E-Business In A Low-Tech Sector: An Oxymoronsds.ukzn.ac.za/files/rr42.pdf · internationally...

E-Business In A Low-Tech Sector: TheCase Of The South African Wooden

Furniture Value Chain

Research Report No. 42

Sagren Moodley

Industrial Restructuring ProjectSchool of Development Studies (incorporating CSDS)

University of Natal

May 2001

ISBN No. 1-86840-435-8

FOREWORD

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The Industrial Restructuring Project (IRP) was initiated at the beginning of 1996 as theKwaZulu-Natal Industrial Restructuring Project (KZN IRP). The project initially focusedexclusively on KwaZulu-Natal, but is now aimed at supporting industrial policy in SouthAfrica at the national, provincial and local levels. It is facilitated by international expertsand is based at the School of Development Studies, University of Natal, Durban. Theproject has two important features. Firstly, it focuses on critical issues that are impactingon the competitiveness of manufacturing sectors that are under threat from increasedinternational competition and the liberalisation of the South African trade regime.Secondly, it is action-oriented in design. The findings that have been generated have, forexample, been presented to numerous industry stakeholders, including government,business associations and trade unions. The project consequently has the support ofvarious regional and national stakeholders.

This particular report has arisen out of both new research and the cumulative knowledgethat has been generated from previous studies. These cover a number of IRP reports,working papers, journal articles and conference papers. Some of the themes coveredinclude South Africa’s manufacturing competitiveness, the automotive industry, theclothing and textiles sector, footwear, middle-management capacity, human resourcedevelopment, institutional support for industrial restructuring, and business services formanufacturing competitiveness. Enquiries regarding IRP material should be addressedto: The Librarian, Centre for Social and Development Studies, University of Natal,Durban, 4041. Tel: (031) 2601031; Fax: (031) 2602359; email: [email protected].

Prof. Mike MorrisDirector: School of Development Studies

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ACKNOWLEDGEMENTS

The International Development Research Centre (IDRC) of Canada provided the fundingfor this study. Their generous financial support is sincerely appreciated and herebyacknowledged.

I wish to express my sincere appreciation to the all the firms which participated in thestudy. I am grateful to my colleagues, Justin Barnes and Mike Morris, and to Raphie Kaplinskyof the Institute of Development Studies, University of Sussex, for their constructivecomments on an earlier draft. The remaining errors, omissions and weaknesses are minealone.

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1 Castells (1996), for instance, writes about a globalised and networked “informational” capitalism.

I. Introduction

E-business promises to have a profound impact on the economic relationship between theindustrially advanced countries of the north and the less developed economies of thesouth. The rapid growth of Internet connectivity in the north seems to be a consequenceof the economic benefits Internet use offers to connected firms. Yet, little seems to beknown about the use of the Internet among developing country companies. The potentialof e-business to promote economic growth and development in developing countries is anissue which needs to be rigorously researched. The question that development workersneed to grapple with is: Will the Internet and the current informational mode ofcapitalism inevitably marginalise developing country manufacturers or are theiropportunities for industrial upgrading, increasing efficiency and facilitating entry into themore attractive export niches?

Economic globalisation is driven by pervasive information and communicationtechnology (ICT) use, deregulation, the opening of markets and global trade expansion(Cohen et al 2000; Dicken 1998). ICTs now form an integral part of the accelerated paceof globalisation, linking together nation states into complex webs of transnationalexchanges (Castells 1996; Gereffi 2000).1 The Internet is becoming a key enabler of theglobal, digital, networked economy. Moreover, economic progress is becomingincreasingly knowledge-driven, and information and knowledge are becoming primarywealth-creating assets (Castells, 1996; Evans and Wurster 2000; Fine 1998). It isbelieved that advanced e-business capabilities could enable developing countryenterprises to pursue more lucrative and diversified commercial activities, and it alsoholds out the promise of enhanced access to the global marketplace (Panagariya 2000).Although the deployment of ICTs provides opportunities for developing countries tobypass stages of development, considerable obstacles (infrastructural, skills, education,legal, etc.) stand in the way of making a transition to a knowledge-based informationsociety.

The transition to an Internet-connected, ICT-based economy presents both opportunitiesand challenges for the South African wooden furniture value chain (WFVC). Thisexploratory paper considers the prospects and challenges of e-business for the low-tech,labour- and resource-intensive WFVC. From a development perspective, this exploratorystudy is important because employment and export growth prospects for the WFVChinge increasingly on leveraging ICTs as a means of promoting industrial upgradingwithin global and local value chains. The study also has implications for other low-tech,labour-intensive sectors such as clothing and footwear. The main issues that this paperwill focus on include: Whether e-business has the potential to grow in the WFVC, and toconsider the circumstances under which e-business in the WFVC may grow – this islikely to lead to identification of appropriate policy instruments which may be used tosupport e-business growth in the WFVC.

The informational logic that currently shapes the WFVC is one of personal contacts. Inother words, market relations in the WFVC are “embedded” in close, dense networks of

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personal ties. Fully automated front- and back-office systems, integrated ITarchitectures, computer-mediated inter-firm relationships, Internet-based inter-firmcollaboration, and advanced networking capabilities built on strong and productiveexternal linkages with customers, suppliers and business partners, are generally not foundin the WFVC. This paper will examine what, if anything, e-business has to offer theWFVC, and carefully explore the possibilities of e-business taking root in a low-techindustry that is run by long-established social networks.

The paper is structured as follows. Sections II and III provide the background for theempirical research. Section II provides a “state of the industry” review of the criticalfactors that are impacting on the South African wooden furniture value chain (WFVC).We focus on key issues such as market concentration, value chain upgrading, supplychain management, inter-firm co-operation, global connectivity and the importance ofpenetrating export markets for the WFVC. The purpose of this section is to contextualisethe study. Section III explains what e-business entails, and why it is important for theWFVC. We also trace recent e-business developments in the international woodenfurniture industry as a point of reference for the South African WFVC. The objective ofthis section is to look critically at the prospects and challenges of e-business for theWFVC. Our aim here is to provide an analytical framework to anchor the empiricalsection of the paper. Section IV explains the research methodology that was used for thee-business survey of 48 firms in the WFVC. In this section we describe the process thatwas followed in selecting the sample, and in preparing the research instrument. SectionV presents the key research findings that emerged from the e-business survey. Thefindings of the empirical research are displayed in tabular form using counts andpercentages. Section VI discusses the implications of the findings for the South AfricanWFVC. We also explore the implications of e-business for small firms. This sectionalso highlights critical policy issues. Section VII, the conclusion, ties the threads of thevarious argument presented in different sections of the paper together. We also put fortha number of questions for further research.

II.

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III.The South African Wooden Furniture Value Chain: An Overview

The inward-orientation of the low-tech, labour-intensive furniture sector has beenfostered by a history of protectionism and import-substitution industrialisation (ISI)during the apartheid era. This inward focus was reinforced by trade isolation andeconomic sanctions during the 1980s and early 1990s. The possibilities for export-ledgrowth in the wooden furniture sector was thus stymied for a long period of time. Partlyas a result of trade isolation, the WFVC has failed to adopt the new methods ofproduction and work organisation (such as lean production, flexible specialisation, just-in-time manufacturing, total quality management and knowledge management) which areinternationally recognised as contributing towards enhanced efficiency (Best 1990; Porter1990; and Womack et al 1990). Moreover, with the lifting of tariff barriers, localfurniture manufacturers are having to compete with low-cost producers from developingcountries such as China, Indonesia, Malaysia and Vietnam for a share of the exportmarket. Moreover, a new wave of competition has also been unleashed by the formercommand economies of Central and Eastern Europe, the ramifications of which are feltparticularly in export markets.

Since 1994, the South African WFVC landscape has been substantially altered by thepressures of globalisation and trade liberalisation. During this transitional period,industry observers have noted significant job losses, firm closures, consolidation (i.e.acquisitions and mergers) in the manufacturing and retail sector, manufacturersstruggling to get a foothold or consolidate their position in the export market for woodenfurniture products, and domestic firms attempting to restructure their operations in orderto become internationally competitive (Dunne 2000a, 2000b; Fakude 2001). The criticalimportance of issues such as value chain upgrading, supply chain management, inter-firmco-operation, global connectivity and the importance of penetrating export markets forthe WFVC have been flagged by Dunne (2000b), Fakude (2001) and Kaplinsky, Morrisand Readman (2001).

Market Concentration

The South African wooden furniture value chain (WFVC) is characterised by high levelsof ownership concentration and oligopolistic domination of markets (Manning 1996).The timber growing, sawmilling and board industries are dominated by a few very largefirms. The sawmill sector, for instance, is dominated by three large groups: a parastatal(SAFCOL) in the process of being privatised, and two groups (Sappi and Mondi) whichhave large investments in paper and pulp. The highly concentrated sawmilling industryhas often been accused of collusive behaviour, such as price-fixing. Apart from theorganised sawmill sector, there also a number of peripheral market players, often referredto as “bush mills” (Kaplinsky, Morris and Readman 2001).

The wooden furniture manufacturers, on the other hand, are predominantly small andmedium firms. Steinhoff Africa, a subsidiary of the German-based SteinhoffInternational Holdings, is an exception. Steinhoff Africa has acquired the MegacorGroup of timber manufacturers and Pat Cornick (formerly AFCOL), the largest group offurniture manufacturers in South Africa. Steinhoff Africa is Southern Africa's largest

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furniture and household goods manufacturer and distributor, and has access to SteinhoffInternational Holding’s European marketing and distribution network.

The retail market in South Africa is also highly concentrated, with the five large retailgroups monopolising the market: i.e. the JD Group, Relyant, Ellerines, Profurn and theRenaissance Retail Group. Unlike the highly industrialised countries, the powerful retailchains in South Africa have not played a “catalytic and nurturing role in encouragingsuppliers to pursue objectives such as enhanced quality and service and shorter leadtimes” (Manning 1996: 10). According to Dunne (1999: 14), “Manufacturerscomplained that chains are bad with their payments, take excessive profits and are notloyal to their suppliers”. Apart from the large retail groups, there are also independentretailers with small market share, some of which are serving niche markets. Theindependent retail sector also includes hundreds of small, mainly survivalist “mom andpop” stores scattered throughout the country.

A distinctive feature of furniture retailing in South Africa is the degree of higherpurchase sales. Manning (1996) discusses how the provision of easily accessibleconsumer credit has adversely influenced the nature of retailer competitiveness in SouthAfrica. Furniture retailers earn a substantial portion of revenue from financial servicesand products, including interest and insurance charges. For example, in the first 6months of 1996, the JD Group earned R1.9bn in revenue from furniture and appliancesales and R536m from finance charges. During the same period, Relyant’s sales of R2bnincludes R500m in finance charges (Business Day, 30/10/2000).

International experience suggests that “whilst the exercise of retail dominancestrengthens retailers’ bargaining power, it can strengthen the position of suppliers, if it isassociated with a nurturing and collaborative relationship with suppliers” (Manning,1996:155). This is not the case in South Africa. Manning (1996) has identified theissuance of credit in furniture retail as one of the obstacles to the development ofnurturing and collaborative relationships between retailers and their suppliers in SouthAfrica's domestic furniture markets. It seems as if the mass retailers are selling creditand financial services rather than furniture per se.

Exports

In the last ten years, there has been a re-organisation of the wooden furniture industryinto new global-scale value chain and production network configurations. Furnitureproduction has become globally dispersed and competition between countries hasintensified (Kaplinsky and Readman 2000). The importance of connecting into globalvalue chains to grow exports is important for the long-term survival and growth of theSouth African wooden furniture industry. There are several reasons for shifting the focusto export markets. Firstly, the local market is small, making it difficult to sustaineconomies of scale. Furniture manufacturers often produce small volumes of a range ofwooden furniture products. Under such circumstances, the higher volumes and higherprices offered by the export market offer a superior growth trajectory for the woodenfurniture industry. Secondly, furniture is a consumption good and in a developing

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2 To put this growth in context, the other two low-tech sectors, i.e. clothing and footwear, grew by 18 percent and 2 per cent respectively during the same period.

country like South Africa which has a depressed construction and building industry, highformal unemployment, a sluggish economic growth rate, and high levels of poverty andinequality, the potential for growing the domestic market in the short-term is not great.

Furniture manufacturers generally make use of direct contacts, and to a lesser extentmarketing agents, trade fairs and the Export Council for facilitating exports. The mainexport destinations for South African wooden furniture products are the UK andGermany, and to a lesser extent Australia, the Middle East, USA and other parts ofEurope. According to Table 1, furniture accounted for 3.52% of total manufacturingemployment and 2.74% of total manufacturing exports between 1995 and 1999. TheIndustrial Development Corporation (IDC) reports that South Africa’s furniture exportshave grown since the late 1980s, albeit from a low base (Business Day, 14/02/2000). Ofthe labour-intensive sectors (i.e. footwear, and clothing and apparel), furniture is thehighest net exporting sector and has the best exporting performance figures between1995-99 (Table 2).

TABLE 1: Trade and Employment Data for South Africa: 1995-1999 (SelectedIndustries: 1997 Figures)

Industry Numberof

Employ-ees

AnnualChange

inEmploy-ment(%)

AnnualChange

inExports

(%)

Exports(US$m.)

Imports(US$m.)

Product-ion

(US$m.)

AnnualChange

inExportOpen-

ness (%)

WagePerHead(US$)

AnnualChangein WagePer Head

(%)

AnnualChange in

Productivity (%)

TotalManufact-uring

1436430 -0.2% 6.9% 14919 21688 73132 5.9% 9550 2.9% 1.2%

Textiles 70210 -3.6% 5.0% 426 693 2396 6.5% 6429 3.2% 2.1%Footwear 23310 -1.3% 10.3% 17 158 478 11.3% 4710 1.9% 0.3%Apparel 126280 0.2% 10.5% 166 200 1714 9.0% 4575 3.2% 1.3%Furnitur

e50570 2.9% 20.2% 409 91 1027 19.1% 6452 1.6% -1.9%

Source: Based on data from the International Trade Centre (www.intracen.org)

TABLE 2: Net Exports 1995-1999: South African Customs Union (US$’000)Selected Product Groups Gross Export

Value 1998Net Export Value

1995Net ExportValue 1998

Net Export % Change1995-98

Furniture & Stuffed Furnishings 447,176 330,507 365,895 10.7%

Footwear 15,761 -154,585 -153,780 0.5%

Clothing & Apparel1 150,809 17,321 -38,995 -225.1%

Source: Calculations based on data from the International Trade Centre (www.intracen.org)

In 1998, the furniture industry was the 19th largest traded goods sector, with a total valueof world trade of US$44.9bn, surpassing the value of trade in the clothing industry(US$40.6bn) and the footwear industry (US$33.8bn). Between 1994 and 1998, all worldtrade grew by16 per cent, whereas world trade in the wooden furniture sector grew by 26per cent (www.intracen.org).2 Competition in the global furniture industry hasintensified in recent times with the increasing penetration of industrialised countrymarkets by developing countries (mainly from Asia) and the former command economies

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3 IKEA is the world's largest furniture retailer.

of Central and Eastern Europe (Table 3). Table 3 clearly illustrates this trend: there areonly 5 industrially advanced economies (i.e. Italy [1st ], Canada [3rd], Denmark [5th],Spain [8th] and Sweden [11th]) in the list of the top 20 net exporting countries. SouthAfrica is positioned at number 14.

TABLE 3: World Furniture Trade: The 20 Leading Net Exporting Countries (US$ `000)

Country Gross ExportValue 1998

Net ExportValue 1995

Net Export Value1998

Net Export % Change1995-98

Italy 8,630,577 7,595,051 7,831,184 3.1%III. China 2,821,435 1,670,459 2,725,244 63.1%III. Canada 4,254,850 684,846 1,805,593 263.6%III. Poland 1,909,699 1,179,853 1,563,564 132.5%III. Denmark 2,022,567 1,686,785 1,323,069 -21.6%III. Mexico 1,841,054 467,702 1,190,136 254.5%III. Malaysia 1,113,788 825,857 1,050,869 127.2%III. Spain 1,476,699 522,492 731,090 139.9%III. Thailand 629,261 711,506 609,308 -14.4%III. C z e c h

Repub.854,524 147,833 499,274 337.7%

III. Sweden 1,341,673 509,901 494,747 -3.0%III. Slovenia 565,421 340,720 432,703 127.0%III. Romania 435,571 471,857 382,337 -19.0%III. S o u t h

Africa447,176 330,507 365,895 10.7%

III. Indonesia 355,065 818,946 339,028 -58.6%III.

Philippines324,620 235,055 271,453 15.5%

III. Hungary 430,546 79,523 228,092 286.8%III. Brazil 342,881 211,936 135,197 -36.2%III. K o r e a

Repub.187,803 -34,165 76,515 4235000.0%

1. Slovakia 195,571 143,155 63,423 -55.7%Source: Calculations based on data from the International Trade Centre (www.intracen.org)

International retailers and marketers are increasingly placing new demands onmanufacturers vis-à-vis cost reduction, improved quality, product innovation,productivity, environmental standards and service issues. The uptake of this is thatdeveloping country manufacturers increasingly have to focus on improving theiroperational efficiency, productivity, product quality and service in order to maintain theirmarket positions (Dunne 2000b). The international mass retailers, such as IKEA(Sweden) and B&Q (UK), source furniture products globally, thus there is intensecompetition between manufacturers selling to these retailers.3 IKEA and B&Q sourcehigh quality products for the cheapest possible price. IKEA, for instance, sets exactingquality standards, offers technical expertise and support, and provides all specifications,drawings and designs (Fakude 2001).

Although the South African WFVC has increased its share of exports, it is competingmainly on price and not on higher value-added criteria such as quality, design ormarketing (Fakude 2001). The depreciating Rand has enabled many manufacturers toabsorb tight price squeezes in the export markets. The quality of locally-produced timber

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4 It is important to bear in mind, though, that the Rand depreciated quite drastically against the US dollarduring this period. So the massive fall in unit prices may well be a combination of the large fall in theexchange value of the Rand, as well as the downward pressure on prices in the export markets.5 Saligna, a species of eucalyptus, is a commercially grown hardwood.

is generally poor, adversely affecting furniture manufacturers’ ability to produce high-quality furniture for exports. Furthermore, the lack of a good local design base forcesmanufacturers to compete in the cheap furniture segment of the export market.

World prices for the wooden furniture industry are declining rapidly (Kaplinsky, Morrisand Readman 2001: 13). This is mainly to do with the fact that the wooden furnitureindustry is highly competitive, especially as more producers enter the global market(Table 3). The downward pressure on prices has become more acute since the entry oflow-cost producers, such as China, in the mass market segments. South African furnituremanufacturers are responding to the challenge of minimising input costs in threesignificant ways: (1) vertical integration; (2) diversification of the customer base; and (3)increasing use of contract labour. The latter, of course, is a short-term low-road strategy.

The share of exports in furniture sales grew from less than 5% in 1992 to over 40% in1999 (Kaplinsky, Morris and Readman 2001: 28). This exceeded the export/sales ratio inthe South African manufacturing sector as a whole. The unit prices of South Africa’swood furniture exports, measured in US dollars, fell by a staggering 250% between 1992and 1999 (Kaplinsky, Morris and Readman 2001: 29).4 It appears that South Africa’sfoothold in export markets is based largely on price competitiveness. Participation inlow-margin, price-sensitive products places the South African wooden furniture valuechain in a very vulnerable position, and underscores the immense upgrading challengeconfronting the industry. This implies that merely increasing furniture exports insegments characterised by sustained price declines will not sustain profitable production.Rather, it is the capacity to upgrade through moving up the value chain by improvingdesign, branding and marketing which is important.

The lack of co-operation among exporters in the furniture sector is a major obstacle to theadoption of a co-ordinated export strategy. As a result, buyers are able to play onemanufacturer against another and drive prices down. The competitive terrain is intense,and is underscored by the lack of information flows between the manufacturers, the lackof a strategic vision, and highly opportunistic behaviour, such as the copying of designsand the undercutting of prices. This is captured and reflected in the following quote fromFakude (2001: 21):

“…[A] manufacturer of pine doors early this year tried to raise the price of hisproducts to accommodate increases in freight charges. He was unsuccessfulbecause at the same time two other giant door manufacturers who export to thesame market increased their capacity and so there was an oversupply in themarket”.

Recently, there was a window of opportunity for exporting saligna furniture, but the lackof a clear strategic vision and co-ordination in the South African saligna value chainblocked this opportunity.5 As a result, the much more organised Brazilian saligna

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6 The Brazilians are marketing saligna as “Lyptus”. 7 Power refers to one’s ability to get what one wants from others. This definition subsumes both thecommon usage of Weber (1947), i.e. the ability to coerce others into doing what they would otherwise notperceive to be in their best interest, and the popular contemporary usage of Foucault (1980), i.e. the abilityto control the consciousness of others. Power relations emerge from a particular historical configuration offorces and discourses in the market.

furniture sub-sector has been quick to exploit the “gap” in the lucrative export market forsaligna furniture.6 Thus, an opportunity to enter new market niches, with higher unitprices went begging.

IKEA is no longer interested in sourcing from South Africa and has decided to leaveSouth Africa, in order to focus its attention on Eastern Europe and East Asia. It,therefore, appears as if the upgrading challenge for the wooden furniture value chain isgoing to be largely a domestic responsibility. South African furniture manufacturers willneed to internalise the efficiencies of world class manufacturing, focusing onreorganising production layout and work organisation. Greater emphasis will also needto be placed on high quality finishing and original design. However, a narrow focus onefficiency alone will not be sufficient for sustainable income growth. It also depends onhow a producer is linked into global markets, which affects its capacity to upgrade.

Value Chain Issues

Gereffi (1999) distinguishes between two distinct kinds of governance in global-scalevalue chains: buyer-driven (or retailer-driven) and producer-driven. The powerfulretailers are the key actors in the chain that shape the capacities of furnituremanufacturers to upgrade their activities. Power is leveraged by retailers and marketersat the distribution and retail end of the chain.7 Figure 1 provides a schematic view of thevertical wooden furniture value chain in South Africa. The upstream (near the source ofproduction) segment of the WFVC is, to a large extent, dominated by the largecommercial timber growers, sawmills and board producers. While the downstreamsegment is controlled by the powerful retail chains. Furniture manufacturers, however,generally tend to be smaller firms. As a result, there tends to be an imbalance in thepower relations between the value chain participants. Power tends to be skewed towardsthe primary producers/processors and the retail chains.

A long history of adversarial and conflictual buyer-supplier relations in the WFVC hasresulted in an environment in which co-operative efforts are strongly resisted by thevalue chain participants. The wooden furniture value chain is governed by a logic ofmistrust and suspicion (Manning 1996). Some major sources of tensions include: pricecutting;

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FIGURE 1: A Schematic Representation of the South African Wooden FurnitureValue Chain

Power DynamicsGovernance StyleGeographic ReachLinking MechanismMode of Inter-Firm Communication and InformationFlows

Inter-Firm Problems, Tensions and Conflicts

Type of ICT Architecture(Closed, Proprietary Systems orOpen Networks Based onPartnerships?)

Physical or Electronic B2B and B2C Transactions

Degree of ICT Infrastructure Integration and InteroperabilityThe Dynamic Configurations Embodied in the Production NetworkNetworking CapabilitiesNature of the Buyer-Supplier

Linkages

Globalisation (Trends in Production, Trade & Investment)

Technological Changes (Transport, Information, Communication & Production)

State Policies (Trade,Foreign Investment, Industry, etc.)

Bilateral/Multilateral Policies (Agoa, WTO, etc.)

Timber Growers(seeds, water, fertiliser, machinery & equipment

, research, logistics, etc.)

Furniture Manufacturers(product strategy, design,

transforming inputs, sales,

Consumers

Recycling

Sawmills(chemicals, machinery,research, logistics, etc.)

Intermediaries(such as trading houses, export

agents & wholesalers)

Retailers [Domestic &Foreign]

(marketing, sales, packaging,

Vertical Sequence of Productive

Factors Impacting on the

Internal Factors

External Factors

13

Transnational Corporations

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the copying of designs; the lack of availability of furniture quality timber; thesupply of timber which is not of the correct dimensions; late deliveries; latepayments; competitive switching; etc.

The power of the sawmills lies in their ability to control the quantity and quality oftimber supplied to the manufacturers. The sawmills have been accused of beingunresponsive to the needs of manufacturers. Part of the reason is that furnituremanufacturers account foronly 12% of South Africa’s timber resources, thus making furniture manufacturersa relatively small customer group for the sawmills (Dunne 2000a; Dunne andMorris 1999). The principal customers are the paper, pulp and packagingindustries, and the exportation of raw logs to foreign companies. There is thus littleincentive for the sawmills to supply furniture manufacturers, when the same valuecan be yielded through pulping the logs. Moreover, the sawmills are equippedmainly to deal with pine rather than hardwoods, such as saligna.

According to Manning (1996), the leading international retailers often play a keyrole in upgrading their suppliers' positions through the promotion of nurturing andcollaborative relationships. South African furniture retailers, however, have failedto adopt this international trend. Nonetheless, there is some evidence thatinternational retailers (such as IKEA and B&Q) which source from South Africamay be playing this role with their South African suppliers (Fakude 2001). But thishas been short lived since IKEA is now leaving South Africa.

Fakude (2001) mentions that there is a great deal of operational and processinefficiencies in the wooden furniture supply chain. This is, to a large extent, areflection of the arms-length relations that still pervade the way business is carriedout between manufacturers and their suppliers, and between manufacturers and theretailers. The WFVC is characterised by poor intra- and inter-firm linkages.Dunne (2000a: 19), for example, stresses the limited networking capabilities of theWFVC: “little emphasis is placed on developing relationships with suppliers andcustomers”. Flows of information is one critical mechanism through which firmscould improve or consolidate their position within the value chain.

Manning (1996: 211) mentions that she “…observed almost complete absence of communication orco-operation between firms [i.e. furniture manufacturers], regardless of where they are located”.Dunne (2000b) found no evidence of extensive inter-firm co-operation, such as joint ventures, in herexploratory study of 13 exporting timber product manufacturers, located in the Eastern Cape andKwaZulu-Natal provinces. She did, however, find some evidence of subcontracting relationships andthe “ … ‘siphoning off’ of parts of orders that proved too large for the capacity of the primarysupplier” (Dunne 2000b: 18). The primary reasons for the lack of high levels of co-operation has todo with the tight price margins, the opportunistic behaviour of the firms, and the general lack ofinstitutionalised, substantive trust between firms in this sector. Information flows and informationsharing between firms are thus thwarted, as firms are suspicious of each others motives.

In a “buyer-pulled chain”, such as the WFVC, the final retailers are often not aware of the challengesinvolved in production. According to Manning (1996: 11): “… furniture retailers have exhibited nointerest in entering into collaborative relationships with their suppliers, especially smaller suppliers”.This is a major impediment to promoting supply chain learning in the WFVC.

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8 Industrial Restructuring Project, based at the School of Development Studies, University of Natal, Durban.

Recently analysts have witnessed a growing trend towards joint ventures andvertical integration in the wooden furniture sector in an attempt to becomeinternationally competitive and to eliminate bottlenecks in the supply chain,especially at the raw material end. Manufacturing groups such as Steinhoff Africaare acquiring (or setting up) their own sawmills, and are also increasing theirleverage by co-ordinating group purchases of timber from suppliers. Other firmsare also opting for the “vertical integration” path (Fakude 2001). Sunfurn is oneexample of a group of furniture manufacturers which are in the process of settingup a joint venture. As mentioned previously , the issue of timber quality and timberavailability is a source of great tension between furniture manufacturers andsawmillers. This is not surprising, considering that manufacturing firms’international competitiveness is at stake.

There have also been attempts to form clusters and loose partnerships in order toaccess export markets which would otherwise be out of reach of smallmanufacturers. It is believed that these alliances might have the leverage toinfluence supply chain performance. Gloserv (Pty) Ltd, for example, is a firmwhich functions as a “cluster driver” for a small group of furniture manufacturers.Apart from providing a marketing service, Gloserv also runs a finishing plant forits cluster of small manufacturers in order “to ensure uniformity and quality offinish, as well as handling packaging and offering central warehousing facilities”(Fakude 2001: 19).

There has also been an attempt by the IRP8 to promote a greater level of collaboration inthe saligna hardwood sub-sector. The Saligna Value Chain Interest Group(SVCIG) consists of timber growers, sawmillers, timber product manufacturers,and representatives from government (Department of Trade and Industry [DTI]and the Department of Water Affairs and Forestry [DWAF]) and otherstakeholders (such as the Council for Scientific and Industrial Research [CSIR],private consultants and trading houses). The underlying rationale of the SVCIG isto take advantage of the export prospects for saligna timber products and jointlytackle the problems that are limiting the ability of saligna manufacturers topenetrate international markets. But it appears that the key issue which actuallymobilised the SVCIG concerned the supply of saligna timber. Once this criticalsupply problem was resolved, the SVCIG lost its raison d'être. In order to keep thisvalue chain initiative alive, it is necessary to mobilise the members around otherpressing concerns such as exploiting the export potential of saligna furniture.

Based on various analyses and case study material, it would appear as if the woodenfurniture industry is a conservative and inflexible industry, which is slow to respondand adapt to changing market conditions (Dunne 1999, 2000a, 2000b; Fakude 2001;Manning 1996). The mindset is largely “business as usual”. There has been arelatively slow rate of diffusion of industrial international “best practice” in theWFVC. Furthermore, the majority of firms have poor inventory management

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systems (raw materials, work-in-progress and finished goods). Many researcherscomplain that firms in the WFVC often do not keep accurate and up-to-date recordsof production and inventory management figures (Dunne 2000a; Fakude 2001; andManning 1996). Nonetheless, it is plain that supply chain inefficiencies in theWFVC are high (Manning 1996). For example, there is a marked tendency to holdlarge buffer stocks:

“… in the case of board suppliers … average ten days of raw material inventoryheld by domestic market focused firms. In the case of pine, the tendency forsudden supply shocks is much greater, and the pine manufacturers hold thirtythree days, or approximately one month of raw timber inventory. The existence ofsuch buffer stocks … calls into question the assertion by several manufacturersthat they operate on a JIT system. Clearly supply chain relations are a crucialaspect of improved competitiveness in this sector” (Dunne 2000a: 17).

Resolving these supply chain inefficiencies is crucial for sustained internationalcompetitiveness in the new global operating environment confronting furnituremanufacturers.

Reflections

Is the “high-tech” profile of e-business in contradiction with the resource- andlabour-intensive low-tech wooden furniture industry? The question that arises is:In an industry run overwhelmingly on personal contacts, albeit adversarial andarms-length relationships, what are the prospects for computer-mediated, Internet-based value chain interaction between the players? According to Dunne (1999: 14):

“The South African furniture sector operates on the basis of long standingrelationships and personal contacts. Retailers become aware of newmanufacturers through word of mouth or after contact is initiated bymanufacturers. Formal media such as the Internet, furniture fairs and agentsplay little part in establishing contact between buyers and sellers in what is arelatively small and concentrated market”.

In a sector with little experience of electronic communication and information linksbetween market actors, is it realistic to expect that “open” Internet platforms couldprovide wooden furniture firms with opportunities to fundamentally restructuretheir intra- and inter-firm business processes? Also, what sort of impact could e-business have in transforming or reconfiguring the current fixed and linear supplychain, especially to eliminate supply chain inefficiencies that are hampering theinternational competitiveness of the industry.

There is no strong sense of interdependence among the players in the South Africanwooden furniture value chain. Under such circumstances, is it realistic to expectfirms to employ Internet-based supply chain management in order to shorten thetravel time associated with both finished goods and work-in-progress goods, and to

17

reduce inventory costs? E-business is premised on close collaboration betweencustomers, suppliers and business partners. Is the WFVC ready for electronic-based collaborative arrangements which entails the sharing of businessinformation?

Key issues that need to be addressed include, the potential of the Internet to:manage supply chain logistics; address the channel conflict between sawmillers andmanufacturers, and between manufacturers and retailers; and increase the overallefficiency and productivity of the industry. There is an urgent need to reshape theway both products and information move between sawmillers, manufacturers, andretailers, i.e. to realign what has been historically a very inefficient process. This iscritically important from an industry development perspective, as well as forunlocking upgrading possibilities.

We know what the value chain questions are, but is e-business the answer or at leastpart of the answer?

18

III. E-Business: Prospects and Challenges for the Wooden FurnitureValue Chain

But What is E-Business?

Although the precursor of the Internet appeared in the late 1960s, e-business isprimarily a product of six significant transformations in the global economy: theglobalisation of markets; shift towards an economy based on knowledge andinformation; the growing prominence of ICTs in the economy; innovations inbusiness organisation and practice (such as Just-In-Time Production, Total QualityManagement, Knowledge Management, etc.); the liberalisation of thetelecommunications sector in primarily OECD countries; and technologicalinnovations such as email, the World Wide Web, Internet browsers, and theexpansion in the volume and capacity of communication networks (viz. optic fibre,digital subscriber line technologies, and satellites). These six factors are closelylinked to the emergence of e-business.

The term e-business has no widely accepted definition. In a very broad sense, itmeans doing business over the Internet. We define e-business as any form ofcommercial or administrative transaction or information exchange that takes place viaan Internet-based, computer-mediated network. E-business thus entails theapplication of the Internet to the complete value chain of business processes. TheInternet offers a wide spectrum of potential commercial activities and informationexchange (Figure 2). This paper focuses exclusively on business-to-business (B2B)Internet interactions (i.e. the shaded block in Figure 2). There are two main reasonsfor this focus: (1) our concern is

FIGURE 2: E-Business Matrix

G2Ge.g. co-

ordination

G2Be.g.

information

G2Ce.g.

information

G2Ee.g.

information

B2Ge.g.

procurement

B2Be.g. e-

commerce

B2Ce.g. e-

commerce

B2Ee.g.

informationexchange

C2Ge.g. tax

compliance

C2Be.g. price

comparison

C2Ce.g. auction

markets

C2Ee.g.

information

E2Ge.g. tax

compliance

E2Be.g. HR

information

E2Ce.g. productinformation

E2Ee.g. email

communicat

Governmen Business Consum Employee

Government

Business

Consumer

Employee

19

9 One of the main reasons why business-to-consumer (B2C) e-commerce has not taken off in the furnitureindustry is because furniture is a “high-touch” commodity, by that we mean that the sale has a lot to do withthe consumer actually viewing (colour, design, etc.) and touching (texture, quality, etc.) the furniture. Thepurchasing of furniture, therefore, is a much more personalised experience than that of buying music CDsor books over the Internet.

ion

primarily with the potential of the Internet for enhancing inter-firm supply chainmanagement, and (2) because current trends seem to indicate that B2B e-commercewill far outstrip that of business-to-consumer (B2C) e-commerce (Intelligence:Business in the Internet Age, May 2000).

B2B e-commerce refers to procurement, logistics and administrative processesoccurring between firms. In B2B e-commerce, companies use the Internet tointegrate the value-added chain which can extend from the supplier of rawmaterials to the final consumer. Over 90 per cent of global e-commerce revenuesare forecast to be business-to-business (IBM 2000). B2B e-commerce is still largelydominated by the US, accounting for almost 80 per cent of global revenues. There isthe perception that the US has benefited substantially from the improvedproductivity promised by e-business (IBM 2000).

Inter-business e-commerce can be divided into two categories: open marketplace-based trade anddirect trade between business partners. The former takes place at various Internet-based auctions orexchange sites, whilst the latter occurs either through a firm’s web site which has an onlinepurchasing function or an EDI-type network. B2B e-commerce is likely to spread globally and growrapidly because of its potentially significant impact on business costs (associated with inventories,sales execution, procurement and distribution), and its assumed increase in productivity gains. Asalready mentioned, the South African WFVC needs to improve its productivity and substantiallyincrease its supply chain efficiency in order to become more competitive in international markets. Itappears, therefore, that the South African WFVC could benefit from adopting e-business.

E-Business Developments in the Wooden Furniture Industry

The furniture industry is lagging behind that of the automotive, chemicals,industrial and high technology equipment, steel and shipping industries in terms ofadopting the Internet for supply chain management. Unlike the producer-drivenautomotive, steel and chemical industries, the furniture industry does not have asingle, globally-integrated Internet trading hub that directly connects all (or themajority of) suppliers online. Such Internet-based (vertically integrated)consolidation is generally not found in buyer-driven value chains.

The US is currently the largest market for e-commerce in the furniture industry.However, the Centro Studi Industria Leggera (CSIL) reports that new initiativesare being launched in Europe, particularly in the UK, the Netherlands, Finland andItaly (www.csilmilano.com). The CSIL report also claims that B2C e-commerce inthe furniture industry will grow moderately in the medium-term, while B2B e-commerce is expected to grow rapidly.9

20

The American Furniture Manufacturers Association’s (AFMA) task force on B2BInternet commerce has already embarked on developing industry standards(www.furnituretoday.com/news). AFMA called for the development andimplementation of strategies that promote e-business within the furniture industryto improve the consumer buying experience and boost operational productivity.AFMA intends to develop composite business requirements representing suppliers,manufacturers and retailers. The task force aims to commission an acceptable e-commerce provider to develop, operate and maintain an effective portal based onthe furniture industry’s requirements.

Recently, several B2B trade exchanges for the furniture industry have beenlaunched, with most based in the US. For example, in the six month period toMarch 2000, at least six furniture B2B companies (Furnishnet.com,FurnitureFind.com, HomePoint.com, RetailMetro.com, etc.) have been set up in theUS alone. Homepoint (www.homepoint.com), a leading provider of e-businesssolutions to the home furnishings industry, has developed a sophisticated extranetsystem that links retailer and manufacturers across the US. The system enablesretailer members to browse through a virtual inventory of a broad range of in-stockhome furniture products, place orders and manage inventory. Industry analystsspeculate that the furniture industry will see consolidation and the weeding out ofthe weaker online B2B exchanges (The Business Journal, 24/03/00).

Two B2B e-commerce portals are based in Singapore, i .e .GlobalFurnitureMarket.com and BuyLateral.com, which seek to link furniturebuyers and sellers globally. Apart from supporting e-commerce,GlobalFurnitureMarket.com also provides a communication platform for theindustry, provides industry news, and operates as an application service provider(ASP) by offering to construct e-commerce sites for manufacturers, retailers anddistributors. At the moment, the B2B online exchange has mainly Asian members,which include: Singapore-based Unicane, HTL International, and KODAWoodcraft; PT Hadinata Brothers from Indonesia; Seng Yip from Malaysia; andDickson and Tian Tan from China. According to Ghee-Tat Lee,GlobalFurnitureMarket’s CEO, “We received good response to our portal servicesat the China International Furniture Expo. The Chinese seem ready to embrace thetechnology that would enable them to have a wider market reach”(www.furnituretoday.com/news).

South Africa has not been unaffected by B2B e-commerce developments in theinternational furniture industry. An online exchange, namely TimberAfrica.com,servicing the South African timber products industry was launched in October2000. The portal was developed by Ideosphere, a software development company,in conjunction with timber brokers Crickmay Erasmus and Associates (CEA) andProc-Broc, and the publisher of Wood Southern Africa and Timber Times. AndrewCrickmay of CEA claims that the portal was born out of “the need to position andproject the sector through a unified global and regional approach, to showcase thestrength, depth and capabilities of South Africa’s forestry, timber, furniture and

21

value-added products and services” (www.TimberSA.com). The marketplace is adynamic price discovery environment, rather than an auction-based system. Theadministrators of the trading hub manage the settlement process once a trade hasbeen matched, including physical fulfilment and payment settlement. The paymentsettlement function is facilitated through the involvement of American Express SAand Nedbank’s Iveri transaction processing system, and is backed up by CreditGuarantee Insurance Corporation of Africa. TimberAfrica.com processed overeight million Rand of transactions in its first three months of operation.

TimberAfrica.com is marketed as an independent, neutral trading portal bringingsupply and demand together into a single online trading hub. TimberAfrica.comprovides a centralised marketplace for timber products manufacturers, suppliersand agents. Currently there are no electronic exchange platforms for the furnitureand value-added industries. TimberAfrica.com offers the sawmiller the potentialbenefits of greater exposure of products to buyers, access to new markets, reducedselling costs, streamlined stock and administration procedures. The value to thebuyer is the access to a broader range of timber qualities and dimensions, speed andefficiency, access to new sources, real-time stock availability, and streamlinedadministration procedures.

An information portal for the South African timber industry, called TimberSA.com,has also been developed. TimberSA.com provides members with information suchas industry news, product and market information, and industry statistics such asthe SA Lumber Index produced by CEA. It also has a trade inquiries page and afurniture export trade directory. TimberAfrica.com is regarded as the trading armof TimberSA.com.

Prospects

E-business presents furniture manufacturers with the opportunity to expand theirmarkets through enhanced international trade via the Internet, and upgradethemselves by generating comparative advantages. The Internet is creating newvalue propositions in and between global furniture value chains. The challenge forSouth African firms is one of how to position themselves within these evolvingInternet-connected global value chains in order to gain competitive advantage andcapture value. Theoretically, the Internet provides South African furnituremanufacturers with the requisite connectivity to become a global player throughworld-wide marketing and sourcing. The use of the Internet to co-ordinateproduction through domestic and cross-border, inter-firm networks is likely to havea significant impact on the competitiveness of the South African WFVC. Moreover,the Internet enables firms to digitally access global-scale trade networks, Internet-based trading platforms and to leverage trade agreements such as the US AfricaGrowth and Opportunity Act (AGOA).

The emergence of the Internet as a means of intra- and inter-firm linkage, has greatpotential to harness information flow to streamline the wooden furniture value

22

10 Getting the right product to the highest volume segment of the market on time can provide substantialprofits for first movers.

chain and to reach new markets (see Section II). Of particular importance for theSouth African WFVC, is the use of the Internet to improve firm and supply chainefficiencies. The WFVC includes a geographically dispersed group of stakeholders.ICTs substantially reduce proximity constraints – both with regard to markets andproduction. The reach and ubiquity of the Internet, therefore, has much to offer asa common communication and information platform for the geographicallydispersed furniture market actors. Further, e-business represents a majoropportunity for small furniture manufacturers to compensate for their traditionallack of access to national and international markets. The improved transactionefficiency and reduced costs (communication, information search, etc.) of e-businessoffer opportunities to small producers for extending their global reach. Small firmcompetitiveness can also be enhanced through the attainment of Internet-mediated“collective efficiency” gains (Schmitz 1999).

For the South African wooden furniture value chain, the potential of the Internetfor real-time information links represents a quantum leap in collaboration withdistributors, suppliers, business partners and customers. The Internet has thepotential to profoundly change both the organisation of the single firm and in theinteraction of the firm with its suppliers and customers. Enhanced informationflows could play an important role in creating and strengthening value chain co-operation.

Because e-business is still at a very early stage in its development, much of itsbenefits are based on speculation or anecdotal evidence. Nonetheless, e-business hasthe following potential benefits for firms in the WFVC:

improved productivitysystemic efficiency gains reaped through streamlined inter-firm connectivityspeed-to-market10

lower cycle timescollaborative supply chain managementbetter planningreductions in inventoriesmore efficient logisticsmore efficient and effective customer servicelower purchasing, sales and marketing costsnew sales opportunitiesgreater connectivity to new and existing markets

Theoretically, the Internet holds great potential for revamping the woodenfurniture value chain to improve data flow and streamline operations. As discussedin Section II, the buyer-supplier relationships within the wooden furniture chain arefixed, linear and clearly demarcated. Enormous potential, therefore, exists increating an environment in which relationships between the players in the WFVCcan be more direct, cost efficient and interactive. Integrating functions across

23

11 We are referring to the channel through which goods pass from the point of origin tothe point of final sale to consumers. It includes all related activities in the chain, such asraw material supply, production, ordering, warehousing, wholesale, distribution and

businesses, such as workflow arrangements in a supply chain situation, is predicatedon integrated internal business processes. In other words, each value chainparticipant’s front-office (i.e., sales, marketing and customer support services) andback-office systems (i.e., databases, order processing, inventory and accounting)must be integrated, then only can optimal collaborative supply chain managementbegin to take place. The problem is that the vast majority of firms in the WFVC donot have integrated IT systems in operation. Integrating the vertical and horizontaltiers of the supply chain is, therefore, very much a long-term strategy, consideringthe current low IT base and lack of integrated intra- and inter-firm electronicnetworks in the WFVC.

Figure 3 illustrates how an integrated Internet-based architecture could providefirms in the WFVC with the ability to visualise their value chains from end-to-end,i.e. as an integrated whole. The Internet facilitates collaboration both within andbetween firms by dynamically sharing information in real-time. Figure 4 illustrateshow the Internet enables the networked or virtual organisation to connect,dynamically in real-time, the supply and demand side of the company. The Internetcreates the possibility for firms to communicate, transact and collaborate withenhanced flexibility, and at a lower cost. The firm focuses on its distinctivecapabilities, and then forms strategic alliances with other firms in the overall valuechain (Figure 4). Increased dependence upon suppliers thus becomes a requirementof the firm, and has a major impact on the buyer-supplier relationship. In theWFVC, the buyer-supplier relationship has traditionally been arms- length andadversarial (Section II). A move towards a closer collaborative relationshipmediated through Internet-based networks will therefore represent a sea change inbuyer-supplier relationships in the WFVC.

FIGURE 3: An Integrated Value Chain

Raw EndMaterials Consumer

Web-based IT Integration of the upstream and downstream businesses11

Overlap indicates flexible, responsive digital linksbetween the value-adding stages

24

retailing.

High-Capacity Networking Capabilities

FIGURE 4: A Virtual Value Chain

Virtual Integration: Seamless, Internet-Enabled Information Flows

Business-to-Business(B2B) Supply Chain

Links

• Supply chain management

• E-procurement

• Stock management

• Integrated forecasting

• Quality systems management

• Extension of a firm’sIntranet to suppliers (i.e.deployment of an Extranet)2

• Move from independence tointerdependence• Etc.

Business-to-Employee(B2E) Information Links

• Deployment of an Intranet3

which streamlines the firm’sinternal business functions,and connects individualworkstations (includingremote employees)

• Web-based Internal businessprocess efficiency andeffectiveness

• Internet-connected front-and back-office systems andprocesses

• Cross-functional orientation

• Use of collaboration and Knowledge managementtools

• A move to responsiveknowledge workers

• Etc.

Business-to-Customer(B2C) Communication

Links

• E-commerce (i.e. e-sales)

• Customer service

• Customer relationshipmanagement

• Interactive marketing

• Demand forecasting

• Orders management

• Extension of a firm’sIntranet to customers (i.e.deployment of anExtranet)

• Etc.

The Diffusion of InformationWithin the Firm ~ Intra-Firm

Collaboration (Intranet)

25

Suppliers Inter-Firm Collaboration and Networking Customers

Virtual Extended Enterprise (Extranet)

26

In principle e-business tools have the potential to lower operational costs throughautomated order and fulfilment processes, provide the ability to transact businessand access information in real-time, and connect to new and existing markets. Thepotential for reduction in supply chain costs through online purchasing represents asignificant profit opportunity across the supply chain. Since real-time informationon forecasts, selling and inventory levels travel immediately through the supplychain, companies are more likely to maintain lower inventory levels withoutincreasing the risk of component shortages. Stockpiles of inventory within thesupply chain for “just-in-case” events are, therefore, minimised because demandinformation is directly available to the entire supply chain.

Furniture firms that exploit Internet-enabled supply chain management are likely to be far moreresponsive to their customers, suppliers and market conditions, as well as (potentially) lower the costof goods and transactions right across the chain, from the primary supplier through to the end-user.The uptake of this is that firms jointly manage inventories across the supply chain, forecast salestogether, and plan collaboratively to keep levels of component and completed product inventorydown to a bare minimum. As a result, there are also opportunities for higher value-addedmanufacturing.

Challenges

As mentioned above, the potential benefits of the Internet for fundamentallyreconfiguring the buyer-supplier relationship in the wooden furniture value chainare indeed great. However, realising the benefits that e-business promises is notgoing to be an easy task, as there are many formidable obstacles to overcome, suchas: a path dependency which focuses on the reduction of labour and input costs ascompetitive advantage rather than pursuing a knowledge-intensive trajectory;closed-minded management, etc. An important precondition for the emergence ofinter-firm collaboration is the existence of trust-based “obligational” relations.Where social networks are weak and social capital insubstantial, the outlook forB2B co-operation appears bleak. The wooden furniture value chain currently hasvery low levels of trust, and there are very limited cases of co-operation, and supplychain functions do not operate in a tightly co-ordinated and integrated manner(Section II).

E-business places a premium on openness, transparency and trust. In order torealise the potential costs savings and the productivity gains e-business promises,companies in the WFVC must be willing to open up their internal systems tosuppliers and customers. This, of course, raises policy issues concerning potentialanti-competitive effects as firms integrate their operations more closely. This isparticularly a problem in highly concentrated markets, as is the case with the SouthAfrican wooden furniture value chain. Moreover the lack of supplier upgrading,investment in suppliers and open pricing policies are serious impediments to e-business taking root in the WFVC.

Achieving e-business gains in the WFVC is contingent on a number of factors: theavailability of advanced networks able to support the provision of Internet services;the existence of the skills and capabilities needed to practice e-business; firms’

27

ability to connect to digital networks and access e-commerce systems; etc. The lackof adequate IT infrastructures, skills and capabilities in the wooden furniture valuechain are currently barriers to the diffusion of e-business in the chain. Otherobstacles include: the existing corporate culture; the existing transaction structure;pre-existing modes of production and information management – especially the lackof end-to-end free flows of data; buyer-supplier relationships inherited from thepast; and evolutionary path dependencies. Furthermore, the high costs of Internetaccess, lack of bandwidth, the slow pace of planned liberalisation of thetelecommunications sector, and a lack of awareness of the potential benefits of e-business in the WFVC are also major blockers to e-business.

28

12 The South African Lumber Millers Association (SALMA) is the official employer’s body representingthe organised sawmilling industry in South Africa.13 The contact person was identified by IRP researchers working in the furniture sector, and throughtelephone calls to the firms in question.14 We also emailed the questionnaire to all firms which had email facilities.

IV. Methodology

In previous sections of the paper we provided a “state of the industry” review,focusing on key problem areas such as supply chain inefficiencies, the lack of inter-firm co-operation, high market concentration, failure to leverage value chainupgrading opportunities, and poor global connectivity in the WFVC. We alsodiscussed the opportunities and challenges that e-business holds for the woodenfurniture industry which operates largely through personal contacts, albeitconflictual and arms-length relationships. These previous sections provide thebackground for the empirical research. In this section of the paper, we explorecorporate use of the Internet by surveying a small sample of companies in the SouthAfrican wooden furniture value chain. This study focuses on the following marketsegments of the wooden furniture value chain: pine, eucalyptus/saligna, householdfurniture, garden furniture and DIY products. Manufacturers of upholsteredfurniture and bedding were also excluded from this study, mainly because theyexhibit significantly different characteristics (i.e. a high-level of non-timber inputssuch as fabric and foam) from that of solid timber furniture manufacturers. Firmsthat relied significantly on non-timber inputs such as fabric, plastic or metal werethus excluded from the survey because they are linked into different value chains,the dynamics of which differ from that of the WFVC.

Several sources were used to identify the required firms. There is no single, up-to-date register of all firms that are part of the South African wooden furniture valuechain. We used the following sources: the 1999 South African Wooden FurnitureDirectory’s list of timber product manufacturers; Brabys online business directory(www.brabys.co.za); SALMA’s12 membership list; the Federation of FurnitureManufacturers membership list; and the IRP’s Saligna Value Chain Interest Group(SVCIG) membership list. From these sources, a consolidated list of firmsbelonging to the wooden furniture value chain was prepared. From this sampleframe, 150 firms were randomly selected. The sample was weighted in order toensure both geographical representativeness and value chain representativeness(i.e., timber growers, sawmills, furniture manufacturers, trading houses, exportingagents and domestic retailers). Since the timber furniture industry is concentratedin three provinces, i.e. Gauteng, KZN and the Western Cape, the sample wasdeliberately biased towards these provinces.

Three key informant interviews were held with experts on the wooden furnitureindustry. Based on the discussion with the industry analysts, a short two-pagequestionnaire was designed by the researcher. The questionnaire was pretested on asmall sample of firms in the Durban area, and then revised in accordance with thecomments received from the pretest group. The final questionnaire, together witha cover letter, was then transmitted by facsimile to a contact person13 in each firm.14

29

Firms not responding to the first fax or email were sent a follow-up letter and asecond copy of the questionnaire. A total of 48 questionnaires were eventuallyreturned. There is likely to be a bias in the pattern of responses, since non-users areless likely to return the questionnaires than are Internet users.

Tables 4-6 provide a snapshot of the surveyed firms. Table 4 reveals that themajority (68.8%) of respondents were independent firms. Table 5 shows thatalthough different segments of the wooden furniture value chain are represented inthe responses, there is nonetheless a bias towards manufacturers (62.5%). Table 6reflects that micro (16.7%), small (22.9%), medium (45.8%) and large (14.6%)firms are represented in the responses.

TABLE 4: Ownership Profile (N=48)

Frequency Percent

Subsidiary of domestic company 5 10.4Joint venture with foreign company - -Subsidiary of foreign company 2 4.2Independent: Ltd or private 33 68.8Parastatal 1 2.1Owner-managed (proprietor or partnership) 7 14.6Total 48 100

TABLE 5: Type of Firm (N=48)

Frequency Percent

Sawmill 3 6.3Manufacturer 30 62.5Retailer 4 8.3Trading House 5 10.4Marketer & Distributor 1 2.1Manufacturer & Retailer 1 2.1Timber Grower & Sawmill 2 4.2Sawmill & Manufacturer 2 4.2Total 48 100

TABLE 6: Size of Firm (No. of Employees) (N=48)

Frequency PercentMicro (1-19) 8 16.7Small (20-100) 11 22.9Medium (101-500) 22 45.8Large (500+) 7 14.6Total 48 100

V.

30

VI. Findings

This section of the report presents the findings of the empirical research. It isimportant to bear in mind that a large number of firms who did not respond to oursurvey are likely to be either not connected to the Internet, or if connected, are notusing the Internet to any great extent. In other words, our findings might bereflective of the usage patterns of the early adopters of the Internet in the WFVC.

TABLE 7: Does Your Company Have a Web Page? (N=48)

Type of Company Yes No TotalSawmill

Count 2 1 3Row % 66.7 33.3 100.0Column % 9.5 3.7 6.3% of Total 4.2 2.1 6.3

Manufacturer


Retailer


Trading House


Marketer & Distributor

Count 1 - 1Row % 100.0 - 100.0Column % 4.8 - 2.1% of Total 2.1 - 2.1

Manufacturer & Retailer

Count 1 - 1Row % 100.0 - 100.0Column % 4.8 - 2.1% of Total 2.1 - 2.1

Timber Grower & Sawmill


Sawmill & Manufacturer


Total

Count 21 27 48Row % 43.8 56.3 100.0Column % 100.0 100.0 100.0

32

Table 7 indicates that less than half (43.8%) of the total respondents have a webpage. The breakdown by type of company is as follows: 80% of trading houses,66.7% of sawmills, 50% of retail chains and only 30% of manufacturers have ahome page on the Internet. The breakdown by firm size is as follows: 71.4% oflarge firms, 50% of micro firms, 40.9% of medium firms, and only 27.3% of smallfirms have a web site (Table 8). We can thus conclude that small manufacturers arethe least likely to have a web site. We surveyed the respondents’ web sites andfound that all firms used their home pages merely to provide information on thecompany, its organisation and its products. In other words, the web sites are littlemore than a contact page and an online “brochure”.

TABLE 8: Web Page by Firm Size (N=48)

Firm Size Yes No TotalMicro (1-19)


Small (20-100)


Medium (101-500)


Large (500+)


TOTAL

Count 21 27 48Row % 43.8 56.3 100.0Column % 100.0 100.0 100.0

Table 9 highlights that the majority (70.8%) of firms have between 1 and 5 Internetconnections, with 14.6% of firms having between 6 and 10 connections, and theremaining 14.6% have more than 10 Internet connections. Most micro (75.0%),small (90.9) and medium (81.8%) firms have less than 6 Internet connections, whilethe majority of large firms (85.7%) have more than 10 Internet connections. Itappears as if there may be a relationship between firm size and Internet penetrationrates. But this will need to be explored with a bigger sample to draw more concreteconclusions.

33

TABLE 9: Number of Computers Connected to the Internet (N=48)

Firm Size No. of Internet Connections Total1-5 6-1010+

Micro (1-19)

Count 6 2-8Row % 75.0 25.0-

100.0Column % 17.6 28.6-

16.7% of Total 12.5 4.2-16.7

Small (20-100)

Count 10 1-11Row % 90.9 9.1-

100.0Column % 29.4 14.3-

22.9% of Total 20.8 2.1-22.9

Medium (101-500)

Count 18 3122Row % 81.8 13.64.51

00.0Column % 52.9 42.914.3

45.8% of Total 37.5 6.32.145

.8Large (500+)

Count - 167Row % - 14.385.7

100.0Column % - 14.385.7

14.6% of Total - 2.112.51

4.6TOTAL

Count 34 7748Row % 70.8 14.614.6

100.0Column % 100.0 100.0100

.0100.0

While 75.0% of retailers and 66.7% of sawmills have more than 10 Internetconnections, only 3.3% of manufacturers have an Internet penetration rate of morethan 10 (Table 10). Table 10 highlights that 85.7% of manufacturers have less than6 Internet connections. This suggests that manufacturers are lagging behind that ofthe sawmills and retailers in terms of Internet penetration rates.

34

TABLE 10: Internet Penetration Rates by Type of Company (N=48)

Type of Company No. of Internet Connections Total1-5 6-1010+

Sawmill

Count 1 -23Row % 33.3 -

66.7100.0

Column % 2.9 -28.66.3% of Total 2.1 -4.26.3

Manufacturer

Count 26 3130Row % 86.7 10.03.31

00.0Column % 76.5 42.914.3

62.5% of Total 54.4 6.32.162

.5Retailer

Count 1 -34Row % 25.0 -

75.0100.0

Column % 2.9 -42.98.3% of Total 2.1 -6.38.3

Trading House

Count 3 2-5Row % 60.0 40.0-

100.0Column % 8.8 28.6-

10.4% of Total 6.3 4.2-10.4


Count - 1-1Row % - 100.0-

100.0Column % - 14.3-2.1% of Total - 2.1-2.1


Count 1 --1Row % 100.0 --100.0Column % 2.9 --2.1% of Total 2.1 --2.1


Count - 112Row % - 50.050.0

100.0Column % - 14.314.3

4.2% of Total - 2.12.14.

2Sawmill & Manufacturer


Total

Count 34 7748

35

Row % 70.8 14.614.6100.0

Column % 100.0 100.0100.0100.0

Table 11 reveals that 45.8% of all firms have between 1 and 5 employees who accessthe Internet, and only 22.9% of firms have more than 10 employees who use theInternet. More than half of micro (62.5%) and small (81.8%) firms have between 1and 5 employees who access the Internet, whereas 71.4 % of large firms have morethan 10 employees who access the Internet. Medium firms seem to be more or lessevenly spread across the 3 categories.

36

TABLE 11: Number of Employees Who Have Access to the Internet (N=48)

Firm Size No. of Employees Total1-5 6-1010+

Micro (1-19)

Count 5 3-8Row % 62.5 37.5-

100.0Column % 22.7 20.0-

16.7% of Total 10.4 6.3-16.7

Small (20-100)

Count 9 2-11Row % 81.8 18.2-

100.0Column % 40.9 13.3-

22.9% of Total 18.8 4.2-22.9

Medium (101-500)

Count 8 8622Row % 36.4 36.427.3

100.0Column % 36.4 53.354.5

45.8% of Total 16.7 16.712.5

45.8Large (500+)

Count - 257Row % - 28.671.4

100.0Column % - 13.345.5

14.6% of Total - 4.210.41

4.6TOTAL

Count 22 151148Row % 45.8 31.322.9

100.0Column % 100.0 100.0100

.0100.0

Table 12 reveals that 66.7 of sawmills and 75.0% of retailers have more than 10employees connected to the Internet as compared to only 16.7% of manufacturers. Table10 reveals that 86.7% of manufacturers have between one and five Internet connections.Yet Table 12 shows that 50.0% of manufacturers have more than five employees thataccess the Internet. This means that employees in manufacturing firms are sharingcomputers that are connected to the Internet.

37

TABLE 12: Number of Employees Connected by Type of Company (N=48)

Type of Company No. of Employees Total1-5 6-1010+

Sawmill

Count 1 -23Row % 33.3 -

66.7100.0

Column % 4.5 -18.26.3% of Total 2.1 -4.26.3

Manufacturer

Count 15 10530Row % 50.0 33.316.7

100.0Column % 68.2 66.745.5

62.5% of Total 31.3 20.810.4

62.5Retailer

Count 1 -34Row % 25.0 -

75.0100.0

Column % 4.5 -27.38.3% of Total 2.1 -6.38.3

Trading House

Count 2 3-5Row % 40.0 60.0-

100.0Column % 9.1 20.0-

10.4% of Total 4.2 6.3-10.4


Count - 1-1Row % - 100.0-

100.0Column % - 6.7-2.1% of Total - 2.1-2.1




Count - 112Row % - 50.050.0

100.0Column % - 6.79.14.

2% of Total - 2.12.14.

2Sawmill & Manufacturer


Total

Count 22 151148

38

15 Eight furniture manufacturers (or 16.7% of total respondents) claimed to be using email to communicatewith other manufacturers. Since there are 30 manufacturers in our study, this means that only 26.7% ofmanufacturers use email for “horizontal” supply chain communication.

Row % 45.8 31.322.9100.0

Column % 100.0 100.0100.0100.0

TABLE 13: Does your Company Use Email (N=48)

To Communicate With: YesCustomers 85.4%Suppliers 72.9%Agents & Buyers 43.8%Employees 43.8%Retailers 41.7%Banks/Financial Services 27.1%Other Furniture Manufacturers 16.7%Head Office & Branches 12.5%Designers 10.4%Statutory Bodies 2.1%

Table 13 reveals that a high percentage of firms claimed to be using email tocommunicate with their customers (85.4%) and suppliers (72.9%). A lower percentageof firms claimed to be using email to communicate with agents and buyers (43.8%),employees (43.8%), retailers (41.7%), banks/financial services (27.1%), other furnituremanufacturers (16.7%), head office and branches (12.5%), designers (10.4%) andstatutory bodies (2.1%). Only 26.7% of furniture manufacturers use email tocommunicate with other furniture manufacturers.15

TABLE 14: For What Purposes does your Firm Use the Internet? (N=48)

Function: YesEmail 97.9%Information Searches/Research 70.8%Online Financial Transactions 50.0%Marketing 39.6%Online Customer Service 14.6%Online Sales 8.3%Online Procurement 4.2%

Table 14 clearly shows the limited use of the Internet for e-business applications. Thisimplies that furniture firms have not found wide operational need for the Internet in theiroperations. The main uses of the Internet by firms include: email applications (97.9%),information searches (70.8%), financial transactions (50.0%), marketing (39.6%) andcustomer service (14.6%). The Internet is being used primarily as an information,marketing and communication tool rather than for B2B e-commerce. Only 8.3% of firmsuse the Internet for online sales, and a mere 4.2% use the Internet for e-procurement.

According to table 15, 10.4% of firms felt that the Internet was only “slightly useful”.The majority (89.6%), however, found the Internet to be “useful” or better. None of the

39

firms rated the Internet as “not useful”. It is interesting to note that 75.0% of micro and100.0% of small firms rated the benefits of the Internet as “useful” or better, thusimplying that the benefits of Internet use is not just a “big company” gain. However, onehas to be cautious when reading Table 15 since most of the furniture firms in our studyare not using the Internet for B2B e-business interactions (Table 16). They are, therefore,rating the Internet on a very narrow set of uses (i.e. email, information searches, bankingand marketing) (Table 14).

40

TABLE 15: How Would You Rate the Benefits of the Internet for your Company?(N=48)

Firm Size Benefits of the Internet TotalNot Useful Slightly

UsefulUsefulVeryUsefulIndispensa

bleMicro (1-19)

Count - 21418Row % - 25.012.5

50.012.5100.0

Column % - 40.07.717.414.31

6.7% of Total - 4.22.18.

32.116.7Small (20-100)

Count - -63211Row % - -

54.527.318.2100.

0Column % - -

46.213.028.622.9

% of Total - -12.56.34.222.9

Medium (101-500)

Count - 3512222Row % - 13.622.7

54.59.1100.0

Column % - 60.038.552.228.6

45.8% of Total - 6.310.42

5.04.245.8

Large (500+)

Count - -1427Row % - -

14.357.128.6100.

0Column % - -

7.717.428.614.6

% of Total - -2.18.34.214.6

TOTAL

Count - 51323748Row % - 10.427.1

47.914.6100.0

41

Column % - 100.0100.0100.0100.0100.

0

TABLE 16: B2B E-Commerce (N=48)

Yes

Engaged in B2B e-commerce? 4.2%Linked to an Internet-based tradingportal?

14.6%

Despite the emergence of B2B trading exchanges, such as TimberAfrica.com, only20.0% of sawmills and manufacturers are trading through a central e-marketplace (Table16). Furthermore, a mere 4.2% of firms are currently engaged in B2B e-commerce withtheir business partners. The picture painted by Table 13 is that business over the Internethas only just begun in the wooden furniture value chain.

TABLE 17: Barriers to E-Business (N=48)

Barriers Yes (%)Slowness of Response Time 50.0Low Customer Internet Use 43.8Limited Knowledge of the Internet 41.7Low Supplier Internet Use 39.6Security 31.3Unconvinced of the Benefits of theInternet

18.8

High Cost of Internet Access 16.7Firm Computerisation Too Low 4.2

The firms mentioned that the main obstacles to e-business adoption are: slow Internetresponse time (50.0%); low customer Internet use (43.8%); limited knowledge of theInternet (41.7%); low supplier Internet use (39.6%); security concerns (31.3%);unconvinced of the benefits of the Internet (18.8%); high cost of Internet access (16.7%);and low firm computerisation (4.2%) (Table 17).

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VI. Discussion

The Promise of E-business

The supply chain efficiencies promised by the Internet are dependent on full Internet-based integration of the value chain, offering a broad range of collaboration andintegration between the trading partners. Reaching this ideal is going to be expensiveand require the sort of industry-wide co-operation not generally prevailing in the SouthAfrican wooden furniture value chain today. Furniture companies embarking on a fullyInternet-enabled system at this early stage in the development of e-business, might findthe return of investment to be quite low. In other words the benefits might not justify thecosts incurred in the short-term. But as more and more suppliers and customers use theInternet to web-enable their front- and back-office systems (internal functionality), and toconnect with their trading partners, the benefits of Internet-enabled collaborationfunctionality are likely to become more pronounced.

E-business is not yet a strategic imperative in the South African WFVC. The majority offirms in the WFVC are unable to support e-business ventures today, because they do nothave the integrated customer and supplier IT interfaces in place. The lack of anintegrated IT infrastructure has to do mainly with a lack of technical knowledge on thepart of the firms; path dependency; the WFVC being a cost-driven rather thanknowledge-driven value chain; and the WFVC operating primarily on the basis of socialnetworks which are not complemented by ICT-based linkages. Currently the majority offirms in the South African wooden furniture value chain are either at the 1st or 2nd level ofe-business capabilities (Figure 5). Firms at the 2nd level generally have a simple webpresence, i.e. static information about a company and its products. A firm at level 6 isone which is able to build relationships with customers, suppliers and carriers to moreeffectively reduce operating cost, improve customers service and expand into newmarkets. The progression of firms to higher levels of e-business capabilities is likely tobe slow and incremental. The impact of B2B e-commerce, whether large or small, willprobably only start becoming apparent in about five years from now.

E-business has to be placed in a relative context , i.e. how fast is adoption compared tocompetitors. If the rate of B2B e-commerce uptake is lower than that of competitors, thismay result in declining value-added and market shares. Until sufficient numbers of theirmain customers (both domestic and foreign) and suppliers participate in e-businessinitiatives, there is little incentive for individual firms to develop a web-based customerand supplier interface, and to become engaged in e-business themselves.

While e-business is not a critical success factor in the WFVC today, it is likely to becomeimportant in the next 5 years or so. The primary e-business impediment appears to be thearms-length and adversarial nature of the relationships that currently exist between valuechain participants, both vertically and horizontally; and evolutionary path dependencieswhich have locked firms into an insular, inwardly-oriented way of thinking. The latter,for instance, manifests itself in firms’ reluctance to bring their customers, suppliers andbusiness partners inside the “corporate machine”. What is needed therefore is a new

43

FIGURE 5: Levels of E-Business Capabilities

LEVEL 1Companies with no online capabilities

LEVEL 2Companies with a web site

but no advanced capabilities

LEVEL 3Companies able to takeorders on their web site

LEVEL 4Companies able to take

orders and provide customerservice on their web site

LEVEL 5Companies able to complete

transactions and receivepayments on their web site

LEVEL 6Web-enabled supply chain

management (SCM): acompany can digitally link

sales, marketing,distribution, manufacturingprocesses, and customers,

44

strategic direction in the industry, which is likely to entail a sea change in businessmindsets. As already mentioned, lack of trust, suspicion and opportunistic behaviour aredeeply ingrained into the fabric of inter-firm interactions in the WFVC (Section II). Suchan environment of mistrust does not promote long-term, inter-firm co-operation andcollaboration, which is necessary for e-business to take root.

The Internet holds great promise for the WFVC in two key areas: (1) increasing theefficiency of internal processes, and (2) enhancing inter-firm linkages. Apart fromimproving intra-firm and inter-firm process efficiencies, the Internet can also play a keyrole in facilitating supply chain learning and innovation. B2B Internet-basedcollaborative interactions and real-time communication is likely to sharpen thecompetitive edge of the participating firms, reduce information asymmetries, andimprove the quality of information embodied in business relationships. Moreover, e-business capability is likely to become influential in determining export success(Panagariya 2000).

There appears to be a fear amongst some wooden furniture firms that integrated inter-firm (impersonal) digital links may corrode and ultimately destroy long established socialnetworks (Source: informal conversations with owner-managers). It appears as if firmsview social networks and Internet-based digital networks as mutually exclusive. This iscounterproductive, since the two modes are mutually enhancing and provide a morecomprehensive and strategic view of buyer-supplier relationships. However, there arealso risks associated with e-business: cost cutting, price-based supplier relationships andcompetitive switching. Electronic links theoretically make it easier for buyers to beginand end supplier relationships. The pursuance of short-term price advantages and theconcomitant “factory hopping” on the part of buyers, is at odds with upgrading thepositioning of South African wooden furniture manufacturers in local and global buyer-driven commodity chains. Therefore, the building of trust and reciprocity to reduce thethreat of opportunism and to make it difficult to break long-term network relationships isimportant.

Retailers developing long-term obligational relationships and investing in theirproducers’ capabilities is critical for crafting a knowledge-intensive value chainupgrading path for wooden furniture manufacturers (Sako 1992). There is, therefore, anurgent need for retailers to adopt a conscious policy of building stable, long-termrelationships with their suppliers based on: the transfer of complex information across theinter-firm link, fluid interactive information flows and intensive inter-firmcommunication links. In other words, stronger inter-firm “informational” and“knowledge-based” relationships between manufacturers and the sawmills and betweenmanufacturers and the buyers is essential for producers upgrading into quality-drivenmarket segments which offer higher returns. The highly concentrated domestic retailmarket is, however, likely to make the upgrading challenge for producers more difficult(see Section II). This notwithstanding, the upgrading challenge appears to be tightlybound up with the e-business challenge of creating dynamic, high performancenetworking between buyers and suppliers to cope with the “new competition” (Best1990; Porter 1998).

45

A key policy priority should be the creation of an enabling and nurturing environmentaimed at promoting and accelerating the growth of inter-firm co-operation andinformation linkages between firms. The Sector Partnership Fund of the DTI could be animportant catalyst to promote inter-firm co-operation in the WFVC. There is also a rolefor mobilising interest groups such as the Saligna Value Chain Interest Group, which wasset up by the Industrial Restructuring Project (IRP) as part of its value chain upgradinginitiative. Recently, there have been promising moves in the WFVC toward theformation of clusters (e.g. Gloserv and Sunfurn) of small producers to forge businesslinkages and partnerships with the objective of penetrating export markets. Otherstakeholders who could play a key role include: relevant government departments (suchas the DTI and DWAF), furniture business associations and the trade unions to give voiceand to articulate a coherent vision of common interests. There is also a role for powerfulmanufacturing groups such as Steinhoff Africa who have enough leverage to influencethe restructuring of the wooden furniture supply chain.

Effective communication and inter-firm co-operation between value chain participantscould lead to enhanced competitiveness for the WFVC. These relationships are criticalfor increasing domestic market share and for penetrating and expanding export markets.Consultative buyer-supplier relationships revolving around policies such as supplierupgrading, and the nurturing of personal relationships between the sawmills andmanufacturers and between manufacturers and the retail chains are critical to enhance thecompetitiveness of the WFVC.

In a producer-driven value chain, such as the high-tech automotive industry, e-businesshas been driven by the transnational assemblers (i.e. General Motors, Ford andDaimlerChrysler) who are operating at the cutting-edge of ICT developments. In abuyer-driven value chain, such as the low-tech wooden furniture industry, the retailchains have been slow to encourage their suppliers to become e-business literate. Onereason for this is that relationships in the WFVC are based largely on personal contacts,whereas the automotive sector has a greater degree of automation and a long history ofelectronic communication (i.e. EDI linkages).

The Small Firm Question

The furniture manufacturing sub-sector is made up of predominantly small firms(Manning 1996). From a development perspective, these small furniture firms areimportant because of their potential for job creation, black economic empowerment andredistribution (Kesper 1999). SMEs with a web presence and that can demonstrate theircapabilities to use e-business will have a competitive advantage in the B2B e-marketplace. SMEs without e-business capabilities may become marginalised assuppliers, and possibly even locked out of the supply chain, with adverse developmentimplications.

Many small furniture manufacturing firms believe that e-business has little or norelevance for their own enterprises and business plans (Source: informal conversationswith owner-managers). It is often seen as a big business application. One reason for this

46

is that small firms are not fully aware of the benefits and uses of e-business. Many ofthese small firms are unsure of how to set up a web site, and need assistance in setting upan effective and coherent e-business strategy. The DTI, for instance, should investigatecreating SME portals and online directories and information, services for small furniturefirms. Another option would be to aggregate small firms into Internet-based businesscommunities. This is likely to give small firms more procurement power and possiblylay the foundation for a collaborative e-commerce strategy in which small firms sharecosts and expertise. Such a strategy is also likely to encourage agglomerationeconomies; economies of scale and scope; joint learning, problem solving, purchasingand marketing; and the reaping of collective efficiencies (Humphrey and Schmitz 1995;Piore and Sabel 1984; Sengenberger and Pyke 1992; Schmitz 1999).

There is a need for strengthening the capacities of the SMEs, to nurture e-business, andexamine the feasibility of a local/regional mechanism to promote information sharing,capacity building and the exploitation of particular aspects of e-business to enhance theefficiency and competitiveness of SMEs. SMEs are typically less able to absorb theconsiderable fixed costs in adopting the Internet, web-enabling their front and back officesystems, and trading on the web. There is therefore a role for the DTI to play insupporting SMEs in the use of e-business. Some small furniture firms equate having aweb site with e-business (Source: informal conversations with owner-managers). Thereis therefore a need for the DTI to provide support for SMEs through training and skillsdevelopment programmes, the diffusion of e-business best practices, and thedissemination of critical success factors.

As highlighted in previous studies, SMEs face particular information asymmetries,management and skills issues (Sengenberger and Pyke 1992; Humphrey and Schmitz1995). State support for small businesses should have a component aimed at increasingthe rate of uptake and use of ICTs. Many SMEs are hesitant to embark on web-basedstrategies because of the perceived “insecurity” of the Internet as a business environmentand as a basis for contracts. Therefore, there is a need for measures to educate the firmsabout security issues, especially the development of such technologies as cryptography,firewalls and screening devices. The government should also put in place policies gearedat lowering network infrastructure access costs for SMEs. Government will also need togive priority to creating a competitive, market-driven telecommunications sector;establishing low-cost Internet access; developing broadband access on a national basis;and developing Internet-capable connectivity to the major business centres.

47

VII. Conclusion

The transition to an Internet-connected, ICT-based economy presents both opportunitiesand challenges for the low-tech, labour- and resource-intensive South African woodenfurniture value chain. E-business holds much promise for firms in the WFVC, and offersthe possibility of new models for organising production and transacting business.Companies in the wooden furniture value chain will have to weigh the importance ofprotecting existing relationships, which account for most of their current revenue, againstthe advantages of establishing future strategic positions and revenue streams through e-business.

The growth and diffusion of e-business in the WFVC has been very slow. Furniturefirms are generally considered to be ICT followers in the manufacturing sector, and theirexperience in using Internet technology may be suggestive of use by other South Africanlower-tech firms such as clothing and footwear. This notwithstanding, we believe that e-business is likely to become a critical success factor in the next 5 years or so. Furnituremarkets (particularly export markets) are becoming more demanding and complex, ande-business might well become an order-qualifying criterion (similar to process standards)which producers need as a prior condition for participating in global markets. Ourexperience in the automotive sector suggests that this is likely to be the case.

It is almost as if the market actors in the WFVC are so tightly bound up in their networksof face-to-face personal relationships that they are unable to envision a potentially moreefficient digital mode of communication and information flow. Perhaps, what needs tobe emphasised is that there is not necessarily a bipolar opposition between the Internetand long established social “personalised” networks. In other words they are notmutually exclusive, both systems can, and in fact should, coexist. What at first blushappears to be a binary opposition (i.e. low tech personalised linkages and the “high tech”modalities of e-business) is in fact a dialectical relationship, and should be seen asinteractive and mutually defining rather than alienating. Co-ordinated and integratedinformation flows via an integrated Internet-based architecture is crucial for a low-techsector that is struggling to compete in a globalised and interconnected world which isorganised around information flows (Castells 1996). Of course, the transition to a digitalsystem will not be easy. It is very much a long-term project which will require a greatdeal of commitment from the different stakeholders, a large amount of resources,expertise, enlightened leadership, will and effort.

International trade and production systems in the wooden furniture industry are likely tobecome increasingly Internet-based as a defence against the complexity and uncertaintyof markets. Internet-based ICTs represent a major opportunity for WFVC companies thatcan access and use it effectively, and a threat to those companies that cannot. The policychallenge for South African WFVC firms is, therefore, how to use the Internet to:

leverage, consolidate and deepen their links with theglobal economy;

48

access global Internet-based trading networks;take advantage of the potentials of globalisation; and exploit the systemic and productivity-enhancingpossibilities inherent in e-business.

E-business is still at a very early stage in its development, and the notion that Internetapplication may lead to a sustained higher level of economic efficiency is still very muchat the level of theory, and will need to be rigorously explored in practice. Moreover,achieving these efficiency gains is contingent on a number of factors, including: access toe-business systems and the needed skills; firms’ willingness to open up their internalsystems to suppliers and customers; and more generally, a firm’s evolutionary pathdependencies. By not making the transition to Internet-based business, South AfricanWFVC firms may be placing themselves at risk of becoming less competitive in theglobally interconnected market, impacting on both their current market positions andlong-term viability. If this were to happen it would have adverse developmentimplications for the country, such as job losses, a decline in revenue growth and aneroded export base.

The critical mass needed to reap positive network externalities is not, as yet, present inthe South African wooden furniture value chain. This requires leadership by several ofthe powerful retail chains to define e-business standards for all electronic marketparticipants, and create incentives that attract more companies to it. If the buyersembrace e-business, this will have implications for suppliers. Retailers will expectsuppliers to facilitate their procurement efforts by integrating with those of theirsuppliers. In such a scenario, the message for suppliers is clear: participate in e-businessor risk losing our business.

The catalytic role that early adopters can play is also critical in promoting the diffusion ofe-business in the WFVC. In addition, the following four factors will potentially lead to aquicker adoption of e-business in the wooden furniture value chain: (1) a defensivereaction to competitors engaging in e-business; (2) pressure by large firms that all of theirsuppliers link into their e-business system as a condition of doing business; (3) if onlinetrading portals achieve a critical mass of members and become established as a tradingplatform of choice; and (4) if the cost-reduction and value creation potential of theInternet begin to be realised in practice.

The growth of e-business in the WFVC is dependent on the introduction of collaborativebuyer-supplier relations. This is a tall order given the historical lack of trust pervadingthe sector. What is needed is a carefully considered strategy that vertically andhorizontally integrates all components of the WFVC value chain to enhance businessrelationships. There are two critical success factors of e-business, centred around thenetworking of internal and external business interactions, which South African furniturefirms will need to seize and rapidly exploit in order to be globally competitive. Firstly,strengthening the bonds between an enterprise and its value chain through a digitallybased system is important. Apart from enhancing inter-enterprise electronic

49

communication, firms will also need to focus on their intra-organisational connectivity(i.e. the integration of front- and back-office systems) in order to tie transactional flowstogether within the organisation.Internet impact can be fully examined only as a long-term phenomenon. Initialassessments, especially at such an early stage of e-business development, are at bestinconclusive. There is therefore a need for long-term analytical studies by independentresearchers on the impact of the Internet on business relationships in the WFVC.Questions for further research include: Can online trading hubs (such asTimberAfrica.com) provide a single common system that can be extended to include themajority of timber growers, sawmills, board manufacturers and furniture manufacturers?What is the potential of the Internet and the transactional tools associated with e-businessto shape links among market actors in the WFVC? What is/will be the impact of onlinetrading hubs and B2B value chain interactions on the structure and dynamics of theWFVC? Who are the winners and who are the losers? Are the closed business networksthat operate today merely replicated in the Internet environment? What progress aresmall furniture manufacturing firms making towards adopting e-business, and are theysucceeding in leveraging the benefits of e-business for improving their competitiveness,and for upgrading in the WFVC? What is the role of e-business for promoting valuechain upgrading, innovation and learning in the WFVC? Under what conditions can e-business become a vehicle for industrial upgrading in the WFVC?

To recapitulate: While the pressure on wooden furniture firms to re-organise to tap theadvantages of e-business is, currently, not high. This is likely to change soon, as e-business becomes a powerful competitive tool for WFVC firms to maintain whatSturgeon (2000) calls “geographic agility” and “output agility”. The Internet holds greatpotential for integrating the backward and forward linkages in the WFVC, and digitallyconnecting all phases of the value chain from raw material supply, to design, production,marketing, distribution, consumption and finally recycling. Hence, e-business could playan important role in: (1) facilitating (network-based) dynamic learning and innovationcurves in the WFVC; and (2) improving the ability of wooden furniture firms to move tomore profitable, knowledge-intensive, higher value-added economic niches ininternational trade networks. Industrial upgrading could, for example, take place throughharnessing and exploiting the information flows, the synergies, and learning potentialassociated with Internet-based buyer-supplier links. Thus, the Internet-connected digitalnetwork could, at least in theory, be used to create a new source of competitive advantagefor the South African wooden furniture value chain in export-oriented development.That said, though, the benefits of the Internet for the WFVC are only potentials, and suchpotentials have to be sought for and released. This is the critical development challengefor the South African wooden furniture value chain.

50

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15 Includes the following product groups: 841 (men’s/boys wear); 842 (women’s/girls clothing); 843(men’s/boys wear, knitted/crocheted); 844 (Women’s/girls wear, knitted/crocheted); 845 (Articles ofapparel); 846 (clothing accessories); and 848 (headgear/non-textile clothing).

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15 Internet-based network for company-use only.

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Newspapers and Magazines:Business Day, 14/02/2000Business Day, 30/10/2000The Business Journal, 24/03/00Intelligence: Business in the Internet Age, May 2000

Web Sites:www.brabys.co.zawww.BuyLateral.comwww.csilmilano.comwww.Furnishnet.comwww.FurnitureFind.comwww.furnituretoday.com/newswww.GlobalFurnitureMarket.comwww.HomePoint.comwww.intracen.orgwww.RetailMetro.comwww.TimberAfrica.comwww.TimberSA.com

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