in administration workload as a result of the new computerized accounting system.

Required

(a) Describe the impact that e-commerce has had on the way business is conducted. (5 marks)
(b) Analyze the potential benefits to SL of the proposed e-commerce system. (15 marks)
(c) Discuss how SL might use its e-commerce system to increase the volume of business related to customized components.
(5 marks)
(Total = 25 marks)

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 Subject: Strategic Analysis & Leadership
CGA Md. Wahid Murad FCA, FCGA

(a)

E-commerce consists of the buying and selling of products and services over electronic systems like the internet. E-
commerce has challenged traditional business models and has changed the way businesses and their customers inter-relate,
both in terms of the way goods are bought and sold, and also the way information is communicated.

New business model – E-commerce enables the suppliers of products and services to interact directly with their customers
instead of using intermediaries (for example, hotels can now sell rooms directly to overseas holiday makers rather than
going through a tour operator or a travel agent). In this way, ecommerce has enabled business to improve the effectiveness
of their downstream supply chain management.

Opening up global markets – The internet is global in its operation; and so e-commerce allows small companies to access
the global market place, whereas previously they would have been restricted by their physical infrastructure.

New online marketplaces – The emergence of online marketplaces (such as bagdoom.com/rokomari.com) means that
small enterprises can now gain access to customers on far greater scale than the previously could.

Increases speed and scope of communication – The internet allows online transactions to be completed very quickly. It
also allows new networks of communication – between businesses and their customers (most notably through email); and
between customers themselves (for example, discussing product features or quality through chat rooms, and forums).

Increased price transparency – Potential customers can readily compare prices from a range of suppliers before making a
purchase, thereby increasing the level of price competition in the market.

(b)

International marketplace – Possibly the most significant strategic benefit of the e-commerce system is that it will enable
SL to reach an international, potentially global, audience. This offers SL significant opportunities in terms of market
development.

Construction is a global business, and so being able to sell to new customers outside Bangladesh should allow SL to
achieve the sales growth which it has been unable to do over the last two years. The sales manager expects the introduction
of e-commerce to generate turnover growth of 10% each year for the foreseeable future.

However, in order to realize this benefit, SL will need to ensure that it has the operational resources (production capacity,
distribution networks etc) to cope with any increase in demand. This will include making sure that SL's upstream supply
chain can cope with any increase in demand.

One of SL's strengths at the moment is the level of service it offers customers. If the drive for expansion means it is unable
to fulfill customer orders or to meet customer expectations, then its reputation (and then potentially also its sales) will
suffer.

Equally, if the development of the international business means that prices all become quoted in BDT with no option for
local currency, this may mean that Bangladeshi customers who used to pay in local currency may move their custom
elsewhere (especially if the local currency weakens against BDT).

Commercial image – If SL wants to expand and serve an international marketplace, it needs to present an image which
supports that ambition. Potential customers will want to be able find out about the company, its capabilities and credentials,
and the website will allow them to do so.

The interactivity of the website should also help improve the levels of customer service SL can offer its customers, so is a
competitive benefit as well as a strategic one.

Improved customer service and customer information – The sales manager has noted that customers are increasingly
mentioning that they would like to be able to order online. Therefore, if the new system showed a list of all previously
supplied components, and a price, they would be able to do this without having to phone or fax their order in. Moreover, the

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 Subject: Strategic Analysis & Leadership
CGA Md. Wahid Murad FCA, FCGA
customer would be able to get the information immediately without waiting to design a price as they do at the moment.
This will support SL's aim to provide the highest levels of customer service.

The online ordering would also support the international growth, because the website could take orders 24 hours a day.

We are not told anything about SL's competitors in the scenario, but to a degree the extent to which the online ordering
facility is a competitive benefit will depend on the comparative levels of service offered by SL's competitors. It may be
that some of them already offer a similar service, which is why customers have mentioned it to the sales manager.

Also, SL will need to review its customer service arrangements to ensure that it has enough staff on hand to deal with any
queries. It is likely that queries will now be more complex. Simple orders will be processed on the e-commerce system, so
the ones which require assistance are likely to be more complex. As SL prides itself on the personal service is provides, it
will need to ensure that the e-commerce remains properly supported by customer service staff.

Moreover, online ordering would only be available for previously ordered products. Unique customized products would
still need to be ordered in person, and will continue to take longer to price up due to the complexity of the design process
involved.

Internal information management – SL should be able to reduce the costs currently incurred by the engineer in creating
paper-based drawings of the components, and in the time taken for these drawings to be passed to the costing clerk and
then priced up.

As noted from the customer's perspective in the previous point, if the new e-commerce system contains a database of
previous orders, component specifications, and technical drawings this would allow SL to standardize, and therefore speed
up, its order preparation process.

However, this standardized process would not be possible for customized products as each job is unique and so there
wouldn't be any information in the database to help with such jobs.

Improved cash collection times – At the moment customers pay by cash or cheque usually within 30 days of an order
being fulfilled. SL could investigate the possibility that customers who order online pay, (either in part or in full) at the
moment they make the order. This will be beneficial to SL's cash flow management.

However, as SL is a relatively small company it may find that trade customers do not want to change their credit terms,
especially as they will still have to wait for SL to produce the goods after the order is made. In which case, the e-commerce
system will not generate any significant benefits in this area.

Moreover, SL does not currently have a problem with bad debts, which again reduces the upside potential from improving
cash collection processes.

Improved inventory management – One of the theoretical benefits of e-commerce is that it allows a business to reduce its
inventory levels; instead of producing goods and then trying to sell them, the business responds to demand 'pull' and
produces on demand. However, this appears to already be the way SL operates and it only holds very low levels of finished
goods inventory. Therefore, there are unlikely to be any significant benefits from the e-commerce system in this respect.

(c)

The e-commerce project is aimed at directly increasing the volume of business SL generates from 'standard' product sales.
The complex, one-off nature of customized components means SL will not be able to sell them directly online in the same
way, but instead SL could use the e-commerce platform to generate extra demand for these components.

Cross-selling – At the moment, SL does not advertise its services. However, it could use the e-commerce platform to
advertise and promote the full range of services it offers. Therefore, customers who are looking initially to purchase
standard components without realizing SL also offer a customizing service may subsequently also purchase customized
components.

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 Subject: Strategic Analysis & Leadership
CGA Md. Wahid Murad FCA, FCGA
Direct marketing – SL could also email customers who have purchased standard components, informing them about the
additional range of services it offers. The e-commerce system should have a database which gathers all the email addresses
of customers, and SL can use this to send subsequent marketing messages.

Some customers may not wish to receive these emails, viewing them as junk mail, and so customers need to be offered the
option of not receiving any subsequent marketing mail from SL when they make a purchase.

Online questions – SL could offer a facility for potential customers to contact an engineer to discuss potential work, and
may also show some of the more frequently asked questions pre-answered. Equally, SL could host a forum for customers to
discuss issues among themselves. Either of these options should help create 'noise' about SL's products and services which
in turn should help promote demand.

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