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MBA Oman: Assignment 2 Help Guide Assessment criteria Knowledge & Understanding (30%) Key Considerations Try to limit the general description of Netflix global production industry where possible

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MBA Oman: Assignment 2 Help Guide Assessment criteria Knowledge & Understanding (30%) Key Considerations Try to limit the general description of Netflix global production industry where possible. Marks are generally for analysis and evaluation, not just for description. You must demonstrate your knowledge of the global production industry and Netflix. Do identify and focus your discussion (remember your word count) on those features that you think are most relevant e.g. have the most impact on successfully conducting business in the global production and content platform business today. Don’t forget to use discussion/examples. Interpretation & Evaluation (30%) references to support your You will need to complete a PESTEL analysis and a Porter’s 5 forces analysis (both will be covered in Business School 3). Please note that in these analyses you will be evaluating the overall global production industry that Netflix operates in. You should then review Netflix online marketing using their technology (streaming media service), website and social media to build up a view of their current offering (products, services, prices, countries etc.). You will then need to compare/evaluate your findings versus the PESTEL and the Five Forces analyses that you will have completed. For example, using the PESTEL analysis you should focus on how political, economic, social, technological, legal and environmental forces affect their business. Then using your analytical judgement, you will need to determine which markets/products etc. (strategy) Netflix should focus on in the future to remain profitable/competitive. You may of course identify several things that Netflix should continue to focus on, but what we are keen to see from you, are examples of changes (adjustments to current) to and additions to (new areas of focus) Netflix production and content platform strategy. The outputs of this become Netflix future recommended strategy. Please remember to use the available literature to strengthen your supporting rationale. 1 Do review the business school slides (BS-2 and BS-3) as these will help you structure your strategy thinking. In your conclusion, you should summarise your key points. Presentation & Structure (20%) Note: There isn’t a formal structure for the report but you could use something along the lines of: Introduction/Background (250--350 words) PESTEL Analysis Five Forces Analysis Key features of Netflix current strategy Recommended future of Netflix strategy Conclusion (250-350 words.) The is a 3,500 word count limit Do carefully consider the overall structure and logic/flow of your discussion. Are the key points that you are trying to get across clear? Check that you are employing appropriate industry/business terminology. Ensure that you proofread your work. Feel free to include appendixes if you think they will add value. This could include Netflix data and industry information etc. Relevance and Quality of Sources & Referencing (20%) Try to include at least 10-12 high-quality references (use highquality sources e.g. industry & management books and journals) in your report. Ideally, more than 12 to get a good mark. Ensure that you follow the Harvard UoB referencing style. In the main, try and use contemporary references (ideally, from the last 5-6 years) where possible, unless citing seminal works ( influential sources of great importance). 2 Do reconcile your in-text references to your reference list, in order to ensure alignment. 3 Submission Deadline Marks and Feedback Before 10am on: 20 working days after deadline (L4, 5 and 7) 15 working days after deadline (L6) 10 working days after deadline (block delivery) Before 9am (UK time) on: Thursday, May 20, 2021 Unit title & code MAR023-6 Thriving in a Competitive Global Context Assignment number and title Assessment 2: Written Report (Subject to external examiner approval) Assessment type Individual Written Report Weighting of assessment 70% Size or length of assessment 3,500 words Unit learning outcomes 1. Demonstrate knowledge and understanding of the changing nature of the global business environment, buyer behaviour in a global context and the factors which influence the implementation of an organisation’s competitive business strategy in a global context. 2. Demonstrate skills and abilities in collecting and analysing appropriate information, applying a range of strategic business and financial tools and techniques available, to plan and evaluate global business and e-business operations. What am I required to do in this assignment? Your Task: Imagine you are a consultant you have been tasked with the following: 1. To conduct a PESTEL and Porter’s 5 Forces analyses to identify the key forces of change in the global production and media streaming industry. 2. Analyse and evaluate Netflix global production industry current offering. Building on your PESTEL and 5-Forces analysis consider the potential strategic direction for the business and include recommendations about which markets and product categories it could potentially focus on in order to grow and sustain its international competitiveness/profitability. What do I need to do to pass? (Threshold Expectations from UIF) In order to pass Assessment 2 you will need to: • Identify and assess some of the current strengths and weaknesses of the international organisation(s) relative to its global environment. • Recommend a logical outline strategy / plan to enhance its global competitiveness. How do I produce high quality work that merits a good grade? We will be filling this section in together in class on make sure you have downloaded/printed out the Assignment Brief and bring it to the session with you. How does assignment relate to what we are doing in scheduled sessions? This assessment will allow you to reflect upon some of the core concepts which contribute to the foundational themes of the unit. This assessment will allow you to demonstrate your knowledge in understanding the nature of the global business environment of the production and media streaming service industries. You will be expected to think laterally about the global business environment (with particular focus on the macro environment) and the unique set of challenges an increasing level of interdependence can have on business activities/operations. How will my assignment be marked? Your assignment will be marked according to the threshold expectations and the criteria on the following page. You can use them to evaluate your own work and consider your grade before you submit. 2 3rd Class – 40-49% Lower 2nd – 50-59% Basic use of academic literature, with basic use of course concepts, models and theories but lacking in depth and/or breadth in some areas. Good use of academic literature in connection to problem set and good overall application of multiple course concepts, models and theories. Very good use of academic literature in connection to problem set and very good overall application of multiple course concepts, models and theories. Excellent use of academic literature in connection to problem set and excellent overall application of multiple course concepts, models and theories. 2 Interpretation & Evaluation (30%) Some basic ability to synthesize different perspectives, but lacks evaluation of the international business environment and analysis of contemporary research to explain the complex interrelationships between the macro environment and the motorcycle industry Argument lacks consistency, critical thought and appropriate conclusions Good ability to synthesize different perspectives, but limited evaluation of the role of I.B. and limited analysis of contemporary research to explain the complex interrelationships between the macro environment and the motorcycle industry Attempt to develop a consistent argument, but lacks critical depth Conclusions are made, but not supported Very good ability to synthesize different perspectives and evaluate the role of I.B., and to analyse contemporary research to explain complex interrelationships between the macro environment and the motorcycle industry Evidence to construct a consistent argument (which is not critical throughout) and derive relevant conclusions Excellent ability to synthesize different perspectives and evaluate the role of I.B., and to critically analyse contemporary research to explain complex interrelationships between the macro environment and the motorcycle industry Strong evidence to construct a consistent and critical argument and derive relevant conclusions 3 Basic presentation skills but major inconsistencies in terms of structure and flow that hinder understanding Basic style of writing without using adequate terminology and vocabulary, major spelling and grammatical errors Good presentation skills, but inconsistencies in terms of structure and flow Very good presentation skills, but minor inconsistencies in terms of structure and flow Very good style of writing in terms of terminology and vocabulary, grammar and spelling; however, some minor issues in terms of clarity of writing Excellent presentation skills evidenced by a clear structure and coherent flow (Basic) identification of some sources; however, sources lack relevance and quality and are not used effectively to support ideas Good identification of relevant sources, however, weaknesses in using sources to support arguments effectively Excellent identification and use of a wide range of relevant and high-quality sources that support arguments effectively Basic referencing following the university’s standard (both in-text and reference list), but with major inconsistencies Good referencing following the university’s standard (both in-text and reference list), but with some inconsistencies Very good identification of and use of a range of relevant and quality sources in an effective manner Very good referencing following the university’s standard (both in-text and reference list) to a large extent 1 Knowledge & Understanding (30%) Presentation & Structure (20%) 4 Relevance and Quality of Sources & Referencing (20%) Good style of writing; however, limited in using appropriate terminology and vocabulary and some minor spelling and grammatical errors Upper 2nd – 60-69% 1st Class – 70%+ Excellent style of writing in terms of clarity of expressions, terminology and vocabulary, grammar and spelling Excellent referencing following the university’s standard (both in-text and reference list) without any flaws 3 Technology in Society 31 (2009) 139–149 Contents lists available at ScienceDirect Technology in Society journal homepage: www.elsevier.com/locate/techsoc Competitive advantage in an industry cluster: The case of Dalian Software Park in China Weilin Zhao a, Chihiro Watanabe a, *, Charla Griffy-Brown b a b Department of Industrial Engineering and Management, Tokyo Institute of Technology, 2-12-1 W9-49 Oo-okayama, Meguro-ku, Tokyo 152-8552, Japan Graziadio School of Business and Management, Pepperdine University, 6100 Center Drive, Los Angeles, CA 90045, USA a b s t r a c t Keywords: Competitive advantage Industry cluster Local institutional systems Dalian Software Park China Technology parks Innovation Regional growth This paper explores the competitive advantage of Chinese software parks for promoting industrial development. These industry clusters provide competitive advantage because they are rooted in local institutional systems. Taking the case of Dalian Software Park in China, this analysis is conducted qualitatively based on Porter’s ‘‘diamond’’ model, SWOT framework and interview results. Industry clusters, which encompass a series of interconnected ?rms in designated geographic concentrations, show competitive advantages for industrial development with substantial resources rooted in local institutional systems including government, industry and academia aspects. In order to successfully navigate the economic paradigm shift from mass manufacturing production to innovative new product development in China, it is essential that the competitive advantages of industry clusters are strengthened and sustained in order to enhance industrial development, generate innovation and increase regional economic growth. Ó 2009 Elsevier Ltd. All rights reserved. 1. Background Since the emergence of information and communication technology (ICT) in the 1990s, a tremendous amount of socioeconomic changes has occurred, transforming daily life, global economic markets, and business practice. ICT is central to discussions about economic growth and performance because it is pervasive and widely diffused. China, with its rapidly expanding economic growth, has experienced tremendous development and change in various sectors of ICT, particularly in the development of the software industry. The Chinese government stepped forward to promote the software industry in the mid-1990s. Although this emphasis began later than the promotion of the hardware sectors in ICT, software development in China bene?ted from the hardware development that preceded it. Simply put, software development increasingly demands a sizeable installed computer base, with reliable and pervasive telecommunications links both domestically and internationally. These requirements were addressed by the rapid strides in PC and Internet development in China. Development has been accelerated by a series of regulations, important policies, excellent industrial support, and many factors that bene?t rapid development. In particular, the Eleventh Five-Year Plan (2006–2010), which began in the spring of 2006, accelerated these strengths [1]. In this plan, innovation was again key, and improving innovation capability was identi?ed as the crucial task for future development in all areas. In addition, developing the information service industry was also pinpointed as an important development strategy. Industrialization by informatization, or an information-driven economy, was also emphasized in the plan. As a core industry, the information industry was given high priority to develop * Corresponding author. Tel.: þ81 3 5734 2248; fax: þ81 3 5734 2252. E-mail address: watanabe.c.aa@m.titech.ac.jp (C. Watanabe). 0160-791X/$ – see front matter Ó 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.techsoc.2009.03.008 140 W. Zhao et al. / Technology in Society 31 (2009) 139–149 rapidly and promote the development of related industries. The software industry, as another important sector, continues to develop innovative products that can compete in the global market. The development history of the Chinese software industry is relatively short. In its brief history, a distinct industrial structure with two basic strategiesddevelopment in domestic markets, and exportsdhave led this effort. By stimulating domestic market demand and encouraging software exports, resources for software development are expected to improve in quality and in turn, induce further expansion of the domestic market and strengthen the competitive advantages of the industry. It is generally understood that demand is an important factor in promoting industrial development. ICT development brings with it a huge demand for software in various sectors of an information society. The compound annual growth rate of ICT software spending1 in 38 countries, between 1993 and 2004, ranked China at the top [2]. This demand is an important catalyst for the remarkable development of the software industry in China. At the same time, China has been adjusting its development strategy, and in 2000 it began strengthening its export policies [3]. The underlying principle of this policy is to make the software industry face two kinds of market and two kinds of resources, domestic and international, in order to make the industry more competitive globally and technologically. Efforts continue at the national level to promote software-related industry clusters in order to help realize China’s goals and to achieve success in domestic and international markets. Since the early 1990s, China has begun to establish software parks, including 11 national software industrial bases and 6 national software export bases, which support the overall planning and layout of the Chinese software industry. As a result, the development environment of the Chinese software industry has been dramatically improved and awareness of the competitive advantages of these industry clusters has greatly increased. Thus, more research on the recognition and improvement of competitive advantage in an industry cluster is indispensable. 1.1. Objectives and structure This article seeks to identify institutional sources for the competitive advantages offered by Chinese software parks. To do this, we take the case of Dalian Software Park (DLSP). Dalian’s local institutional systems, and especially their drive toward software exports, are the focus. Section 2 introduces some related research work. Section 3 outlines the analytical framework, including methodology and data collection, and Sections 4 and 5 provide results and discussion of the analyses. 2. Literature review 2.1. Competitive advantage ‘‘Competitive advantage’’ is a popular term in many ?elds, and broader de?nitions include national, industrial, and ?rm levels. The advantage is termed ‘‘competitive’’ when what the ?rm does is unique and dif?cult to replicate. In the global context, developing competitive advantage has become the core strategy for many businesses. And when it comes to this term, existing work must be introduced from the basis of the theory and research concerning competitive advantage completed by Michael Porter [4]. In his book The Competitive Advantage of Nations, he addresses the question ‘‘Why [do] nations succeed in particular industries, and [what are] the implications for ?rms and for national economies?’’ He stresses the important role played by ‘‘a nation’s economic environment, institutions and policies’’ that lead to successful competitive industry development, and he states: Differences in national economics structures, values, cultures, institutions and histories contribute profoundly to competitive success. The home nation takes on growing signi?cance because it is the source of the skills and technology that underpin competitive advantage. ([4], p. 19) Based on this view, our paper analyzes the competitive advantage of industry clusters embedded in local institutional systems within the macro context of national institutional systems. Porter developed the ‘‘diamond model’’2 which he uses to discuss the determinants of national advantage based on four broad attributes of a nation: factor conditions, demand conditions, related and supporting industries, and ?rm strategy, structure, and rivalry [4]. Porter states: The determinants, individually and as a system, create the context in which a nation’s ?rms are born and compete: the availability of resources and skills necessary for competitive advantage in an industry; the information that shapes what opportunities are perceived and the directions in which resources and skills are deployed; the goals of the owners, managers, and employees that are involved in or carry out competition; and most importantly, the pressures on ?rms to invest and innovate. ([4], p. 71) 1 ICT software spending refers to ‘‘expenditure for ICT development/utilization including the purchase of all software products, external customization of computer programs, systems software/utilities, application tools and application solutions’’ [2]. 2 Diamond is used to refer to the determinants as a system [4]. W. Zhao et al. / Technology in Society 31 (2009) 139–149 141 Since our analysis is also based on Porter’s diamond model, its content and application in this study are discussed in Section 3. 2.2. Industry cluster ‘‘Industry cluster’’ is a current concept in economic development, also popularized by Porter [4]. As a recognized expert in global economic strategies, he discusses the power of industry clusters to advance regional economies. He writes: The concept of ‘‘clusters,’’ or groups of interconnected ?rms, suppliers, related industries, and institutions that arise in particular locations, has become a new way for companies and governments to think about economies, assess the competitive advantage of locations, and set public policy. However, there has been no exact de?nition of ‘‘industry cluster’’ until now. Recent research by Doeringer and Terkla [5] and Leveen [6] examine the literature regarding industry clusters and identify them as ‘‘geographical concentrations of industries that gain performance advantages through co-location’’. ‘‘Geographical concentration’’ is the key that de?nes the basic but distinctive characteristic of an industry cluster. As a specialized concentration of ?rms and industries in a region, they usually have common markets, and share common suppliers, trade, or education institutes, and intangible things like know-how and information; similarly, they also may face similar opportunities and threats. There are many industry cluster development models in countries around the world. For example, in the U.S., Silicon Valley (California) and Route 128 (Massachusetts) are well-known industry clusters. The former is famous for microelectronics, biotechnology, and venture capital markets while the latter is well known for its software, computer, and communications hardware [7]. The reasons why software ?rms tend to cluster were analyzed, with a special focus on the transfer of information and knowledge [8]. In fact, although research about industry clusters has been examined from the perspectives of economic development, strategic management, knowledge sharing, and technology spillover, there is little research that addresses the competitive advantage offered by industry clusters that are based on institutional systems. As introduced by Leveen [9], industry clusters can be classi?ed into two types: vertically integrated clusters and horizontally integrated clusters. The ?rst type of cluster is ‘‘made up of industries that are linked through buyer-seller relationships’’; the second one ‘‘includes industries which might share a common market for the end products, use a common technology or labor force skills, or require similar natural resources’’ [9]. The software parks that we examine in this paper can be considered part of the second type. 2.3. Institutional systems The development of industries is led by innovation, assimilation and utilization of technology that chie?y depends on the economy, society, culture, habits, systems and policies embedded in a speci?c geographical context. This kind of comprehensive system can be referred to as an ‘‘institutional system’’. In terms of institutional systems, North’s de?nition must be cited. He considered institutions as ‘‘The humanly devised constraints that structure human interaction. They are made up of formal constraints (e.g. rules, laws, constitutions), informal constraints (e.g. norms of behavior, conventions, self-imposed codes of conduct), and their enforcement characteristics. Together they de?ne the incentive structure of societies and speci?cally economies’’ [10]. Kondo et al. suggested that ‘‘While a number of works have conducted broad-ranging theoretical and empirical analyses on the behavior of institutions, their focus is not necessarily the identi?cation of the role of institutions as a core inducing factor of innovation and stimulator for broad diffusion. Binswanger’s work [11] paid special attention to the role of institutions in inducing innovation’’ [12]. Watanabe et al. [13] have also conducted intensive analyses on the behavior of institutional systems. They de?ned institutional systems as a three dimensional system with speci?c details in each dimension consisting of (i) national strategy and socio-economic system,(ii) entrepreneurial organization and culture, and (iii) historical perspectives. Using this framework, we consider the local institutional systems to be shaped by the cooperation and co-evolution of government, industry and academia. The following analysis is conducted based on this framework. 2.4. Software parks in China Since the 1990s, there has been a clustering of industries, particularly high-tech industries, in various Chinese cities. As Hu notes: ‘‘Although neither Silicon Valley nor Route 128 came into existence by design, countries around the world, developed or under-developed, have tried to emulate the American success stories by offering policy incentives to encourage hightechnology ?rm formation in designated locations’’ [14]. China is one such country. Situated in a special geographic location, industry clusters can take many forms. The ?rms share well-constructed infrastructure and services, specialized customer markets, labor markets, human resources, know-how, and information. These shared resources create helpful synergies between industrial and regional economic development. In addition, clusters fuse indigenous strengths with global best practices from ?rms in a variety of countries that have different institutional systems. The establishment of software parks in China began in the 1990s. Important policies included the ‘‘policy for promoting the development of the software industry and integrated circuit industry’’ (initiated in 2000) and the ‘‘action program for the vitalization of the software industry’’ (2002–2005) [3], both of which stimulated the development of software parks. Today, software parks are a crucial incubator for the development of the software industry. Regional clusters, which served as 142 W. Zhao et al. / Technology in Society 31 (2009) 139–149 Table 1 Comparison between main software parks in China (2003–2005). Beijinga Shanghai Dalian Xian Sales revenue (Yuan billion) Export ($ million) 2003 2004 2005 2003 2004 2005 Number of ?rms 2003 2004 2005 2003 2004 2005 3.07 4.00 2.40 1.98 9.18 5.00 4.50 2.80 15.00 6.00 5.00 4.0 29.30 20.00 80.00 23.04 35.00 50.00 200.00 31.00 – 120 228 173 359 217 223 230 400 300 – 267 420 7.8 6.0 6.0 14.1 13.6 9.0 20.0 16.0 30.0 – 25.0 20.0 70.00 300.00 – Total employees (thousand) Source: Authors’ summary, derived from [3]. a Data for Beijing in 2005 is estimated based on 2006 data. mechanisms for policy implementation, not only led the growth of the local software industry, but they also were crucial for national development in this area. In 2001, the Chinese government launched 11 national-level software industry bases in Beijing, Shanghai, Dalian, Jinan, Xian, Nanjing, Changsha, Chengdu, Hangzhou, Guangzhou, and Zhuhai [3]. Based on an export-oriented development strategy, the Chinese government tried to increase exports by establishing specialized industry clusters of export bases and encouraging ?rms to be more active in software exports. Subsequently, in 2003 six software parks in Beijing, Shanghai, Dalian, Shenzhen, Tianjin, and Xian, were authorized as software export bases [[3]]. Well-constructed infrastructure, preferential support policies, a continually improving legal environment, a supply of suitable talent, and sound education among the local population were major factors driving software development in these parks. In addition, software parks in other cities have tried to develop their own unique parks that set them apart from the earlier parks. For example, the software park in Beijing focuses more on the domestic market, R&D, and product provision. The software parks in Dalian and Shanghai focus on foreign markets and exports by providing more relevant software services. Cities with software parks have emerged as leading software cities in China. Table 1 compares the main software parks that have two identitiesdboth as a national software industry base and a software export base in China. Among these cities, the software park in Dalian demonstrates particular excellence in exports, which can be attributed to a geographical advantage as well as suitable development strategies and industry policies that are supported by the local government. At the ?rm level, the top two ?rms in software exports in 2004dNeusoft3 and Hi-Thinkdare located in Dalian [15]. Similarly in 2005, the top three, Neusoft, Hi-Think, and Hi-soft are all from Dalian. Although Dalian is not economically developed like Beijing or Shanghai, it is located in a comparatively important geographical position as a marine gateway. Dalian is famous for its beautiful harbor, ?nance, trade, tourism, and recently developed high-tech industries. It is becoming a leading city as a result of increased economic reforms and activities. It also plays a crucial role in promoting regional economic development for most of the northeastern part of China, which traditionally relied on old manufacturing industries before economic reforms were implemented. Dalian’s attractiveness features and location continue to encourage more ?rms to come and conduct business. Friedman notes: ‘‘There are still plenty of miserable, backward ones, which are grabbing business as knowledge centers, not just manufacturing hubs. The signs on the buildings tell the whole story: GE, Microsoft, Dell, SAP, HP, Sony and Accenture’’ [16]. At Dalian, the strength of Chinese ?rms and the learning effects of global best practice from foreign ?rms are well fused. Table 2 provides the number and ratio of local and foreign ?rms in DLSP. Compared with the 33% of foreign ?rms in Shanghai’s software park and 30% in Beijing’s [3], DLSP has the highest rate of foreign ?rms, which in turn plays a major roles in inducing additional clustering and learning. Thus, as a result of the clustering effects, ?rms from various countries with different cultural backgrounds and institutional systems stimulate and encourage a co-evolutionary development that leads to the win-win development as illustrated in Fig. 1. As Table 1 shows, compared with other software parks, DLSP is especially strong in exports. After it was established in 1998, DLSP has grown into an important software outsourcing service provider, particularly to Japan because of its geographical proximity to Japan and historical background. DLSP’s goal is to be the ‘‘software, business process outsourcing (BPO) and IT-enabled service (ITES) center of north Asia’’ and to be ‘‘a global resources center of multinationals to serve and support their northeast Asia operations and the American and European markets’’ [17]. The upward trend in basic indicators for DLSP isshown in Fig. 2. DLSP’s achievement can be attributed largely to clustering, which induced a good business environment, preferential supportive policies, and a huge pool of talented human resources. All of these features are signi?cantly rooted in its local institutional systems. 3. Analytical framework 3.1. Methodology The overall methodology for this research is a case study of DLSP. Yin regards case study as an empirical inquiry that ‘‘investigates a contemporary phenomenon within its real life context, especially when the boundaries between phenomenon 3 In the case of Neusoft Group, the location of the export-oriented subsidiary is in Dalian. W. Zhao et al. / Technology in Society 31 (2009) 139–149 143 Table 2 Number of Chinese and foreign ?rms in DLSP (2005–2007). Number of ?rms/Year 2005 2006 2007 Chinese ?rms Foreign ?rms (including global 500 corporations) 159 (60%) 108 (40%) (22) 211 (58%) 153 (42%) (27) 227 (58%) 165 (42%) (33) Total 267 364 392 Source: Authors’ summary based on [17]. and context are not clearly evident’’ [18]. If qualitative discussions rather than technical issues are the focus of the research, the case study methodology is ideal for understanding the dynamics of competitive advantage at DLSP. Furthermore, we analyzed the institutional sources of the competitive advantage enjoyed by DLSP using Porter’s ‘‘diamond’’ model and a SWOT (strength, weakness, opportunity and threat) analysis, to do the analysis. In addition to the general analyses described above, interviews were conducted and information from them provided more practical management implications based on the industrial experiences of managers at DLSP. 3.1.1. Porter’s diamond model Michael Porter’s diamond model [4] was used as the framework for evaluating the competitiveness of regional industries and elucidating local industry clusters. This framework is illustrated in Fig. 3, which shows the relationships between the key drivers. 3.1.2. SWOT analysis SWOT refers to strengths (S), weaknesses (W), opportunities (O), and threats (T). A SWOT analysis is useful for analyzing ?rms’ strategic management and identifying the level of ?rms in each dimension. Our SWOT analysis provided a clearer map of the four factors as they appear in DLSP, which helped to make it aware of its strategic position and indicated how to strengthen its competitiveness. 3.1.3. Interview survey To support the general analyses from the industry’s point of view, interviews were conducted to evaluate more qualitative aspects and gain insights into current development issues. Interviews of people from selected ?rms were conducted in Dalian in January 2007. 3.2. Data collection Most of the statistical data in this paper came from websites such the China Software Industry Association [3], and published documents like the Annual Report of Dalian Software and Information Service Industry [19] and China Statistics Yearbook on High Technology Industry [20]. In the interview phase, the selected ?rms represented all ?rm types in DLSP, including four branches of foreign ?rms, two of China’s top-ranked ?rms in software exports, and one SME (Small Medium Enterprise). All the interviewees held manager-level positions responsible for project management and practical business management. Table 3 summarizes the pro?les of the ?rms and interviewees. 4. Results 4.1. Diamond model analysis Porter states: ‘‘Promoting cluster formation in developing economies means starting at the most basic level. Policy makers must ?rst address the foundations: improving education and skill levels, building capacity in technology, opening access to capital markets, and improving institutions’’ [22]. Dalian has tried to encourage cluster formation ranging from the construction of basic Clustering effects Win-win development Competition and cooperation Network clustering Leading software park Variety of firms in DLSP Centrality Relative importance of nodes: core role Externality Diffusion effect of nodes: impact role Problem solving Innovative ideas Fig. 1. Co-evolutionary function of clustering effects in an industry cluster. 144 W. Zhao et al. / Technology in Society 31 (2009) 139–149 90 80 70 60 50 40 30 20 10 0 Sales revenue Export Number of firms Number of employees 2000 2001 2002 2003 2004 2005 2006 Fig. 2. Increase trend in basic indicators of DLSP (2000–2006). Note: Real data with 0.1 billion yuan in revenue and export, thousand in number of employees, 10 times in number of ?rms, $1 ¼ 8 yuan). Source: Authors’ summary and elaboration based on [1]. infrastructure to a wide range of human resources. With Dalian’s local institutions providing substantial resources, cooperation between government, industry, and academia is crucial for creating a good business cluster. Based on Fig. 3, the factor determining the competitive advantages of DLSP in the local institutional systems represent a kind of virtuous cycle or self-propagating function. The cooperation between government, industry and academia is demonstrated in Fig. 4. In order to highlight the competitive advantages of DLSP shown in Fig. 4, the analysis focused on the three aspects of government, industry, and academia in combination with the elements of the diamond model. Since all the determinants of the diamond model can be summarized in these three dimensional aspects, this kind of consideration for the analysis is appropriate. With detailed descriptions of support policies and strategic actions in the three dimensions, it is noteworthy that the competitive advantages of DLSP are rooted in the cooperation between government, industry, and academia. This cooperation is driven by the local institutional systems, which incorporate different factor determinants from the diamond model. The local institutional systems seem to be ‘‘fertile soil’’ that promotes the growth of DLSP as a mature industry cluster and supports and expands its competitive advantages. 4.1.1. Government Unlike Silicon Valley, DLSP was initially established and organized by the local government with government support. Although Porter’s view is that government is only a facilitator [4], the government has played a decisive role in establishing and developing DLSP with well-organized infrastructure construction, top-down development guidance, and supportive policies. Factors conditions in the diamond model, including physical, capital resources, and infrastructure, can be attributed to support from the government. All kinds of government-sponsored events are regularly held in Dalian to improve the city’s reputation and to encourage more foreign investment. The government’s high priority on development makes infrastructure construction happen with more ef?ciency, top quality, and modern information equipment. The subsequent increased users of PC and Internet construct the basic information infrastructure. Policies provide support for software ?rms including taxes, ?nance, and technology. For example, software ?rms do not pay any taxes for the ?rst two years. Thereafter, they pay only half of the assessed taxes for the following three years. The total of ?ve years of preferential tax treatment enables many ?rms to develop rapidly and encourages more start-ups. A special fund has also been established for ventures. In order to improve intellectual property (IP) protection awareness, the ?rst IP service center in China was set up in DLSP with the Dalian government’s help. In conjunction with laws governing private data protection in Japan, DLSP took early action to provide guarantees for Japanese customers. Clearly, ongoing government efforts have led to the successes and achievements of DLSP. 4.1.2. Industry DLSP was established to promote the development of the software industry. Industry is the core part of this endeavor and all parts of the diamond model are represented here. The rapid development of ICT, and information infrastructure Factor condition: Necessary inputs for • Physical resources competition: • Human resources • Knowledge resources • Capital resources • Infrastructure Demand condition: Related and supporting industries: • Competitive home-based suppliers • Related industries for pull-throug effect • Size of home demand • Anticipatory buyer needs • Buyers for pulling the products/services abroad Firm strategy, structure and rivalry: • A context in which firms are created, organized and managed well • Competition among domestic rivals Fig. 3. Factor relationships in the ‘‘diamond’’ framework. Source: Authors’ summary based on [4]. W. Zhao et al. / Technology in Society 31 (2009) 139–149 145 Table 3 Pro?les of ?rm types and interviewees. Firm type Interviewees A: branch of one of global 500 corporations from the US, focusing on IT hardware and software. It mainly serves the clients from the US and Japan in project development, outsourcing and consulting. It is a CMMIa 5 ?rm. I-a: total 2 years work experience in A, responsible for software development and project management. B: branch of one of global 500 corporations from the US, focusing on management and IT consulting. It mainly serves the clients from Japan in outsourcing and consulting. It is a CMM 5 ?rm. I-b: total 4 years work experience; 2 years in B, responsible for outsourcing project. C: branch of one of global 500 corporations from Japan, focusing on software development and maintenance for its parent company in Japan and other branches in other cities of China. It has its own quality standard. I-c: total 2.5 years work experience in C, responsible for project management and communication as BSE (Bridge System Engineer). D: branch of one of famous IT corporations from Japan. In dependence or by cooperation with local ?rms in Dalian, it mainly serves the clients from Japan and Japanese ?rms in China in system development, system integration and outsourcing service. It is a CMMI 3 ?rm. I-d: total 4 years work experience, 3 years in D, responsible for Japan-oriented project management and communication as BSE. E: one of China’s top-ranked ?rms in software export and outsourcing service. With a good reputation in Japan, it mainly serves the clients from Japan. It also has excellent performances in system, solution and service in Chinese domestic market. It has its own specialized IT training institutes. It is a CMMI 5 ?rm. I-e: total 5.5 years work experience in E, responsible for software quality and multi-projects management as a department manager. F: one of China’s top-ranked ?rms in software exports and outsourcing services. It mainly serves the clients from Japan and has a good cooperation relationship with Japanese ?rms. It is also attracting the projects from the US and Europe. It is a frontier in providing professional IT training. It is a CMM 5 ?rm. I-f: total 4 years work experience in F, responsible for Japan-oriented software development and project management. G: one of local ventures set up by an IT professional with work experience in Japan and good connection with some Japanese ?rms. It mainly serves the clients from Japan in software development and outsourcing service, focusing on medium-small scale projects with lower cost. I-g: total 8 years work experience in Japan, responsible for the whole management in particular in connecting with Japanese ?rms to get new projects. a CMM means Capacity Mature Model, which is a kind of international quality standard for evaluating the capacity mature of software development. Now CMMI (Capacity Mature Model Integration) replaces the CMM [21]. The level difference is from 1 to 5. construction, generated huge domestic ICT markets, while the need for human resources had a pull-through effect on the development of the related IT training industry. Both of these factors resulted in more innovations in traditional IT education at the universities. At the end of 2007, nearly 50% of the ?rms in DLSP were foreign, including major participation by well-known multinational corporations seeking to establish a base of Asian operations.4 This can be ascribed to the unique business environment, rich development resources, and high growth potential for DLSP. The competition and cooperation among the ?rms is another virtuous self-propagating cycle that brings out more innovative ideas, which in turn continues to stimulate industry dynamics. Related industries are bene?ting from the development of the software sector. Intel has invested US$2.5 billion to set up a new chip factory in DLSP, which will be Intel’s largest chip factory in Asia [17]. In the meantime, Intel has collaborated with Dalian University of Technology to encourage the development of local talent for the semiconductor industry, which is expected to be another important sector of DLSP in the near future. 4.1.3. Academia As a knowledge-intensive industry, the software industry cannot develop well without quali?ed human resources. One role of academia is to guarantee the availability of human resources, which are another important factor in the diamond model. Since DLSP was established, software-related education has been strengthened. In addition to quantity, the current education system focuses on the quality of graduates. Many private training institutes and centers are pursuing a new demand-oriented training model that focuses on practice as a supplement to traditional education. By collaborating with ?rms, basic research in the universities has a more practical focus in software research and development. This not only enhances the reputation of the academic institutions but also promotes the ?rms’ capacity to develop innovative products. 4.2. SWOT analysis After the diamond analysis of Dalian’s local institutional resources, a SWOT analysis was conducted to identify the general opportunities and threats associated with Dalian’s competitiveness, thus providing further insight into the strengths and 4 Famous global corporations include GE, Dell, Accenture, IBM, SAP, Panasonic, HP, Nokia, Sony, NEC, Hitachi, Ricoh, Mitsubishi, Convergys, Omron, Sumitomo, Siemens, Intel, Avaya, Oracle, NTT, and Fujitsu. 146 W. Zhao et al. / Technology in Society 31 (2009) 139–149 Government: factor condition • IT related education in 22 universities and institutes • Economic background: high-tech driven economic development • Preferential policies: national/local ones including tax and finance • City attractiveness: events for reputation, tourism, living environment • Infrastructure construction: well constructed infrastructure of DLSP • Information infrastructure: increasing use of PC, Internet, mobile phone • IP protection: 1st IP service center established by DLSP in China • Private data protection: take action first in China • Professional absorption policy: special financial fund • 5 Software graduate schools • Firm-university cooperation training mode: e.g. Dell/IBM + Dalian University of Technology • 35 IT career training centers • On demand training: Demand condition: IT skill + foreign language • Increasing demand for outsourcing • Increased graduated students: service, software development, 15620 (2005) Industry: firm strategy; related HR resources; • Domestic demand for informatization Academia: factor condition; related industries • Rapid development of high-tech industry • Huge ICT market demand • Positively attract foreign investment/firms • Co-existence of competition and cooperation among firms • Mobility of employees • Information development: e-government, e-business • Industry-led training center: IT education industry • New integrated circuit (IC) industry: invested by Intel Fig. 4. Factors governing the institutional sources of DLSP’s competitive advantages. weaknesses of DLSP. Such an analysis would also help to identify areas in which the existing institutional systems could be improved. The results of the SWOT analysis are tabulated in Table 4. Strengths are the ways DLSP can obtain opportunities and face existing threats. In most cases, weaknesses are the opposite of strengths, but there are areas that existing strengths cannot easily overcome. Strengths need to be further improved, weaknesses should be overcome, opportunities need to be taken, and threats should be resolved in order to enhance DLSP’s competitiveness. Though Dalian has a favorable geographical location, the increasing cost of living is threatening the availability of human resources. Dalian’s attractiveness needs to be strengthened both in hard aspects and soft aspects. In order to guarantee a strong talent pool, traditional IT educational institutions are being challenged to focus more on quality rather than quantity only. When some ?rms take a leadership role in the software industry’s development, a performance gap exists and sometimes widens. The problem is that many ?rms tend to pursue a popular technology without previous experience in that area. Thus, the formation of technology concentration creates bottlenecks for developing competitive advantage. Developing Table 4 Key aspects of the DLSP SWOT analysis. Strengths Weaknesses Government: Government: Good geographical location/attraction Well constructed infrastructure environment Developed communication equipment Preferential government support Industry: Improved legal environment/protection Endeavor to get international certi?cation like CMM Partnership between ?rms and collective visions Academia: Efforts in providing IT talents General lower cost Opportunities Huge demand from foreign and domestic markets Increasing demand for outsourcing service and BPO Information-driven economy/High-tech development Status of increasing cost and lack of HR in India General control in living cost Industry: Not so effective/ef?cient in use of development resources Underlying weakness like popular technology pursuit Smaller scale of ?rms Performance gap between ?rms Comparatively lower innovation capability in most ?rms Not standardized in project management in some ?rms Academia: HR provision: quantity focus, quality neglected Not enough HR with good English skill Threats New emerging countries as outsourcing locations New emerging coastal cities as offshore locations Increasing living/training cost for HR in Dalian Market bottlenecks due to market concentration W. Zhao et al. / Technology in Society 31 (2009) 139–149 147 unique requisite technology (rather than everyone pursuing a similar technological area) will diminish these bottlenecks and reduce the performance gap, thus making ?rms more competitive. 4.3. Interview results In addition to the general analyses using the diamond model and the SWOT factors, it is crucial to clearly understand the ?rms’ strategic thinking and to know what their real needs are. Considering the local institutional systems as a co-evolutionary process between government, industry, and academia, the interviews focused on these three dimensions. The results are summarized across several important issues that consistently arose during the interviews regarding speci?c issues in software development, quality management, outsourcing, clustering effects, and education. 4.3.1. Government In general, interviewees regarded DLSP as a good environment in which to do business, and they recognized the substantial number of supportive government policies. However, they consider the networkdincluding information exchange and cooperation among the ?rms in DLSPdto be the most attractive feature. In particular, when they need special skills for certain projects, it is easier to obtain help from other nearby ?rms if good connections have been established. Therefore, ?rms in DLSP believe it is essential to develop and maintain good relationships with other ?rms. Interviewees also remarked that sometimes competition is very intensive in DLSP, especially among some of the SMEs. Interestingly, interviewees from foreign ?rms felt that competition in DLSP was healthy and would produce more innovative ideas; in contrast, interviewees from local ?rms felt that such competition was dangerous and risky, particularly for SMEs who pursue popular technology in software development without having their own specialized skills in-house. The SMEs felt this was risky because their only competitive advantage was reduced cost. One interviewee said that his ?rm experienced this situation and he could understand the dif?culties faced by smaller ?rms trying to survive. He said it is crucial for SMEs to master some of the requisite skills as soon as possible in order to move beyond the simple labor cost advantage. We found it somewhat surprising that in general the question about DLSP was typically shifted by interviewees toward discussions about cooperation and competition between ?rms. They all agreed that the efforts from all parties, including government, industry, and academia, led to greater competitiveness in DLSP. 4.3.2. Industry 4.3.2.1. Quality management. Quality is still at the core of software development. A successful project means not only few bugs but also standardized controls. In the past, many Chinese software ?rms focused more on meeting a deadline rather than quality control. Recently they have recognized the importance of getting international certi?cations in software development. Achieving Capacity Mature Model (CMM) certi?cation has been the goal for most ?rms. Interviewees agree that CMM helps them be more standardized in project management. One interviewee stated that passing the tests for CMM certi?cation is troublesome, but the process helped them learn a lot and realize improvements. Standardization actually made project management much easier. Another interviewee stated that although his ?rm currently does not have the ability to obtain CMM certi?cation, quality is emphasized in detail throughout their business processes. They do well not only in programming but also in documentation management, because customers pointed out that documentation was badly managed by SMEs. Although it takes time for them to pass CMM, this ?rm will continue striving to achieve this goal. When asked about quality comparisons with Indian software ?rms, interviewees from U.S. ?rms thought China lagged behind India in this sector, and that China should do more to improve its quality management in software development. However, interviewees from Japanese ?rms and local ?rms stated they were very con?dent that Chinese SMEs could compete equally with Indian software ?rms on the issue of quality management. In general, the U.S. position was based on frequent contact and work with both Chinese and Indian software ?rms, while the positions of the Japanese and local ?rms was based on their experience with the improving quality management in Chinese software ?rms. 4.3.2.2. Key factors for outsourcing. What are the key factors for success in outsourcing? This is a question to which none of the respondents could provide a complete or exact answer. The interviewees mentioned internal and external factors. Some observed internal factors such as government support, a large talent pool of engineers, and labor costs as advantageous. Other ?rms felt that specialized skills and foreign language pro?ciency were more important. Still other ?rms pointed out that in addition to the requisite technology and human resources, good connections and communications with customers were essential. These observations and industrial experiences are valuable for further development and research speci?cally on outsourcing in China. The factors mentioned here are all incorporated in the competitive advantages of DLSP and related to local institutional systems. It can be concluded that the competitive advantages of DLSP lie in the positive actions taken by ?rms in the park and the cooperation between these ?rms. 4.3.2.3. Potentiality and clustering effects. The competitive advantages of DLSP rely on Dalian’s good geographical position, and supportive government and industrial policies, which are rooted in local institutional systems. The long-term goal for DLSP is 148 W. Zhao et al. / Technology in Society 31 (2009) 139–149 to become the largest resource center for software, BPO, and ITES [7]. DLSP has had some success along these lines, in terms of creating opportunity for development and entrepreneurship. In the meantime, additional clustering effects of DLSP in enhancing competitiveness are expected. All interviewees observed that DLSP shows great potential. This observation was based on expanded globalization, Chinese economic growth, huge market demand, and DLSP’s own competitive advantages. One interviewee commented that their customers prefer to outsource to China now more than ever. More Chinese engineers now can speak English well, and their skills are highly valued. Since more foreign ?rms do business in Dalian, there are more opportunities. Some interviewees agreed that because of its geography and a strong pool of people who can speak Japanese with some pro?ciency, Dalian would remain the ?rst choice for Japanese ?rms that wish to outsource. One interviewee observed that continual improvements to the business and legal environment would provide legal guarantees for further development. In terms of clustering, all interviewees mentioned the networks among the ?rms in DLSP. Similar to the ?rst question about DLSP, their answers concentrated on the topic of cooperation and competition. Although the term ‘‘clustering effects’’ had multiple meanings to the interviewees, they considered partnership to be the most important, since collaboration and information sharing are essential for success, and resource supplement and technological upgrading can be accomplished best through partnerships with other ?rms. In addition to frequent connections among the ?rms, a club for managers is available, organized by DLSP and meeting every month to provide opportunities for more communications between ?rm managers. One interviewee con?rmed that by joining the club, and through frequent communications with other ?rms, a partnership was formed, and he received timely help when he encountered dif?culties in project development. 4.3.3. Education The available IT talent pool is undoubtedly a strong piece of the software industry’s development. Though Dalian’s government is endeavoring to strengthen IT education in order to guarantee the availability of quality human resources, the interviewees indicated this was not enough. They suggested that current IT education at universities lacked an emphasis on practical skills, which resulted in a negative attitude in some ?rms about employing new graduate students. Some managers commented that the IT education in the universities was outdated. Although basic education is important, the practical content is indispensable for IT education. They suggested that their decisions about employing new graduate students depended on whether or not the students had some practical experience. For this reason, they embarked on some collaborative education with one university in Dalian to put practice content into the traditional IT education. In addition to Company A, local ?rms like Companies E and F have tried to do business in IT training. Firm E have set up specialized IT training institutes, both in Dalian and other cities of China, since the beginning of the 2000s. Firms are realizing a win-win both in human resources and ?rm revenues by expanding the IT training opportunities for students. This supports traditional education and promotes innovative education. 5. Conclusion By analyzing DLSP through the use of qualitative data collection and analyses, this article identi?ed the sources of competitive advantage for DLSP and provided insight into industrial development. With the increasing awareness of an industry cluster’s competitive advantages for industrial development and regional economics, our research highlighted the role of local institutions in promoting and expanding this competitiveness. Based on the determinants of Porter’s diamond model, institutional sources were categorized into government, industry, and academic vectors. Then a SWOT analysis pointed out areas for further improvement and development by identifying the strengths, weaknesses, opportunities, and threats faced by DLSP. Interview data re?ected observations from the industry that supported the general analyses. China is facing a paradigm shift from labor-intensive manufacturing processing to the production of more high-tech innovative products because development that depends on low-value-added products is not sustainable. China is trying to move up the value chain in the global context. Its strategy is to develop competitive advantage in high-tech industries as a priority. The speci?c action taken is to encourage industry cluster formations in different cities for regional economic growth. The establishment of these industry clusters provides the industry with a favorable environment that includes attractive incentives and a well-constructed infrastructure that includes communication facilities and environmental services. Behind the visible construction, the potential intangible effects from clustering ?rms in industry clusters are equally important. The clustering effect stimulates more competition and collaboration among ?rms to produce more innovative ideas and establish a win-win environment. This process of competition and collaboration, often referred to as co-evolution, leads to good performance by the ?rms. Because of the clustering effects, the ?rms grow and promote related industry development, and then play a profound role in regional economics by growing to be more competitive internationally. Since the clustering effect also has qualities that are embodied in network externality, the more the industry clusters grow, the more ?rms are attracted to do business in DLSP. This attractiveness to foreign ?rms leads to further co-evolutionary development among the Chinese and foreign ?rms resulting in sustainable competitiveness. The success of DLSP as an industry cluster is based on institutional resources including strong efforts from government, industry, and academia. DLSP is an excellent model of a localized cluster in which development is deeply rooted in its local institutional systems. DLSP displays another competitive advantage by encouraging networks among ?rms, integrating into W. Zhao et al. / Technology in Society 31 (2009) 139–149 149 the international value chain of activities, and improving its reputation internationally. The utilization of an array of resources from different ?rms stimulates more innovation and facilitates industrial and regional economic development. While Porter believed that top-down government guidance would not impact development, Dalian’s government continues to develop strategic plans to strengthen the industry’s development both as a guider and a facilitator, even though DLSP is operated by the private sector. The competitive advantages of DLSP are nurtured and supported by Dalian’s institutional environment in which the local government has played an important role. The limitation of this research is the lack of empirical analysis of the networks among the ?rms in this industry cluster, since a clustering effect from networks is strongly observed in the interview results. Therefore, an empirical analysis of networks could be a future undertaking to further elucidate this relationship and mechanisms for cooperation and innovation in the Chinese context. Undoubtedly, some weakness and underlying threats remain in DLSP. Interview results show that opportunities and challenges co-exist in DLSP, and industry observations include practical suggestions for further development of DLSP. Key implications are the reinforcement of quality management, software-related education, and partnerships among the ?rms, since quality is the origin of competitiveness, human resources are the key for sustaining development, and partnership is at the core of clustering. Acknowledgements The authors are grateful to all participants who agreed to interviews and generously shared their time, corporate information, observations, and expertise regarding the software industry development in Dalian. References [1] Central People’s Government, People’s Republic of China. Available at: http://www.gov.cn. Also see http://www.gov.cn/ztzl/2006-03/16/content_ 228841.htm. [2] Digital Planet. The World Information Technology and Services Alliance. USA 2002. 2002. [3] China Software Industry Association website. Available at: http://www.csia.org.cn. [4] Porter ME. The competitive advantage of nations. New York: Free Press; 1990. [5] Doeringer PB, Terkla DG. Business strategy and cross-industry clusters. Economic Development Quarterly 1995;9:225–37. [6] Leveen J. Industry Cluster Literature Review. Available from: http://www.planning.unc.edu/courses/ 261/leveen/litrev.htm. [7] Connecticut Industry Clusters. State of Connecticut. Department of Economic and Community Development. Available from: http://www.ct.gov/ecd/ cwp/view.asp?a¼1100&q¼249794. [8] Heeks R. Software strategies in developing countries 1999. Working paper series. Available from: http://unpan1.un.org/intradoc/groups/public/ documents/NISPAcee/UNPAN015540.pdf. [9] Industry Clusters. University of North Carolina. Available from: http://www.planning.unc.edu/courses/ 261/leveen/. [10] North DC. Economic performance through time. American Economic Review 1994;84:359–68. [11] Binswanger H, Ruttan V. Induced innovation: technology, institutions and development. Baltimore: Johns Hopkins University Press; 1978. [12] Kondo R, Watanabe C. The virtuous cycle between institutional elasticity, IT advancement and sustainable growth: can Japan survive in an information society? Technology in Society 2003;25:319–35. [13] Watanabe C. Science of Institutional Management of Technology. http://www.me.titech.ac.jp/coe/. [14] Hu AG. Technology parks and regional economic growth in China. Research Policy 2007;36:76–87. [15] Import China, Software Export, http://www.cnies.com. [16] Friedman TL. The world is ?atda brief history of the 21st century. New York: Picador; 2007. [17] Dalian Software Park website. Available at: http://www.dlsp.com.cn/chinese/index.asp. [18] Yin R. Case study research: design and methods. Thousand Oaks, CA: Sage Publishing; 2003. [19] Annual Reports of the Dalian Software and Information Service Industry. 2004, 2005, 2006. Dalian, China. [20] National Bureau of Statistics. China statistics yearbook on high technology industry. China 2006. [21] Capability Maturity Model for Software. Carnegie Mellon University. Software Engineering Institute Available at: http://www.sei.cmu.edu/cmm/. [22] Porter ME. Clusters and the new economics of competition. Harvard Business Review 1998. Nov–Dec: 986–909. Weilin Zhao is a Ph. D. candidate in the Department of Industrial Engineering and Management, Tokyo Institute of Technology, in which she ?nished her master course in one year. She received her Bachelor’s degree from Dalian Maritime University in July 2002. After that, she worked as system engineering in Tokyo for 2.5 years taking charge of software development and outsourcing from Japan to China. She is currently a research assistant in the Research Center for the Science of Institutional Management of Technology. Her research interests include MOT (Management of Technology), institutional innovation, software innovation and outsourcing issues. Chihiro Watanabe graduated from Tokyo University with a Bachelor’s Degree in Engineering (Urban Planning) in 1968 and received his Ph.D.(Arts and Sciences) in 1992, also from Tokyo University. He joined Japan’s Ministry of International Trade and Industry (MITI) in 1968 and is a former Deputy DirectorGeneral of Technology Development in MITI. He is currently a professor in the Department of Industrial Engineering and Management and Director of the Research Center for the Science of Institutional Management of Technology at Tokyo Institute of Technology. He is also Senior Advisor to the Director on Technology at the International Institute for Applied Systems Analysis (IIASA). Charla Griffy-Brown, an associate professor of Information Systems at Pepperdine University’s Graziadio School of Business and Management, is currently part of an international research team examining technology and development issues. She is a former researcher at the Foundation for Advanced Studies on International Development, Tokyo, and earlier served as an Associate Professor at the Tokyo Institute of Technology. She graduated from Harvard University, is a former Fulbright Scholar, and holds a Ph. D. in Technology Management from Grif?th University in Queensland, Australia. Information & Management 40 (2003) 581–590 E-business development for competitive advantages: a case study Dien D. Phan* Department of Business Computer Information Systems, St. Cloud State University, St. Cloud, MN 56301, USA Received 5 July 2001; received in revised form 4 March 2002; accepted 20 July 2002 Abstract Electronic business (e-business) today plays a major role in the world’s economy. Forester Research estimated that, by 2003, the value of e-commerce of US and Europe will reach US$ 3 trillion. As the e-marketplace becomes more lucrative, it attracts new entrants and created turmoil in the market. There have been many spectacular successes and many failures. This paper presents a study of e-business competitive advantage strategies using the success at Intel. After the initial deployment of its e-business pilot system in July 1998, Intel ramped US$ 1 billion sales on e-business each month for the rest of the year. Intel became the fifth most profitable company in the US in the year 2000, up from the rank of eighth in 1999. Despite the rapid decline in stock values of many Internet related companies and the recession, Intel is still successful. By the end of 2001, Intel was the seventh largest market capitalization company in the US. # 2002 Elsevier Science B.V. All rights reserved. Keywords: E-business; E-commerce; B2B; Supply chain; Value chain; Competitive advantage; Strategy; Extranet 1. Introduction E-business has received much attention from entrepreneurs, executives, investors, and industry observers recently. As information technologies (IT) develop, novel ways of business process redesign (BPR) emerged, creating turmoil in the industry. Organizations today frequently integrate Internet technology to redesign processes in ways that strengthen their competitive advantages. Success breeds imitation and invites more entries. The rapid expansion of e-commerce values in the past few years convinced many people that a new economy has emerged. Chairman of Microsoft, Bill * Tel.: þ1-320-255-2174; fax: þ1-320-203-6074. E-mail address: phan@stcloudstate.edu (D.D. Phan). Gates, frequently expressed his fear that Microsoft is about 2 years away from failure, that somewhere out there is a formidable competitor, unborn and unknown, who will use better business models to put companies like Microsoft into obsolescence. And the most successful new business models are probably those that can integrate Internet technology to all activities of the enterprise-wide value chain. 2. E-business concepts, strategies, and frameworks Based on various types of trading partners, there are many categories of e-business, for example: Business to Business (B2B), Business to Consumer (B2C), Consumer to Business (C2B), Consumer to Consumer 0378-7206/02/$ – see front matter # 2002 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 8 - 7 2 0 6 ( 0 2 ) 0 0 0 8 9 - 7 582 D.D. Phan / Information & Management 40 (2003) 581–590 (C2C), People to People (P2P), Government to Citizen (G2C), Citizen to Government (C2G), Exchange to Exchange (E2E) and Intra-business (Organization Unit to Organization Unit). Without the use of face to face operations, all e-business transactions are performed electronically by using computer and communication networks. The three principal categories of e-business applications are: 1. Electronic markets or e-marketplaces: buying and selling goods and services. 2. Inter-organizational systems: facilitating interand intra-organization flow of goods, services, information, communication, and collaboration. 3. Customer service: providing customer service, help, handling complaints, tracking orders, etc. [13]. 2.1. Information systems strategies for competitive advantage Studying the evolution of business organizations has received much of attention in organization theory and MIS research [2,8]. Because organizations are not internally self-sufficient, they require resources from the environment, and thus become interdependent with those elements of the environment with which they transact. Organizational and ecological theorists [6,7] argued that organizations develop internal and external strategies which seek to minimize the uncertainty arising from dependence on the environment for resources. As the technology advances and the e-business market develops and grows, market niches open and close frequently, creating rapid changes in the market. The prevalence of technical innovations may be regular, sporadic, or seldom; these patterns of change have different implications for business organizations. When innovations occur often, a niche may open up and the organization competes to take the advantage of cost savings and market penetration that often results in better profits and market share. From the IS perspective, the value chain model [9] highlights interdependence activities in businesses where competitive strategies can be best applied and where IS are most likely to have strategic impact (Fig. 1). As information technologies developed, novel ways of business process redesign emerged. Most organizations today use Internet technology to redesign their processes in ways that provide new competitive advantage. Through the infrastructure of existing B2B exchanges in the e-marketplaces, many organizations will eventually be able to integrate activities of their value chain encompassing suppliers, customers, and distribution channels within an industry or across industries. The potential of e-business is so great that many believe that e-business is the new economy that decides the success of future business organizations. Andy Grove, Chairman of Intel boldly stated in 1998: ‘‘Within 5 years, all companies will be Internet companies or they would not be companies’’ [4]. Despite the fact this prediction was greatly exaggerated, this statement showed a strong belief in the potential of e-business. However, Porter [10] has argued that the key question is not whether to deploy e-business now to take advantage of Internet technology, but how to deploy it. Fig. 1. The value chain model. D.D. Phan / Information & Management 40 (2003) 581–590 Gaining competitive advantage requires building on the proven principles of effective strategy. Business enterprise can gain competitive advantage by operational effectiveness, doing the same as your competitors do but doing it better, and by strategic positioning, doing things differently from competitors in a way that delivers a unique type of value to customers. Key principles of strategic positioning are: goals that aim at long-term return on investment, distinctive value chains, trade-offs for uniqueness in the market, strategies that fit together, and continuity of corporate direction. Porter also argued that Internet technology should be used as a ‘‘complement to’’ rather than a ‘‘cannibal of’’ traditional ways of competing. The companies that will be most successful will be those that use ebusiness to make traditional business processes better and those that invent and implement new combinations of virtual and physical activities. Without understanding how to deploy Internet technology, entering e-business can bring disastrous consequences. In recent years, the business community and the public have been confused by distorted market signals of many dotcoms, such as the exponential growth in number of customers, artificially-low operation costs, and inflated revenues. Some companies even resorted to dubious accounting methods to inflate revenues and deflate costs. Somehow these distorted signals have misled many people into a belief that the e-marketplaces have rendered old rules of competition obsolete. As a consequence, many companies decided to shift their fundamental ways of doing business from quality, feature, innovations, service, and profits toward mainly low price and revenue growth. Without long-term profits, they failed. To succeed, companies will need to search and implement innovative strategies that capitalize on both the power of the Internet and the changes in both traditional and electronic markets. Companies that run e-business should have tight supply chain relationships with customers, suppliers, and distributors [12]. In addition, the supply chain within e-business companies also continues to change. Businesses need to be sure that customers and suppliers can easily gain access to their websites to gain important product information for decision making. Currently, the major barrier to customers’ and suppliers’ access to the web is ease and speed of 583 access, e-loyalty, and e-trust. Because the use of ecommerce technology tends to reduce the switching cost, it is important for e-business companies to build its strategic position by focusing on e-loyalty which encompasses good relationships and trust with value chain partners. B2B procurement of direct goods requires a relationship, usually long-term, with a vendor who will deliver a known quality of goods. With mission critical buying, companies cannot just buy from anyone in the e-marketplace. If an order for supplies goes unfilled, the missing goods could shut down a production line or an entire factory. In B2B procurement of direct goods, tight integration with major suppliers along the supply chain is absolutely essential. Major success factors for e-business include [5,11,15]: Internet technology fully integrated into the company’s overall strategy. Competitive advantage maintained in both operational efficiency and distinctive strategic positioning. Basis of competition not shifted from traditional competitive advantage, such as cost, profit, quality, service, and features. Company’s strategic positioning well maintained. Support from top management. Buyer behavior and customer personalization. Quick time to market. Right systems infrastructure. Good cost control. Good e-business education and training to employees, management and customers. Customer’s and partners’ expectations well-managed. Good products and services offered by e-business. Current e-business systems expanded to cover entire supply chain. New competitors and market shares tracked. Website of high quality that meets or exceed user expectations. Company’s virtual marketplace established. 3. Intel and its e-business development strategies Intel Corp. located in Santa Clara, California, is the world’s largest producer of Integrated Circuits Chips 584 D.D. Phan / Information & Management 40 (2003) 581–590 today. Incorporated in 1968, Intel supplies the computing and communications industries with chips, boards and systems building blocks that are integral to computers, servers, and networking and communications products. Its products are offered at various levels of integration, and are used by industry members to create advanced computing and communications systems. Today, the company has evolved from a processor maker into a supplier of network and server hardware, Internet hosting services, and other e-business components. Its technological leadership ranges from microprocessor design to advanced manufacturing and packaging. Most of Intel’s business is in the PC market. In past years, it was under intense competition from other chip makers, such as Advanced Micro Devices (AMD), Texas Instruments, Motorola, and IBM. It then customized its paper catalogs and sent them to potential customers along with product availability information. Until summer 1998, this process was performed entirely on paper. However in 1996, when key value chain partners, such as Dell Computers and Cisco Systems, started their B2B e-procurement systems, they pressured Intel to convert B2B activities online. In 1997, Intel began to investigate the feasibility of building an e-business system. The project started with the forming of a Virtual Worldwide E-Business Project Team. Because the project strongly emphasized customer market needs, Intel’s sales and marketing was given overall management responsibility. At that time, converting all operations to e-business for a company with a large global operation was perceived as a daunting task. Under the mandate from the chairman to make Intel an ‘Internet company,’ Sandra Morris, Vice President of Sales and Marketing Group, and Director of Internet Marketing and E-Commerce at Intel stated: ‘‘a lot of people feel overwhelmed by ‘The Task’.’’ 3.1. Project structure From pressure exerted by many value chain partners who wanted Intel to play a leadership role, Intel’s management decided to advise customers that Intel was serious about e-business. It created an ‘e-business program’ (a self-service extranet) which focused on procurement and customer support for Intel products. Access to the site was restricted to Intel’s authorized business partners and customers. Project teams that participated in the early development of the e-business system included: A project planning team that consisted of customer, technical and logistical representatives was created to define the scope and objective of the project. Business analysts were brought in during the early stages to help define the business workflow and to assess how information was given to customers. Intel’s sales and marketing staff were told to study and define how to work with customers via the ebusiness system. Intel’s Planning and Logistics Group was included on the planning team to help the IT department to develop the solutions to integrate the new e-business with existing business activities. The IT department was positioned as an ‘‘enabler’’ of business. Its role was to implement the solutions from the Planning and Logistic Groups. 3.2. Intel’s mission and goals With over 50% of its revenues and many customers coming from outside the US, the benefits of a global ebusiness system for Intel were too great to be ignored. To support over US$ 25 billion annual sales in 1998 and a worldwide network of business partners, resellers, and original equipment manufacturers (OEM), Intel had to improve its efficiency by automating its business to business processes. Traditional business processes at Intel at that time were too slow and thus a decision was made to deploy a web-based order management system. Intel’s early mission was to use Internet technology to improve the competitive advantage of its value chain activities. The goals were to design and deploy a worldwide e-business solution for its current business, and build an infrastructure that worked with existing business processes. The intent was to integrate Internet technology into the company’s overall strategy in order to gain competitive advantage in both operational effectiveness and strategic positioning. In order to avoid potential software engineering problems created by the enormous task of building a new Intel’s e-business system, Intel development teams started cautiously. Rather than cannibalizing the D.D. Phan / Information & Management 40 (2003) 581–590 entire business structure, Intel project teams used an iteration approach in building it first e-business system. They first focused on building an extranet B2B system to support direct customers on-line. ‘‘We picked one thing that we could build very quickly and deploy to our customers,’’ said Sandra Morris. 3.3. E-business strategies for value chain Intel aimed to achieve its competitive advantage by both operational efficiency and strategic positioning. 1. Operational efficiency: In order to improve efficiency, Intel helped its value chain partners connect to the worldwide-web to access information online. To do this Intel automated its order management and information delivery system. The greatest efficiency improvement in 1997 was to customers who were not already electronically connected to Intel. By converting the ‘‘unwired’’ to ‘‘wired,’’ Intel replaced traditional phone and fax lines to PC-based on-line communication. By providing access to real-time information, Intel allowed customers to know more about of Intel products and future direction. On-line access also made customers feel more connected with access to more Intel resources, and thus having a closer business relationship. For Intel, having customers electronically connected brought multiple benefits. First, the company was able to move resources towards a more efficient and productive technology. Second, sales people no longer needed to hand deliver confidential product information as they had in the past. Third, potential sales were enormous, because Intel was dealing with billions of dollars of orders per quarter. 2. Distinctive strategic positioning in the value chain: In 1998, Intel was well positioned with its Pentium processor product lines and enjoyed a distinctive strategic positioning in the market thanks to its unique R&D programs and good supply chain relationships with partners. To further strengthen this position, Intel focused on building on-line relationships with direct customers, including OEMs and distributors. Intel worked hard to convert its system and data from the old vendorcentric model to the new customer-centric model. 585 Because management, procurement, sales and marketing, and engineering functions of value chain partners and customers all have different informational needs, Intel customized its websites within customer accounts. Being able to deliver personalized information on-line allowed Intel to support multiple levels of the customer organization in a manner that best met the individual’s needs. This makes it easier for every customer to do his/her own research and to take appropriate action. Customers visiting the Intel extranet website now find their name and specific applications available to them, based on their personal profile. This user profile allows a customer to obtain confidential information important to him or her alone. 3.4. E-business deployment The initial e-business pilot system launched in 1998 consisted of 240 one-stop shopping sites for customers around the world. Using an iterative development approach to build the system, Intel’s e-business website was serving more than 350 top customer accounts and thousands of individual users within the first year. Personalized data and applications were tailored to users’ needs to provide an individualized experience Fig. 2. 3.5. Quick deployment of access manager application One of the early incremental development efforts at Intel after the launch of their e-business website was an Access manager application that automated the creation of account user IDs and passwords to access the unified environment known as the ‘‘Landing Zone.’’ In the past, Intel account supervisor often spent over an hour in creating user IDs and passwords for a new customer. With the Landing Zone environment, Intel customers may log into one place and have access to many other intra/extranet sites; this convenience attracted many users. ‘‘The people want to come to the environment because it offers these common services of security and entitlement . . .’’ commented M. Kantipudi, the B2B Platform and eContent Application Manager of Intel’s Sales and Marketing Application Group. 586 D.D. Phan / Information & Management 40 (2003) 581–590 Fig. 2. Intel’s developer site. 3.6. E-business infrastructure In order to simplify system maintenance and support activities, Intel decided to standardize the ebusiness architecture to one hardware vendor, one operating system, and minimized the number of database and application vendors. In addition to lower cost, the infrastructure was designed to be flexible and scaleable as the system grew. Servers: Intel’s initial e-business system infrastructure was built around three main clusters of Pentium based servers: web-servers, database servers, and data analysis servers. Standardizing on one hardware vendor simplified maintenance costs, made growth easier, and allowed Intel to interchange components as necessary without compatibility issues. OS and databases: Intel’s e-business system was standardized on Microsoft’s Windows NT. For their databases, Intel limited its operation to two vendors. Application development: Intel provided a number of applications that serve specific needs and has made an effort to use off-the-shelf applications [14]. 3.7. Deployment problems and challenges For transaction security, Intel sites allow customers to place and track orders using standard web browsers with Secure Socket Layer (SSL) encryption. However, the US government previously banned the export of 128-bit encryption technology to foreign nations. To maintain a strong encryption technology worldwide without violating this export ban, Intel encouraged its customers to acquire a third-party 128-bit encryption application developed outside the US for their own protection. Commenting about Intel’s success in the deployment of the 128-bit SSL encryption, Phuc Than, General Manager of Intel Vietnam, stated: ‘‘Intel’s customers in southeast Asia found the use D.D. Phan / Information & Management 40 (2003) 581–590 of the 128-bit encryption technology a necessary step to trust Intel’s e-business system, especially in nations where e-business is relatively new.’’ With the 128-bit encryption model resolved, the project moved forward to deploy the pilot system. During the first month of deployment, Intel found that encrypted file transfer was very sensitive to packet loss when using SSL security. When packet loss rate exceeded 15%, the download times for encrypted pages skyrocketed. It was critical for Intel to reduce the packet loss rate to successfully deliver its e-business system. In addition, most of the transmission problems at customers’ sites were located in the connection between customer’s workstations to endoffices and tandem offices of the telephone companies. One solution was to reduce the number of elements that had to be transferred through the network. This was done by using data compression and redesigning the web pages so that only compressed data had to be transferred. Another solution was to improve connection quality and increase bandwidth between customers’ sites and the tandem office. With some incentives, Intel urged all of its value chain partners to upgrade their connections to ISP servers with high bandwidth pipes and high speed network and routers. Despite the strong encryption technology that was used worldwide within Intel’s value chain of partnership, Intel’s choice of Pentium servers and Windows operating systems created some security concerns. System security is only as good as the weakest link in the security chain. At Intel’s e-business system, the weak links include Microsoft Windows Operating Systems and Windows NT networks. Problems caused by hackers on Windows-based web-servers are commonplace. Fortunately, Intel conducts B2B e-commerce mainly among trusted partners via Virtual Private Networks (VPN) and thus its security risks are reduced. 3.8. Success On 1 July 1998, Intel officially began taking orders from OEM and distribution customers using its new personalized websites. This system enabled approximately 200 of Intel’s customers in almost 30 countries to place orders for Intel products, check product availability and inventory status, receive marketing and sales information, and obtain customer support in real-time, 24 h a day, 7 days a week. Prominent 587 applications in the value chain model at Intel are presented in Fig. 3. Major successes are: Intel moved US$ 1 billion dollars in revenue to its on-line e-business system in the first 15 days, surpassing the company’s initial goal of doing this in the first 3 months. The company was able to eliminate most faxes to its customers worldwide. For value chain partners in Taiwan alone, this eliminated 45,000 faxes per quarter. This produced significant cost savings for Intel and its value chain partners in reduced international long distance phone costs. After the first month of deployment, Intel continued to receive US$ 1 billion value of orders on-line each month for the rest of 1998. Independent customer surveys rated Intel’s e-business at a 94% satisfaction level. Intel became the eighth most profitable company in the US in 1999 and climbed to the fifth in 2000. Amid the collapse of many dotcoms and click-andmortars in recent years and the 2001 recession, Intel remains profitable and retained the value of its equity. For the year 2001, Intel’s income was US$ 1.29 billion. At US$ 211 billion, Intel was the seventh largest US company in market capitalization values at the end of 2001 [1,16]. Many of Intel’s employees who participated in the development of the e-business system continue to receive promotions many years after its successful deployment. Sandra Morris was promoted to the CIO position. 3.9. Lessons learned and success factors Despite thorough planning by Intel’s worldwide team, the most significant payoff from deploying the e-business solution was what the company learned. Key success factors ranked by level of importance are: Building and continuing to strengthen their distinctive strategic position in the market: Intel had the right goals, unique product lines, and was able to deliver a value proposition that is equal or better than that of its competitors. Thanks to its distinctive strategic positioning, buyers continue to pay a premium price for Pentium products. By building its B2B system as early as 1998, Intel further strengthened its strategic position with value chain partners. 588 D.D. Phan / Information & Management 40 (2003) 581–590 Fig. 3. E-business applications of Intel’s value chain. Building e-business to complement rather than cannibalize traditional ways of competing: Intel’s e-business system was intended to strengthen its market, profits, and competitive advantage. Intel was able to fend off lower cost substitute products with its Celeron products while maintaining good profit margins on its Pentium lines. By continuing to maintain innovation and tight supply chain rela- tionships with value chain partners, Intel strengthened its strategic market position. Support from top management: Thanks to the early vision and support from Andy Grove, all Intel ebusiness teams received necessary resources and cooperation to develop and test the new system. Focusing on quality of connections: For a global company like Intel, connectivity can be a real D.D. Phan / Information & Management 40 (2003) 581–590 challenge, especially in parts of Europe and Asia. After its deployment, Intel tested connectivity with customers in a real production environment on a frequent basis. Because performance can vary significantly in different countries, Intel network engineers worked hard to help customers keep up their network connections. While it was not Intel’s responsibility to install high quality connections between value chain partner’s sites to local tandem offices and ISPs, helping some partners to upgrade their connection bandwidth was crucial to Intel’s deployment success during the first year. Providing worldwide support and customer training: In order to promote e-business cooperation to value-chain partners, Intel built an e-business case study website to educate its partners. Intel also developed on-line training to reduce the number of support calls. Intel engineers also provided basic training to its customers in many parts of the world. Deploying the best security protections: Despite the export ban of the US government, Intel required 128-bit encryption technology to be used worldwide from the start, ahead of many US companies. Along with firewalls, VPN, access restrictions, and security audits, Intel provided adequate security, privacy, and confidentiality to customers and value chain partners in using its e-business system. Building and maintaining solid e-business architecture: A robust system will allow e-business to move ahead quickly. By separating front-end functionality of the website from back office systems, applications were developed for customers with frequent updates without being affected by enterprise-type applications. Following good e-business project management strategies: Having clearly defined scopes, goals, and requirements, and following an iteration approach during the development of Intel’s e-business system helped them to avoid many traditional software engineering problems, such as schedule delays, cost overruns, and failure to meet user requirements. Intel strategies of ‘‘build a little, test a little’’ and ‘‘walk first, run later’’ worked. 3.10. Room for improvement Despite the successes, there is still room for improvement of Intel’s e-business. First, attention 589 must be paid to the reliability of Intel’s PC servers. Rapid improvements in technology and competitive environment have forced many software vendors to shorten development cycle and rush software products to market without having thorough integration testing. The decline of Windows system reliability was observed by Larry Constantine: When we look back over the evolution of software, we see fewer clearly defined landmarks, and what dominates the landscape is the relentless trend toward ever larger, more complex, and less reliable systems loaded down with a panoply of bewildering features of questionable utility . . . . . . Ironically, even as hardware has become increasingly reliable and dependable, software has become far less so. It has been years since I have had to deal with a disk crash, yet hardly a day passes without the operating system and application software conspiring to crash one or more of the machines in my office. A 6-year-old machine that serves as our firewall sits with its disk spinning away 24/7 for years with nary a glitch, yet Windows goes brain-dead if it is not rebooted at least once a week [3]. Second, PC workstations and PC-based networks are more vulnerable to security break-in or virus attack due to its relatively simple architecture. Reliability and security are important factors in building trust from Intel’s B2B partners. A failure of delivery on mission critical products could shut down a factory of Intel’s customers and cause them to look for substitute products. An error in the database could cause incorrect parts to be shipped at the wrong time at an incorrect price. Therefore, using PCs as servers to support mission critical B2B operations is risky. Because it is in Intel’s interests to promote the use of PCs it must take extra measures to maintain the reliability and security of its e-business servers. 4. Conclusions With rapid advances in technology, novel ways of business process redesign, which include entering the e-business marketplace have emerged. Organizations today frequently redesign their processes in ways that provide competitive advantage. 590 D.D. Phan / Information & Management 40 (2003) 581–590 However, gaining competitive advantage requires building on the proven principles of effective strategy. Key success factors include maintaining distinctive strategic positioning, using e-business technology to improve efficiency and competitive advantage, maintaining support from top management, putting emphasis on the qual...