The Rise of Store Brands among Hypermarkets in Malaysia

Abstract

The increasing cost of living in Malaysia, the onset of the global financial crisis, increasing unemployment and uncertainty of economic recovery are driving most Malaysians and other people living in Malaysia to become more budget-conscious. The need to “stretch the Ringgit” becomes a norm. In the economic chaos, a business opportunity has presented itself, and the major hypermarkets operating in Malaysia – Carrefour, Giant and Tesco, are already exploiting the opportunity by introducing their respective store brands (a.k.a. house brands, retailer brands or private labels) of consumer goods. This article identifies and discusses the market forces driving the opportunity, the strategies the hypermarkets can consider to further develop the opportunity, and the strategies the manufacturer brands can adopt to defend their turf.



1.0 Introduction

In the Fourth Quarter 2008 Peninsular Malaysia Voter Opinion Survey, respondents had ranked the top two concerns as:

• Unfavourable economic conditions; and
• Inflation and rising cost of living;

as shown in Figure 1-1 (Economy, 2009, p. 12). In another newspaper report, it said that, “basic food items like a 400g loaf of bread cost RM1.60 in 1993 and the price has risen 30 percent to RM2.10” (Chin et al, 2008, p. F20). Ex-farm live chicken per kg has risen by 52.3 percent from RM2.43 in 1988 to RM3.70. Rice – the 15 percent broken variety type, has risen by 34.6 percent from RM13.00 in 1998 to RM17.50, as shown in Figure 1-2. (Note: USD 1 = MYR 3.64 or RM 3.64 as at February 25, 2009).

Figure 1-1: What is the Most Important Issue or Problem in the Country Today?
Source:
“Economy, race main worries”
New Straits Times, 3 February 2009, p. 12

Figure 1-2: The Rising Cost of Living
Source:
“Spiralling out of reach” by Joseph Chin, Joseph Loh & Rashvinjeet S. Bedi
The Star, 22 June 2008, p. F20

From the income perspective, “while the economy has grown in the last 50 years – at 6 to 8 percent annually, salaries have not matched these types of growth. As such, most of the private sector companies still pay Third World salaries” (Gnanalingam, 2008). Furthermore, with the current global financial crisis that has drastically affected global economies, pay rises, if any, in 2009 will remain small (Paul Raj, 2008; Malaysian workers, 2008).

Managing salary and wage increases to a minimum may also be inline with Malaysia’s positioning as being resource rich, offering excellent infrastructure and availability of skilled yet low-cost labour to continue attracting FDI (Malaysia 14th preferred, 2008).

1.1 The Government’s call to buy more local products

The global financial crisis has caused the governments of several countries, for e.g. Vietnam, Indonesia, Malaysia, United States and Peru, to encourage their citizens to buy more local products in order to save money (i.e. lower expenditure), stimulate the local economy and maintain some level of production capacities (In global, 2009; Indonesia mulls, 2009, p. B13; Ritikos & Ling, 2009, p. N4; Give local, 2009, p. 2; Gomez, 2009, p. 12; Bedi, 2009, p. F19; Liow: Use Malaysian, 2009; Millmow, 2009; President Garcia, 2009).

The “Buy Malaysian” call is especially important for Malaysia as 99.2 percent of the total numbers of businesses are SMEs, and they contribute 32 percent of the GDP with a workforce of 56.4 percent (Giving managers, 2009, p. 11). Furthermore, Malaysia’s exports had plunged by 28 percent in January 2009 (RM 38 billion) when compared to January 2008’s RM 53 billion – the worst decline in more than two decades (Damodaran, 2009, p. B2; Sarif, 2009, p. SBW10).

However, the WTO director-general has warned that such “measures by governments will jeopardise export sector jobs and risk setting the world on a damaging downward spiral of beggar-thy-neighbour protectionism” (Williams, 2009; Brazil may, 2009, p. B13; Trade Wars, 2009; Idris, 2009, p. SBW15).

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Smart supermarket shopping just a click away
by Kristina George
(New Straits Times, March 14, 2009)
http://www.nst.com.my/Saturday/National/2504723/Article/index_html

This Web portal http://smartpengguna.my/default.aspx enables consumers to compare groceries and related products among the popular Malaysian supermarkets or hypermarkets. Currently, the comparative product / price information is only available for Klang Valley, Malaysia.

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2.0 Market drivers

The escalating cost of living and the need to stretch the dollar has increased the opportunity and demand for lower priced consumer goods i.e. the market pull effect.

Retailers which are able to offer consumer goods at lower prices i.e. the market push effect, wins higher sales from consumers who are now increasingly prudent in their expenditure.

This market situation provides marketers the business opportunity to identify and develop alternative consumer goods to continue attracting consumers to their stores.

Other micro- and macro-economic factors that are fueling the demand for store brands (also known as private labels, retailer brands or house brands) as alternatives to manufacturer brands are:

• Global economic slowdown, escalating costs and rising inflation
• Global or regional expansion of large retailers e.g. Tesco, Carrefour
• Smaller manufacturers turning to contract manufacturing when their own, but weaker brands fail
• Increasing market competition
• Low cost as a differentiation strategy to achieve competitive advantage
• Retailers’ need to increase margins as operating cost increases
• Store brand products becoming more sophisticated as variety increases, and the quality and packaging improves
• Increasing willingness of consumers to consider lower price alternatives to stretch the household budget

3.0 Differentiation strategy – introduction of Store Brands

From a strategic approach, the large retailers e.g. hypermarkets are faced with:

• A segment of consumers demanding for alternative lower cost consumer goods
• The same segment of consumers expecting a minimal sacrifice in quality in lieu of the lower price
• The hypermarket’s need to increase margin with the reduced selling price

In essence, for the consumer, this can be translated to mean “low priced, respectably-branded consumer goods.” In other words, while consumers are increasingly attracted to lower priced consumer goods, they still require an acceptable assurance on the quality of those lower priced consumer goods.

Based on Porter’s Generic Strategies, as shown in Figure 3-1 below, Carrefour, Giant or Tesco can decide to challenge each other to become the lowest cost player in the Malaysian hypermarket segment. Who succeeds in becoming the lowest cost leader will depend on its value chain being the most efficient and lowest cost.

Figure 3-1:

Striving to be the low cost leader can be effective when:

• The market comprises of many price-sensitive buyers
• Buyers do not care for differences between brands
• Many buyers with significant bargaining power exists
• There are few ways to achieve differentiation

Alternatively, Carrefour, Giant or Tesco can adopt a differentiation strategy instead of purely striving to become the lowest cost leader, because a strategy solely aiming to be the lowest cost leader is subject to the following risks:

• Competitors may imitate, thus driving overall industry profits down
• Buyer interest may swing to other differentiating features beside price
• Technological breakthroughs in the industry causing the strategy to become ineffective

Moreover, most, if not all cost leadership strategies involve some degree of differentiation. Since the product subject here is the respective hypermarkets’ store brands, thus, the brand name of the hypermarket can serve as a strategic form of differentiation, for e.g. Hypermarket X’s store brand is perceived to be of higher quality among all the hypermarkets.

With their respective well-known hypermarket name that they already enjoy – which typically is synonymous with offering manufacturer brand products at everyday low prices – being able to further lower the prices of everyday goods while maintaining the perception that quality is not compromised, creates a competitive advantage to retaining existing customers and acquiring new customers.

Consumer perception do place a value on the store brand product based on the hypermarket’s name. In other words, Consumer A perceives that Store Brand X from Hypermarket X may be of better or higher quality than Store Brand Y of Hypermarket Y.

To date, all three foreign-owned hypermarkets have introduced their respective store brands in Malaysia – Carrefour http://www.carrefour.com.my/carrefour_brands.php, Giant http://www.giant.com.my/store_brand.html, and Tesco http://www.tesco.com.my/article.cfm?id=43 (Hypermarket brands, 2008, p. 8).

The following advertisements (Figures 3-2, 3-3, 3-4, 3-5, 3-6, 3-7 and 3-8) by the aforementioned hypermarkets appeared in popular dailies to promote their respective store brands and to message the savings.

Figure 3-2: “Carrefour Products. Up to 30 percent cheaper compared to well known brands.”
Source: The Star, 11 June 2008, p. N7

Figure 3-3: “Cost Increase? Save more. Go Carrefour.”
Source: The Star, 4 July 2008, p. N21

Figure 3-4: Carrefour’s “Life’s Full of Choices.”
Source: Sunday Star, 29 March 2009, p. M5

Figure 3-5: “Giant Brand. Only RM1.99 each.”
Source: Sunday Star, 24 August 2008, p. N17

Figure 3-6: “Stretch your Ringgit. Spend less with Tesco.”
Source: The Star, 14 June 2008, p. N23

Figure 3-7: “New! Tesco Brand Electrical Range.”
Source: The Star, 28 June 2008, p. N26

Figure 3-8: “New! Tesco Brand Choices.”
Source: The Sun, 21 November 2008, p. 38

Furthermore, market reports by the Malaysia Ministry of Domestic Trade and Consumer Affairs are showing “that consumers are wising up on spending, and many are switching to alternative brands with comparable quality to branded goods. This is supported by the higher sales of house brands offered by the hypermarkets” (Loong, 2008, p. F27).

Datuk Shahrir Abdul Samad, minister of domestic trade and consumer affairs said, “Consumers are saying, let me look at quality and pay appropriate prices rather than going for the best brands all the time” (Loong, 2008, p. F27)

4.0 Market audit – the market size of Store Brands

According to a survey conducted last year by the Nielsen Company, “The demand for private-label products of local hypermarkets and supermarkets is increasing as more shoppers attempt to stretch their ringgit” (Kam, 2008, p. B7; More consumers, 2008, p. 50; Rising costs, 2008).

The Malaysian private label market from February to September 2008 was worth RM240 million as shown in Figure 4-1 (Kam, 2008, p. B7). This represents a 32 percent increase over the February to September 2007 period. As a comparison, branded goods or manufacturer brands grew only 15 percent for the comparative periods.

However, for the February to September 2008 period, manufacturer brands accounted for RM5.3 billion in sales. Thus, there is much room for store brands to grow from its 2008 sales of RM240 million.

It is also worthwhile to note that the survey revealed or confirmed that, “on average, house brands are 30 percent cheaper than their branded counterparts” (More consumers, 2008, p. 50) as shown in Figure 4-2.

Figure 4-1: Sales of Private Label Products vs. Branded Goods
Source:
“Consumers switching to private-label products” by Rachael Kam
The Star, 11 December 2008. p. B7

Figure 4-2: Private Label Price vs. Branded Goods Price
Source:
“More consumers opt for in-house brands” New Straits Times, 11 December 2008, p. 50

5.0 Strategies for hypermarkets to promote and grow their Store Brands

As discussed earlier, hypermarkets are facing:

• A segment of consumers demanding for alternative lower cost consumer goods
• The same segment of consumers expecting a minimal sacrifice in quality in lieu of the lower price
• The hypermarket’s need to increase margin with the reduced selling price

The key strategies hypermarkets can adopt are:

• Competing on price
• Competing on quality at lower prices
• Competing using portfolio segmentation

Competing on price

The key initial attraction of store brands to consumers is the lower price of the alternative product to the market leading manufacturer brands. The alternative product can be defined as, “the consumer perceived almost equivalent product” to the manufacturer brand.

In other words, for a lower price, consumers can accept alternative products or products which they perceive as almost the same as the manufacturer brand products.

Furthermore, with store brands, the hypermarkets are not only able to offer alternative products at a lower price but also earn a higher margin compared to the manufacturer brands which they sell side-by-side.

Figure 5-1 shows the store brand and manufacturer brand pricing model comparison. While the contract manufacturers of the store brands may charge the hypermarket higher costs, the contract manufacturers also earn lower margins themselves as they have no cost adders such as advertising and promotional expenditures to cover compared to the brand manufacturers.

Figure 5-1:

With the lower cost they obtain from contract manufacturers for their store brands, the hypermarkets can also earn a higher margin when they price the store brands close to manufacturer brands. The industry practice in Malaysia seems to be an average 30 percent price gap between store brands and manufacturer brands. This is further supported by the Nielsen Company audit of the private label market in Malaysia mentioned earlier.

Competing on quality at lower prices

In the previous paragraphs, I used the phrase “… almost equivalent product”. Why is almost equivalent important?

Although consumers may be shopping for lower price alternative products, but if the perceived quality of the store brand is in doubt, even the lower price may not significantly attract the consumers.

Thus, the store brand must be perceived as almost equivalent to the manufacturer brand which consumers have been using since trust or quality, and positive emotional bonding with the manufacturer brand have already been established.

In this aspect, hypermarkets such as Tesco and Carrefour offer different categories for their store brands. Tesco offers Tesco Value and Tesco Choice as shown in Figure 5-2, and also the Tesco UK Imported range, while Carrefour offers Carrefour Big Saver and Carrefour Quality Line (NOTE: Carrefour Top Life are sports and fitness equipments, and Carrefour Harmonie are fabric products, i.e. non-grocery categories).

Figure 5-2: Store Brand Categories - Tesco example

Figure 5-3 shows how the hypermarkets position their store brand categories against manufacturer brands.

Figure 5-3:

Competing using portfolio segmentation

Hypermarkets can also use their store brands to compete against manufacturer brands by adopting a combination of portfolio segmentation strategy.

Portfolio segmentation is broadly based on price, category, and benefit:

• Price-based segmentation

Typically, this strategy uses two or three store brands to appeal to different price segments. Tesco uses this strategy with their Tesco Value offering basic need products at cheapest prices, Tesco Choice offering leading brand quality products at lower prices, and Tesco UK Imported range offering imported quality products for more discerning consumers.

• Category-based segmentation

Carrefour uses this type of portfolio segmentation by offering Carrefour store brands across product categories such as Carrefour Big Saver offering everyday basic products at cheapest prices, Carrefour Quality Line that emphasizes on product quality such as freshness, flavour, aroma, etc, Carrefour Top Life offering a range of sports and fitness equipments, and Carrefour Harmonie offering quality fabrics and textiles.

• Benefit-based segmentation

This form of segmentation strategy builds around consumers’ specific needs instead of appealing to consumers’ price sensitivity. For e.g., today, we find consumers being increasingly concerned about the type of fertilizers and chemicals used and long-term effects on health, thus, a market segment for natural and organic products is growing. Among the mentioned hypermarkets, Tesco UK Imported range also fits into this strategy by offering a higher quality benefit to consumers shopping for UK imported products.

6.0 Effects on Branded Goods and their manufacturers

How can brand manufacturers address the growing demand for store brands which competes for the same customer pool? How can brand manufacturers continue to supply and rely on large retailers e.g. the hypermarkets to promote the manufacturer brands when the hypermarkets are becoming more committed to promote their own store brands?

Manufacturer brands can consider and adopt the following strategies:

• Dual strategy – brand manufacturer continues producing its own brand and also the hypermarkets’ store brands
• Increase partnership effectiveness
• Increase the manufacturer brands’ value proposition
• Become more innovative
• Selectively fight store brands

Dual strategy

In markets where store brands have gained market leadership or controls the lion’s share of the market, it may make viable business sense for the brand manufacturers with idle production capacity to produce store brands for the hypermarkets.

By eliminating stagnant brands and extensions, and focusing on a smaller range of successful manufacturer brands, and additionally, producing store brands for the hypermarkets, the brand manufacturers can defend and increase market share and vis-à-vis their overall revenues and profitability.

A complete switchover may also be viable in the long-term, especially for the Tier 2 brand manufacturers that are not as successful as the Tier 1 brand manufacturers – they can become a dedicated store brand producer to the hypermarkets.

Increase the effectiveness of the partnership

Brand manufacturers should realize that a hypermarket also competes against other hypermarkets and large retailers. Thus, a hypermarket will need brand manufacturers to help them differentiate against another hypermarket or large retailer. With the large volume commitment that a hypermarket chain can provide, brand manufacturers should be able to customize certain products for the hypermarket to create product exclusivity via exclusive SKUs (e.g. a lower priced 4kg bottle of cooking oil instead of the standard 5kg bottle, or a tube of Colgate toothpaste with extra 20 percent content with a minimal price increase), and exclusive one-time offerings or limited editions on a mutually benefiting basis.

Another area where brand manufacturers can continue to value-add to the hypermarkets is in product assortment or product range. For hypermarkets to have their own store brands, volume commitment is the name of the game. Thus, the hypermarket will need to focus into specific categories of products where there is substantial volume or economies of scale created within its chain of hypermarkets. However, a brand manufacturer such as Proctor & Gamble (P&G) can easily offer the hypermarket an assortment of brands without the need of the hypermarket to build its own economies of scale simply because P&G already has the economies of scale.

Increase the value proposition of manufacturer brands

Brand manufacturers can increase the value proposition of their brands against store brands by:

• Creating greater product affinity to consumers’ perception (image and emotions)
• Managing the price gap between manufacturer brands and store brands of the same category
• Delivering customer satisfaction and expectation via a quality edge

Figure 6-1: Consumer Decision Making Process
Source: Deschamps and Nayak, 1995, p. 87

The above Figure 6-1 shows the consumer decision making relationship between image and emotional bonds, the price gap, and quality.

Consumers utilize information about the product or brand image, price and quality to assist and reinforce their purchase decisions. If the manufacturer brand lacks the right fit to the consumer’s desired product image and emotional bonding, the prospect is lost.

If it fits, then the consumer will consider the price gap between the manufacturer brand and the store brand. If the price gap is acceptable, the consumer purchases the manufacturer brand.

By using or consuming the manufacturer’s product, the consumer determines whether the product delivers the desired or expected performance i.e. delivering the desired level of customer satisfaction for the consumer to begin establishing a positive relationship with the manufacturer brand, for e.g. repeat the purchase and recommending the manufacturer brand to others (Kumar & Steenkamp, 2007, pp. 195 – 196).

Increase product innovativeness

To continue maintaining their market leadership or defending their market share, brand manufacturers need to increase R&D expenditures to improve products and identify new product innovations.

From marketing management studies and research, the findings support the fact that, “as the number of new product launches in an industry increase, the share of private labels in the category declines” (Kumar & Steenkamp, 2007, p. 168).

Kumar & Steenkamp further says that, “Industries with a consistent history of new technology and brilliant innovation by brand manufacturers have powerful brands and relatively weak retailers” (2007, p. 168). New product technology and innovations are the corner stones of product differentiation strategies, and can create or attract profitable market segments. Differentiated products can act as an entry barrier for a market segment to the store brands.

Selectively fight Store Brands

The brand manufacturers, especially the market leading Tier 1 manufacturer brands can selectively fight the store brands in specific product categories i.e. track the store brand’s growth by product segment and compete against it market-by-market.

In fighting the store brands, the brand manufacturers will need to:

• Increase advertising and promotional budgets
• Reduce prices via sales promotional activities and loyalty programmes
• Introduce discount “fighter” brands

In the long-term, brand manufacturers must regularly re-examine their business and operational efficiency to maintain their core competencies such as:

• Decrease production costs by increasing production efficiency with the use of new technology
• Decrease operational costs by increasing operational and supply chain efficiency
• Reduce waste and idle time within the whole value chain beginning from the raw material suppliers to internal operations to logistics service providers to wholesalers/retailers

7.0 Conclusion

The economic and government influence, and the market drivers that helped to create the opportunity for the demand of store brands in Malaysia have been identified.

From the market audit conducted by the Nielsen Company, we can agree that there is a viable market for store brands in Malaysia, and ample opportunity for growth.

To develop the market for store brands, I have discussed the key issues and strategies the hypermarkets can undertake to promote their store brands and yet maintain strong business relationships with their suppliers i.e. the brand manufacturers.

For the brand manufacturers, the store brands are a threat to their business as more shelf space is being allocated to store brands since its demand is rapidly increasing. In this aspect, I have also discussed the key strategies brand manufacturers can consider in order to defend and continue growing their business.

However, the brand manufacturers which are most likely to suffer eroding sales or market share as the demand for store brands continue to accelerate are the Tier 2 brand manufacturers that presently have not been as successful to market their manufacturer brands compared to the market leading Tier 1 manufacturer brands.

A continuously improving knowledge-base and understanding of consumer needs and wants with respect to the changing economic conditions in the business environment will help ensure the survival and growth of both manufacturer brands and store brands, as in the end, consumers make the final decision to purchase what, where and when.

Thus, it is no surprise to find that manufacturer brand loyalty is still strong in Malaysia, based on a survey conducted by Synovate in November 2008. The survey spanned 18 countries and included 1,000 Malaysians aged 15 to 64 across all income levels (Chong, 2009, p. 53).

The brand loyalty survey results are tabulated as follows:

Figure 7-1:

While this may be good news for brand manufacturers, the fact that the demand for store brands is growing at more than double the rate of manufacturer brands (i.e. 32 percent vs. 15 percent) serves as a strong reminder that brand manufacturers must continue to innovate, maintain customer loyalty, and generate new customer demand.

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Electronic Commerce and Security Issues

With today’s New Economy or Digital Economy, the traditional ways of wealth creation are being transformed. Traditional business models involving costing, product and market development, distribution channels, business partner relationships and supplier chain management, and customer relationship management are being transformed with digital technology brought about by the Internet and the World Wide Web.

Business performance efficiency and effectiveness are being revisited, questioned and challenged as globalisation and adoption of new digital technologies grow in momentum and importance. Commerce as we know it, takes on an electronic paradigm shift to become known as electronic commerce. Some industries or firms are quick to understand and embrace it in order to continue to efficiently create wealth with scarce resources, while others are lost in its web of technological complexity and correlation to traditional business methodologies.

However, electronic commerce, like all commerce, is not without risks. Although there are many economic, political, legal, technological and human resource related barriers and risks to electronic commerce, in this article I will discuss its security issues.


Part 1: Electronic Commerce and Electronic Business

1. The "Big Picture" of Electronic Commerce

What is electronic commerce or e-commerce? Is booking and purchasing an air ticket from http://www.airasia.com/ e-commerce? Is performing online banking on http://www.maybank2u.com.my/ e-commerce? What about buying books from http://www.amazon.com/ and http://www.mph.com.my/? The answer is yes – transacting via these websites involves e-commerce. These are some examples of business-to-consumer (B2C) e-commerce.

E-Commerce, driven by the Internet, is rapidly becoming a new global method of how to conduct business and interact with suppliers, partners and customers, especially in the developing and emerging markets or countries. The e-commerce model delivers a new dimension in speed, efficiency, spontaneity, interactivity, pervasiveness and cost reduction if targeted to the following business areas:

• Marketing, sales and distribution channels


• General, selling and administrative processes


• Product development processes


• Digital content creation


• Manufacturing and procurement processes


• Partner relationship management


• Supply chain management


• Customer relationship management

In economics, we have the traditional market system as shown in Figure 1.1(a). With the introduction and adoption of e-commerce, the traditional supply and distribution channels and business processes are replaced with more efficient processes and lower cost channels. This “big picture” e-commerce market system is shown in Figure 1.1(b).

From both the technology and economic perspectives, e-commerce can be defined as, “E-Commerce is about a global electronic marketplace that enables all members of a value chain to interact spontaneously for mutual benefits. It provides an environment where customers are empowered to control the buying process more effectively, receiving and accessing personalized information. It provides a platform for complete relationship management, not just a one-time transaction,” says Randall Whiting, president and CEO of CommerceNet (Mougayar, 1998).

Since some people generally consider “commerce” as only describing business transactions between two or more parties, this view will severely limit the scope of electronic commerce. Hence, the term “electronic business” or “e-business” is used. E-business can be defined as:

“Encompassing all business transactions and processes, interactions and collaborations within and without the business entity, utilizing computer, electronic, network and Internet technologies in the pursuit to efficiently and effectively create economic wealth with scarce resources.”

In this article, I will use the terms “e-commerce” and “e-business” to mean the same thing.

Buying and Selling

The most common adoption of e-commerce is in the buying and selling of products and services over the Internet. In the early stages of e-commerce, businesses wishing to get a slice of the Internet markets based their understanding on only this buying and selling part.

Today, we know that duplicating a fraction of the buying and selling function electronically does not change enough of the entire process to produce a significant economic outcome. This is where first-generation Internet malls fell into the trap and many remained there.

In e-commerce, two key elements of buying and selling changes. The first element relates to “what” is being bought and sold. The second element relates to “how” we buy and sell. Both these elements are about how the relationship between buyers and sellers changes every step of the way where “value” is created along the value chain. This “value” is not the same set of value propositions that companies have been using to attract customers. The “value” in e-commerce is its digitally transformed equivalent – the “digital” value.

Digital Value Creation

Ravi Kalakota describes the creation of digital value as, “the process of converting digital inputs into value-added outputs" (Kalakota & Whinston, 1996). The digital value creation process involves taking information as a raw material and producing higher added-value information-based products or services.

New Intermediaries

If an organisation does not add digital value quickly enough, the digital value can be delivered to the customer by new types of organisations known as cybermediaries – they can hijack an organisation’s potential new value by adding new value on top of the old value, aggregate it and resell it with other value i.e. winning over an organisation’s customers.

Almost every industry is threatened to a certain degree by the arrival of cybermediaries that cater to the electronic marketplace or e-marketplace and re-direct customer traffic. Other cybermediaries have no direct equivalent to those that they are replacing in the physical space e.g. electronic payment gateways and certification authorities.

Growth of Digital Markets or Electronic Marketplaces

Digital markets or electronic marketplaces include the creation of a large number of electronic trading communities, virtual marketplaces, virtual companies and new types of cybermediary services that compete by building and rebuilding new forms of value on top of one another.

The digital marketplaces, consists of groups of electronic buyers and sellers that come together within the confines of trusted virtual environments to conduct business spontaneously and efficiently. E-Commerce is about businesses and consumers adopting new processes in dealing with each other. These processes are supported by electronic interactions and relationships that replace close physical presence requirements or other traditional means.

The Internet Effect

The Internet and the World Wide Web has brought a new set of capabilities to traditional commerce. It is a new infrastructure composed of new technologies, new applications and new business rules that transcend physical boundaries and borders.

B2B, B2C, Intra-organisational E-Commerce, C2C and G2C

It is generally accepted that there are three major aspects of e-commerce: business-to-business (B2B), business-to-customer (B2C), and intra-organisational.

The intra-organisational side of e-commerce can be associated with Intranets working for the corporation, whereas the B2B and B2C aspects are Intranets working for trading partners and suppliers, and consumers. As Intranets begin to interact externally among different organisations, they can be called as Extranets.

The B2C market focuses on the consumer as the end-user or buyer. The B2B market relates to (a) businesses selling products or services to one another, or (b) transactions and information relating to backend processes between suppliers, partners or channels such as ordering, paying, EDI, procurement services, distribution support and logistics management.

Some established B2B e-commerce businesses are: http://www.e-chemicals.com/, http://www.e-steel.com/, http://www.paperexchange.com/, and http://www.plasticsnet.com/

B2C e-commerce examples are: http://www.barnesandnoble.com/, http://www.dell.com/, and http://www.acmabooks.com/.

Other types of e-commerce are consumer-to-consumer (C2C), e.g. http://www.ebay.com/, http://www.lelong.com.my/; and government-to-consumer (G2C) e.g. online internal revenue payment and related services, online employees’ provident fund services, online payment of traffic fines e.g. http://www.gov.my/MyGov/BI/Directory/Citizen/Home.htm and http://www.kwsp.gov.my/.

2. Business Catalysts

Many factors are driving the growth of e-commerce. Each industry or organisation is affected in a different manner. It is important to note that it is business drivers and not technology drivers that should be paramount in the decision to address e-commerce within an organisation.

Distribution Costs and Value Chain Inefficiencies

Any given product or service travels along the distribution channel that may or may not add value to it. Ultimately, a product or service reaches the consumer at a price that includes the inherent distribution costs, in addition to other benefits it may carry e.g. ease of location and knowledgeable salesperson. In general, for most retail products, a 40 to 60 percent markup from the immediate handling channel is normal. When the product reaches the consumer, this markup could total 135 percent or more in many cases.

Manufacturers are becoming concerned that more customer revenue is being left with their distribution channels and less with them, as they watch their profit margins get squeezed. On the other hand, consumers are realizing that a large part of what they are paying is actually staying with the distribution channels.

Due to the Internet as a marketing and product selection platform, consumers are beginning to question the value offered by the distribution channels when they can obtain the same products directly from the manufacturers. If manufacturers are able to connect directly with consumers and shorten the traditional distribution chain they used to depend on, it is possible to get rid of the inefficiencies of the current structure, and more importantly, reduce cost for the consumers.

Costs of Business Transactions

The cost of doing business with traditional paper-based and human-intensive processes continues to grow (annual salary increments and bonuses, increased employee benefits, employee healthcare and insurance, etc), whereas the electronic processing of transactions can be done at a fraction of the original cost, and with a higher degree of accuracy.

Need for Growth Markets

Retail markets are barely expanding. Many large retailers are still posting declines in sales and earnings or just average financial performances. It is becoming increasingly difficult to expand market share in the traditional marketplaces without large capital investment outlay.

By shifting attention to Internet-driven marketplaces, firms can have the chance to redefine market shares in the digital marketplace. Growth could come from:

• The creation of new online markets for existing products


• The creation of new products for online markets


• The opening of international markets via the digital marketplace

Competitive Pressures

Proper corporate planning takes into account what the competition is doing. In the digital marketplace, old leaders are challenged simply because the value demanded by customers changes, and the company that is agile and quick enough to recognize the trend and act on it, wins the customers.

Demands of the Electronic Consumer

As consumers become increasingly wired and aware of the implied convenience of electronic interactions with sellers of products and services, they will begin to demand more and more online services. Customer choices will be driven by the richness and depth of the online services offered by vendors or service providers, such as banks and retail stores. The same applies to suppliers and partners that will favour each other only if the online exchange capabilities i.e. B2B e-commerce, are in place.

Globalisation Issues

As if local competition is insufficient, globalisation is now bringing more competition to homegrown companies. Consider a company wishing to sell downloadable products (e.g. software) sets up a website in a tax haven country, allowing anybody around the world to order its products without being charged a sales tax, therefore undercutting other non-tax haven companies that sell the same products.

In the traditional channels, manufacturers are relocating or out-sourcing manufacturing capabilities to lower cost countries e.g. China, to increase their competitiveness against other companies manufacturing similar products.

Governments and Economic Growth

Governments continue to grow their countries’ economy. Foreign investors are wooed. Large retailers e.g. Carrefour, Tesco, Jusco, expand regionally or internationally, bringing new competition to the countries they expand to, although jobs may be created.

3. Technology Drivers and Trends

Technology is an enabler of change and a catalyst. Change has to be driven by business drivers that take advantage of the technology. Convergence creates new forms of capabilities by combining two or more existing technologies to create a new one that is more powerful and more efficient.

Convergence of Infrastructure Components

Thanks to the various switching and data conversion techniques, information is able to make its way through the various hybrid components of the information superhighway, such as telephone, TV, satellite, and wired or wireless networks. The Internet benefits as a result since it ties to all of them in a way that is seamless to the user.

Convergence of Information Appliances

The marriages of several information-access appliances are giving birth to more sophisticated devices. These are devices that can be used to conduct electronic transactions, retrieve information, authenticate users and perform other functions related to e-commerce.

Convergence of Vendors and Industry Services Capabilities

Most technology vendors are recasting their marketing savvy and product plans on the Internet. Existing capabilities are merging with new ones that target the emerging Internet market.

Cost of Technology

Whether it is Moore’s Law, which assumes that every 18 months, the power of the semiconductors doubles or whether it is the price/performance of any hardware technology, the cost factor cannot be ignored as a direct contributor to widespread availability and usage.

Content Liquidity

Since almost everything is being digitized, a new form of content liquidity is arising. Content liquidity refers to the ease with which information is obtained, processed, searched, encrypted, classified, converted, disseminated and reused. Content liquidity allows the commercialization and proliferation of information and removes transport inefficiencies.

Rapidity of Software Development

Rapid software development and adoption, fueled by advances in software technology are becoming the norm with Internet applications, and accelerates the deployment of e-commerce solutions.

The Networked Enterprise

The proliferation of networks is allowing many more electronic connections between various businesses and their external trading partners. This leads to more coordinated business processes and workflows between interacting parties.

The Human Dimension to Technology

With the advent of the World Wide Web, with its user-friendly and appealing hyperlinks, brings a human dimension to e-commerce through its interactive multimedia capabilities, thereby providing a richer experience for communicating and collaborating, both important aspects of e-commerce.

Part 2: Electronic Commerce Security

1. The Stakeholders

On February 9, 2004, Datuk Azizan Ayob, executive director of Commerce Dot Com was quoted, “Transactions through ePerolehan http://home.eperolehan.com.my/en/default.aspx, the electronic procurement system for Government-to-Business exchanges, is expected to reach RM1 billion this year” (Foo, 2004).

With the explosive growth in e-commerce and also as the underlying technology become more complex and more difficult to administer, the attraction and opportunities for intrusion and attacks are increasing. Hackers, crackers, industrial spies, corporate insiders, criminal elements and foreign government agents are taking advantage of the situation.

Since 1995, security is one of the most popular Internet risks. The positive reverse effect was to force technology vendors and large users to apply an unprecedented level of resources aimed at addressing the various security issues. The areas of security concern can be broadly identified as follows:

• User authorization and access


• Data, application and database security


• Transaction and payment security


• Network and system security


• Security maintenance and management

As e-commerce is business, these security issues concern the following stakeholders:

• Buyers i.e. customers


• Sellers e.g. wholesalers, distributors, retailers, vendors


• Business partners


• Intermediaries and other support services


• Government

Buyers

The tens of millions of people worldwide that surf the World Wide Web are potential customers of the goods and services offered or advertised on the Internet. While these customers look for goods and services to satisfy their wants and basic necessities, they need to be assured of their privacy and data security.

Sellers

Sellers need to be able to attract customers with their goods and services, but more importantly, they also need to provide customers with the expected high level of professionalism, comfort (peace-of-mind), trust and long-term reliability with customer data and transactions, and privacy matters. Failure is these areas will result in failure of their e-commerce initiatives.

Business partners

Business partners of sellers e.g. suppliers, logistic service providers, banks, and others who have business relations with the sellers and indirectly with the sellers’ customers are equally responsible to establish and provide a high level of security for customer information and transactions.

While the business partners are usually “transparent” to the buyers, security concerns and issues responsibilities are not diminished.

Intermediaries and other support services

Intermediaries are typically third parties that operate between the sellers and buyers. Almost all kinds of intermediaries can be found in the e-marketplace offering a variety of services. These cybermediaries usually offer services that differ from their traditional commerce counterparts such as matching buyers and sellers, provide infrastructure services, help buyers and sellers to institute and complete transactions.

Most of these cybermediaries operate as computerized systems. Hence, providing a high level of security and integrity is also a major concern here. Other support services include certification, trust services and providing secured information or knowledge databases.

Government

Governments, usually via their ministries of trade and industries, and commercial laws, are the major catalyst of commerce and economic growth. It is also a major interest of governments to ensure trade and customer-related security measures are provided and implemented by the sellers, business partners and cybermediaries with the enactment, implementation and enforcement of cyberlaws and appropriate changes or updates to existing commercial laws to encompass and support e-commerce.

2. Security Threats and other Risks

Security Threats to E-Commerce

Network and data security issues represent the paramount risk to e-commerce. Security threats to e-commerce takes many forms. Some of the e-commerce security risks are:

• Installation or use of unauthorized software
• Installation or use of unauthorized hardware or peripherals
• Infection of computer systems via viruses, Trojans, worms, malicious code or executables
• Use of computer systems for illegal or illicit communications or activities
• Abuse of computer systems access controls
• Physical theft, sabotage or intentional destruction of computer and communication systems
• Electronic theft, sabotage or intentional destruction or disclosure of proprietary, sensitive or private data or information
• Fraud or cheating
• Invasion of privacy or online harassment
• Denial-of-Service (DoS) or Distributed Denial-of-Service (DDoS) attacks
• Input validation attacks or exploits related to active program scripting or mobile code (ActiveX, Java, JavaScript, VBScript)
• Attacks related to protocol weaknesses
• Attacks related to insecure passwords
• Attacks on software bugs in Web servers e.g. CGI script-related attacks
• IP spoofing and DNS spoofing
• Transmission interception
• Spamming

With the continued growth and evolution of e-commerce, new threats also continue to manifest. In 2004, a new form of threat called phishing surfaced to world attention. The perpetrators known as phishers send e-mails to victims leading them to similar look-and-feel but fake (banking) websites that cause the victims to disclose account numbers, credit card details and other sensitive information online. Gartner estimates that phishers steal goods, services and cash totaling USD1.2 billion a year (The Net’s Biggest Scam, 2004).

Other forms of risks to e-commerce that warrants mention here are:

• Network Hardware and Communication issues
• Organisational and Human Resource issues

Network Hardware and Communication Issues

A network basically consists of interconnected computer systems and the communication infrastructure. The major issues facing network hardware and the communication infrastructure are:

• Hardware failure - insufficient planning in hardware specifications, selection and evaluation, and overly conservative or miscalculation of network traffic and transaction volume can lead to hardware failure or breakdown due to transaction processing overload.


• Transmission errors - Lightning, power surges and other electro-magnetic interference can introduce unwanted electrical currents in the electronic components or wires used for communication. Interference that is severe e.g. lightning can cause permanent damage to network equipment if not adequately protected.


• Bandwidth issues - Although many people have the luxury of owning their own computers and can afford the latest personal computer models and software, there are also many users who make do with older systems. This is especially true in developing and lesser-developed countries. While broadband technology is available and accessible today, the majority of users in developing and lesser-developed countries are still connecting to the Internet via dial-up modems with possible speeds of between 9600bps to 56Kbps. Lack of bandwidth poses one of the key issues to e-commerce being widely accepted and adopted. Poor dial-up line quality will further add to the overall annoyance and failure of meeting users’ basic expectation and satisfaction.


• Network architecture and security - Poor network design and security implementation is a major risk to e-commerce. Computer and network design and security must address four basic requirements – confidentiality, integrity, availability and authenticity.

Organisational and Human Resource Issues

Risks to e-commerce are not solely technological in nature, as political, economic and legal barriers to e-commerce also exist, but are beyond the scope of this article. However, there is merit to mention here the “catalyst” of security risks to e-commerce i.e. organisational and human resource issues.

Major organisational and human resource issues contributing to and amplifying risks to e-commerce are:

• A lack of knowledge about e-commerce and e-commerce technologies
• Low skill sets in the organisation
• Inability to put together a business case for e-commerce
• Implementation difficulties
• Organisational resistance to change
• Lack of management support to adopt e-commerce or e-transform for the New Economy i.e. no perceived need for e-commerce

Part 3: Conclusions and Recommendations

The major risk to e-commerce is security. E-Commerce systems must provide for or include the following security requirements in its design and development:

• Secrecy - Prevent unauthorized persons from obtaining data, reading messages and business information, obtaining credit card numbers, or deriving other confidential information.


• Integrity - Enclose encrypted information in a digital envelope so that the computer system can automatically detect data or messages that have been altered or tampered with.


• Availability - Provide delivery assurance for each message or data segment so that messages or data segments cannot be lost undetectably.


• Key management - Provide secure distribution and management of encryption keys (public keys and private keys) needed to enable secure communications.
• Non-repudiation - Provide undeniable, end-to-end proof of each message or data’s origin and recipient.


• Authentication - Securely identify clients and servers with digital signatures and digital certificates (Turban et al, 2002).

Protecting Intellectual Property

Just like written or published works, art, music and songs, all forms of digital intellectual property, posted on Web sites are also protected by national and international laws. It becomes the onus of the Web site or e-commerce site to provide recognition of the digital intellectual property protection. In this aspect, the U.S. Department of Justice’s Cybercrime Web site http://www.cybercrime.gov/ provides valuable information about intellectual property attacks and countermeasures that organisations can employ to protect intellectual properties.

Protecting Privacy of Web Site Customers

Cookies, written by servers to client computers can contain private information such as credit card numbers, passwords and login information. Cookies in the wrong hands can pose serious security violations. The best way for Web surfers to protect themselves is to disable cookies entirely. The downside to this approach is that “good” cookies are also blocked. Hence, a more subtle way is to deploy or install cookie blocker programs that can allow only “good” cookies to be written and stored into client computers.

Protecting Client Computers

Client computers must be protected from threats that originate in software (e.g. e-mail), data, plug-ins, and graphics that are downloaded to the client computers from the Internet. Active content delivered over the Internet in dynamic Web pages are potentially harmful.

Threats to client computers can be posed by malevolent server-sites masquerading as legitimate Web sites. The use of digital certificates and digital signatures in e-commerce communications enable authentication assurance of clients and servers.

The use of Web browsers such as Microsoft® Internet Explorer, Netscape® Navigator and the new FireFox provides an extra level of protection for client computers against ActiveX and Java-based active content.

Protecting E-Commerce Communication Channels

Protecting e-commerce communication channels means providing channel secrecy, guaranteeing message integrity, and ensuring channel availability. Encryption technology must be used to protect data, messages or information from unauthorized persons. Public and private key encryption technology is widely used in e-commerce. The use of secure protocols such as Secure Sockets Layer (SSL) protocol, Secure HyperText Transfer Protocol (S-HTTP) and Secure Electronic Transactions (SET) are necessary in e-commerce to ensure transactions and electronic payment security, in the areas of authentication, spontaneous encryption and request/response non-repudiation.

Protecting the Web Server

It is also very important to secure the Web server since e-commerce data is stored in Web servers, data such as confidential customer information, credit card numbers, business transactions, and financial information. Web servers must have access controls and authentication procedures. Security features and capabilities in operating system software are also important considerations for the Web server. Another software required in the Web server is called a firewall. Firewalls provide the first line of defense between an organisation’s network and the Internet. Another security consideration is the physical security of the Web server. Web servers must be housed in secure computer rooms or enclosures to allow secure authenticated physical access by authorized personnel only.

Security in E-Payment Systems for E-Commerce

One of the most fundamental applications of security is in the electronic payment systems of e-commerce, e.g. for credit card payment processes in B2C e-commerce.

Security for e-payment systems is achieved through implementation of high-level encryption, digital signatures and digital certificates, Secure Socket Layers (SSL) and secured e-payment gateways or banking and Electronic Funds Transfer (EFT) networks.

References:

Chaudhury, Abhijit and Kuiboer, Jean-Pierre. (2002). E-Business and E-Commerce Infrastructure: Technologies Supporting the E-Business Initiative. New York, NY: McGraw-Hill

Erbschloe, Michael. (2001). Information Warfare: How to Survive Cyber Attacks. Berkeley, CA: Osborne/McGraw-Hill

Foo, Angeline. (February 9, 2004). “RM1bil ePerolehan deals”. The Star, p. 3

Hassler, Vesna. (2001). Security Fundamentals for E-Commerce. Norwood, MA: Artech House

Kalakota, Ravi and Whinston, Andrew B. (1996). Frontiers of Electronic Commerce. Boston, MA: Addison-Wesley Longman

Laudon, Kenneth C. and Traver, Carol G. (2002) E-Commerce: Business, Technology, Society. Boston, MA: Addison-Wesley/Pearson Education

Mougayar, Walid. (1998). Opening Digital Markets: Battle Plans and Business Strategies for Internet Commerce. New York, NY: McGraw-Hill

The Net’s Biggest Scam. (October 4, 2004). Forbes, pp. 30 – 34

Turban, Effraim et al. (2002). Electronic Commerce 2002: A Managerial Perspective. Upper Saddle River, NJ: Pearson Education

Secret Code of Managership

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ACKNOWLEDGEMENT

This article was published in The Star on January 8, 2009.

Reproduced here with permission from the author
Dr. Wilson Tay, CEO of MIM
and from
The Malaysian Institute of Management (MIM)
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MANAGEMENT and leadership are two sides of the same coin. Management is about making things happen and achieving expected results through people.

In managing, we consider the quality, characteristics and behavioural aspects of management leadership to achieve superior performance.

Over the last decade there has been too much emphasis on “hero” or “iconic” leaders, while “servant” or “management” leaders who go about achieving great results quietly are often forgotten.

These humble and quiet achievers are referred to as the Level 5 leaders in Jim Collin’s book Good to Great. They go about building profitable, sustainable businesses and accomplish great results in an unassuming way.

These management leaders achieve great outcomes because they have learned the “secret code of managership” comprising 28 personal competency requisites and performing habits of management leadership. Through this mastery, they are able to enlist their superiors, fellow managers and workers to work zealously together to pursue a common mission and shared vision.

Management Leadership

Many management writers have incorrectly distinguished managers as those being able to perform tasks that only deal with the efficiency of the business, and leaders as those who can undertake tasks which focus on the effectiveness of the business. However, great management leaders possess the capabilities of both an efficient manager and effective leader, depending on the situation.

Hence, management leadership is the exercise of both these capabilities and competencies through individual high performance within an understanding of operational and strategic requirements. One characteristic of great management leaders is that they are also good followers.

If necessary, they can be just one of the team players, allowing others to assume the leadership role.

Characteristics of Management Leaders

High performing leaders become successful because of the reverence and support from their team of competent managers. Outstanding management leaders always acknowledge that they stand on the shoulders of the great managers that they have. No great management leader can achieve a sustainable superior outcome on his own.

There is now a renewed clarion call for managers to pursue and promote “management leadership” or “managership” through continuous professional development and life-long learning. The challenge is to master the ability to learn faster than the rate of change happening around us.

What is the Secret Code of Management Leadership?

I have created the mnemonics MANAGEMENT and LEADERSHIP to represent the 28 personal requisites of mastering management leadership – 10 efficiency and 10 effectiveness competencies plus eight performing habits. (See the following chart).

The first 10 management leadership or “managership” competencies are embedded in M-A-N-A-G-E-M-E-N-T, wherein lies the Secret Code of “Management” which essentially focuses on the EFFICIENCY of tasks to be achieved: (Table 1)

Table 1: MANAGEMENT

The next 10 managership competencies are endued in L-E-A-D-E-R-S-H-I-P wherein lies the Secret Code of “Leadership” which essentially focuses on the EFFECTIVENESS of tasks to be achieved: (Table 2)

Table 2: LEADERSHIP

Catalyst for Management Leadership

In order to catalyse the achievement of the aforementioned 20 efficiency and effectiveness competencies, we need to practise the 8 “I’s” Performance Habits:

1. Inspire – to articulate the Vision and set Direction;
2. Impart – to engage in Communication and provide Coaching;
3. Influence – to inculcate Sincerity and build Trust;
4. Inquire – to encourage Inquisitiveness and teach Problem Solving;
5. Initiate – to motivate Action and instill a sense of Urgency;
6. Improve – to enable Change and grant Empowerment;
7. Implement – to measure Performance and focus on Results; and
8. Innovate – to stimulate Creativity and seek out Opportunity

These 28 requisite competencies of Management Leadership (Managership) need to be learned, developed and practised by individuals in order to become high performing management leaders. Once these competencies are mastered, the challenge is to institutionalise and integrate a management leadership culture within the organisation.

Written by Dr. Wilson Tay, MMIM, MIM-CPT. Dr. Wilson Tay is the chief executive officer of the Malaysian Institute of Management. He is also an educator and consultant. His speaking engagements have included both public and private educational institutions. His expertise includes management leadership, knowledge management, creativity and innovation, entrepreneurship, human capital and talent management development, coaching and mentoring, and SMEs development.

For more information, please contact the Malaysian Institute of Management http://www.mim.org.my/ at Tel: +603 – 2164 5255 or email: enquiries@mim.org.my