The Dilemma Of Dairy

Farm Group Between

Redesigning of Business
Processes and
Rebuilding of
Management Information

Eugenia M. W. Ng
Ali F. Farhoomand
Probir Banerjee

IDEA GROUP PUBLISHING

 The Dilemma of Dairy Farm Group 1

IDEA GROUP PUBLISHING

1331 E. Chocolate Avenue, Hershey PA 17033-1117, USA IT5601
Tel: 717/533-8845; Fax 717/533-8661; URL-http://www.idea-group.com

The Dilemma Of Dairy Farm Group

Between Redesigning of Business
Processes and Rebuilding of
Management Information Systems
Eugenia M. W. Ng
Hong Kong Institute of Education, Hong Kong

Ali F. Farhoomand
University of Hong Kong, Hong Kong

Probir Banerjee
City University of Hong Kong, Hong Kong

EXECUTIVE SUMMARY
The Dairy Farm Group of Companies (DFG), is a leading food and drugstore retailer in the Asia-
Pacific Region. DFG and its associates operated supermarkets, hypermarkets, convenience stores and
drugstores in nine territories and had sales of US$6.9 billion in 1997. However, the profit margin of DFG
was low compared to its competitors in Hong Kong and China and other retailers in Europe and the
U.S. Consequently, a new chief executive officer was hired in June that year. The new management
team hired the services of two consulting firms to independently carry out a preliminary investigation
of existing systems at DFG and to recommend solutions. Firm A stressed primarily the development
of a management information system and use of emerging trends in technology and firm B focused
on the re-engineering of crucial business processes with supporting technology. If you are the
management team, which firm will be awarded the contract?

BACKGROUND
The Dairy Farm Group of Companies (DFG; http://www.dairyfarmgroup.com/dfarm_graphic/
corporate/default.html), is a major Hong Kong-based food retailer with operations in a large number
of major cities in the Asia-Pacific region. DFG’s shares were listed on the Hong Kong, Singapore,
Bermuda, London and New York Stock Exchanges. The primary share listing of the parent company,
Dairy Farm International Holdings Limited, was in London and the bulk of its shares were traded in
Singapore. The Company was incorporated in Bermuda and its businesses were managed from Hong

Copyright © Idea Group Publishing. Copying without written permission of Idea Group Publishing is
prohibited.
2 Ng, Farhoomand & Banerjee

Kong by Dairy Farm Management Services Limited through regional offices in Asia and Australasia.
Fifty-five per cent of DFG’s shares were owned by Jardine Matheson Ltd. and the balance was held
by the public (http://www.dairyfarmgroup.com/dfarm_graphic/corporate/annual/97/ann10.htm).
Sir Patrick Manson, a Scottish surgeon, and five prominent Hong Kong businessmen formed
Dairy Farm with the objective of supplying cow’s milk to Hong Kong people in 1886. In 1904, the
Company began importing frozen meat and opened its first retail store at the Central District depot,
and by 1957, it had three retail stores and had started expanding its product range, marking the start
of its transformation into a major food retailer and distributor. By 1986, its centenary year, it had more
than 300 retail outlets, including the Wellcome grocery chain. It had become a leading force in the
manufacturing, wholesaling and distribution of dairy and other food products in the Pacific region and
in China. In the same year, the Company acquired a 50 per cent interest in the Maxim’s chain of
restaurants in Hong Kong. In 1987, it acquired 25 per cent of Kwik Save Group plc - the sixth largest
grocery retailer in the UK–and commenced supermarket operations in Taiwan.
The Company subsequently acquired 228 branches of the 7-Eleven convenience stores from
Jardine Matheson in 1989, followed by acquisition of the 108-store Simago chain in Spain and the 61-
store Woolworths chain in New Zealand in 1990. Other major expansion activities included the
establishment of a 49 per cent-owned joint venture with Nestlé to develop dairy factories throughout
China in 1992, acquisition of the 142-store Cold Storage chain in Singapore in 1993, establishment of
a 50/50 joint-venture with Cold Storage and joint ventures to develop supermarkets and discount
stores in Malaysia and Japan in 1994 and 1995 respectively. In 1995, it also signed agreements with
the Hero group in Indonesia and the RPG group in India to manage and develop supermarket chains
in the two countries. In 1996, Guardian pharmacy joint ventures were established in Malaysia and India
and a 51/49 supermarket joint venture was formed in Sichuan.
By 1997, it had operations in all major cities in the Asia-Pacific region, Australia, New Zealand
and Europe with the Asia-Pacific being the most profitable region (Exhibit 1) 1 . In order to concentrate
on its core retailing business in the Asia-Pacific region, DFG disposed of its 49 per cent interest in Nestlé
Dairy Farm to Nestlé and decided to close down the loss-making Mannings drugstores in Taiwan and
the Wellsave discount stores in Japan. As of December, 31, 1997, DFG operated 1,352 outlets,
principally supermarkets, convenience stores and drugstores, and employed some 45,600 people. It
had also entered into the restaurant business through a 50 per cent interest in Maxim’s Caterers Limited,
Hong Kong’s largest restaurant and catering company with more than 300 outlets in Hong Kong and
Mainland China. The reported sales and profit figures for the year 1997 were US$6.9 billion and US$154
million respectively (Exhibit 2). While DFG operated on a sales-to-profit margin of 2.23 per cent in 1997
and 1.98 per cent in 1996, competitor A.S. Watson Group, comprised of the Park’N Shop, Watsons and
Fortress chain of stores in Hong Kong and China, had a 9.22 per cent sales-to-profit margin in 1997,
up from 5 per cent in 1996. Another competitor, US-based Wal-Mart, reported a 2.92 per cent margin
in 1997. The profit margins of DFG was low as compared to its competitors in Hong Kong and China
and other retailers in Europe and the U.S .
DFG’s business mission was: “To be the leading food and drug store operator in sales and
shareholder value creation in Asia-Pacific”. To successfully pursue its business mission it was crucial
for DFG to redefine its business strategy towards “sensing and responding to customer needs” as
opposed to the traditional “buying and selling”. In order to retain its dominant position in the Asia-
Pacific region, DFG had decided on a new business strategy. Firstly, the strategy entailed defending
its existing markets through a process of rationalisation focused on the disposal of, or closure of, its
non-core operations. Such a process was expected to put DFG in a position to expand its core
operations and become a dominant player in each of its chosen markets. A combination of acquisition
and rapid establishment of new formats funded from its cash-rich position was decided upon. The
second component of the strategy was to respond to the increased competitive threat through changes
to its organisational structure, and in this respect it had decided to de-federate its businesses and
 The Dilemma of Dairy Farm Group 3

operate as a single entity wherever possible. Such a move, it was felt, would enable DFG to capitalise
on both its size and resources and work cohesively as a single company with a single vision, identity
and brand where appropriate. The third dimension of the strategy was to improve on its market share
and customer base through exploiting new markets and opportunities consistent with its core market
capitalisation strategy.

SETTING THE STAGE

Existing Systems
The existing systems within DFG were built according to business functions to provide
transaction information rather than providing information for management or decision making.
Basically, there were two systems, namely, the Store Systems and the Operational Systems.

Store Systems
These systems were those deployed at the retail stores of various business units of DFG. The
retail store applications were point-of-sale systems, procured from several vendors and customised
for each store’s requirements. Each store had its own local area networks (LANs) on which the store
system was implemented. The store systems did not interface with any of DFG’s operational systems.
Some stores had optical scanners while some had cash registers at the customer checkout points. Sales
data was transmitted to the related business unit data centres through fax and modem for the purpose
of consolidation and operational decisions. Historical data storage at the store level was minimal,
owing to the high volume of daily transactions.

Operational Systems
The operational systems that supported DFG’s retail operations were the following:
• Central Merchandise Management, which included Item and Vendor Management, Pricing and
Promotions, Stock Management, Trading terms/costs and Store Replenishment
• Financial and Accounting Management
• Inventory Management
• Warehouse and Distribution Management
• Human Resource Management
Operational systems in DFG’s business units were large in scale, complex in operation and
business-critical in nature. Each business unit had its own merchandising, inventory and warehousing
systems, implemented on diverse hardware and software platforms. Managers did not have direct
access to the database in the mainframe. Some standard reports were generated for management
analysis. Any new reports required coding by programmes, and turnover rate of IT staff had been
fairly high as elsewhere in Hong Kong.

Problems With Existing Systems

Historically, information systems developers had developed systems to meet the requirements
of specific business functions within an organisation. DFG was of no exception. It had a wide range
of disparate, independent application systems, each built around specific business functions such as
finance, merchandising, warehousing, etc. These systems were closed walls, with no provision for
information exchange across business functions. Furthermore, as DFG expanded its operations into
various countries in Asia-Pacific, the applications had to be customised to adapt to the multilingual
and multicultural environments of the various countries. As a result, several different versions of the
software existed, significantly increasing the maintenance overhead. Additionally, many business
processes within DFG were manual and inefficient, thereby slowing information processing and
decision-making. Store replenishment was an example of one such system that required considerable
manual action and intervention.
4 Ng, Farhoomand & Banerjee

Another handicap with DFG’s systems was that the store systems were not designed to capture
the full details of customer transactions. As such, the customer database allowed only vague notions
about the customer to be developed. The anonymity of cash transactions, personal privacy laws and
the sheer volume of transactions prevented DFG and other similar retailers from developing the intimate
customer knowledge that was taken for granted in many other industries. This lack of customer
knowledge was seen as a formidable barrier to realising the quantum-level leap that DFG intended to
achieve in “sensing and responding” to customer needs.
There was also a dearth of information for management decisions. The relatively scant
information that was available was fragmented, voluminous, spread across diverse formats and not
current. As such, it was difficult to integrate or analyse. Sometimes, important information was not
available at all. As an example, calculating lost sales opportunity at the stores arising out of stock
outages was not possible because such data was not captured. Information was exclusively made
available in paper form and to analyse it in any other way required that the information be entered into
a spreadsheet and modified into a new structure.
Like other retail businesses, DFG’s business was also highly distributed. Mobile employees
such as the travelling salesmen and those in the warehouse and distribution functions had problems
accessing corporate information from remote locations. All DFG employees were tied to specific
locations in order to access corporate information resources. In the first instance, this occurred due
to the specific nature of the access devices (i.e., an IBM 3270/5250 terminal) and their corresponding
dedicated networks. Subsequently, access locations had been fixed because the wide variety of
system security services had not extended to allow access from more than one location. User identity
was often combined with the notion of a fixed location-dependent network identity.

Problems With Existing Processes

DFG operated as a federated organisation, more by compulsion than by choice. The compulsion
stemmed from the fact that a large number of small companies at geographically dispersed locations
had been acquired over a period of time. Since there was no communications network, each of these
companies operated independently. There was duplication of some assets and waste of human
resources. For example, although Wellcome operated in the daytime and 7-Eleven mostly at night, each
had its own fleet of trucks for stock movement, thereby increasing transportation costs.
In terms of business processes, store replenishment was one process that required significant
manual intervention. Each company had its own set of suppliers from whom goods were purchased.
This resulted in different prices being paid for the same items because they came from different
suppliers. Economies of scale were not possible. There was little power over vendors in terms of
negotiating terms of trade, particularly in regard to discounts on bulk purchases. Monitoring of stock
“shrinkage” was also a major problem. Sometimes excess goods were supplied and charged to the
stores. Average stockholding for some items (except fresh food) was about 35 days, against the
industry norm of seven days. A consequence of high inventory cost was that DFG’s business units
operated at margins that were much lower than those of other operators such as Tesco in the UK and
Wal-Mart and K-Mart in the U.S.
Another business process that wasted human resources was the accounting function. The
function being centralised, copies of purchase orders raised by the stores were sent to the Central
Office. Copies of goods receipt note and supplier invoices were also received at the Central Office.
Manually matching such a large number of orders with supplier invoices and goods receipt notes was
a daunting task, with phenomenal waste of man-hours. In 7-Eleven alone, 375,000 invoices were
matched annually by 120 people.
The shareholders were critical of the extant management’s ability to provide DFG with the
direction needed to fulfill its mission. They were worried that 1997 was the beginning of a slump in retail
sales for DGF. The economic crisis that gripped Asian countries during the later part of 1997 could be
 The Dilemma of Dairy Farm Group 5

one reason for the downturn. A second and more important reason was the increasing competitive
pressures that DFG faced from European and U.S. retail chains which were prepared to gain a foothold
in the Asian market. Consequently, a new CEO was hired in June 1997. The new management team
hired the services of two consulting firms through an “open bidding” system to independently carry
out preliminary investigations of existing systems at DFG, and to recommend solutions. The final
contract was to be awarded to the firm whose recommendations were seen as being actionable and
directly contributing to the bottom line (i.e., competitive advantage through quantum-level leaps in
customer satisfaction and shareholders’ wealth, at significantly reduced costs).
The two consulting firms locked horns to win the contract.

CASE DESCRIPTION
After a detailed investigation and analysis of the existing business operations, systems and
procedures, and the supporting infrastructure, the two consulting firms submitted the following
recommendations:

Firm A
The firm felt that DFG had an excellent network of retail stores and product lines, which gave
it a head-and-shoulders advantage over its competitors. The snag was management control,
attributable to geographically disperse, disparate and close-walled systems. It found that significant
improvements in DFG’s operations and profitability could be achieved by building a corporate
management information system, supported by the right technology and communications infrastruc-
ture. It would enable managers to access corporate information in various ways and across all
functions, thereby facilitating the decision-making process. The systems could also provide an arena
to develop electronic commerce (EC) with business partners and customers. As the telephone density
in Hong Kong was 70 telephones or 55 exchange lines per 100 population, which was one of the highest
in the world, the B2C service is surely an area for growth.
The major recommendations were as follows:

Store Operations
It was felt that DFG could significantly improve sales and customer satisfaction by adopting
electronic retailing as a subset of its retailing function. In this respect it suggested that the store operate
in two environments–the physical and the virtual (electronic). (A schematic view of the proposed
application is shown in Exhibit 3).
Features suggested for inclusion in the electronic store application were as follows:
• It would be a World Wide Web (Web)-based retail system using client-server architecture, aimed
at providing an Internet-based home shopping system consisting of an Electronic Store and an
Electronic Distribution Centre (E-DC). The E-DC was to provide the services of a fulfillment centre,
including product availability, delivery status, physical delivery and product warehousing.
• The application would interface with other functional units linked to the retail operations, such
as the head office, distribution centres, vendors, consumers, and the financial institutions for
settlement of electronic transactions.
• It would provide full retail capability, similar to that provided by a physical store, to the virtual
customer. The functions recommended for inclusion in the application were product browsing,
product purchasing, product information, purchase methods, purchase status, purchase history
and personalised customer service.

Network Computing and Application Re-Design

The development of the Web and its corresponding Web-server and browser technologies had
created an opportunity for organisations such as DFG to re-think the architecture of their applications.
6 Ng, Farhoomand & Banerjee

It was recommended that applications, centrally deployed in the mainframe environment, be rewritten
and ported on the latest n-tier client server architecture, with the Internet browser (or other thin-client
access device) providing the user interface and an application server or information broker as the
middle tier. This design model would help in realising the benefits of information access and data
sharing. Other benefits of adopting such a topology would be scalability, application maintenance
and software component reuse. To support the rewritten applications, it was recommended that an
organisational intranet be developed wherein the LANs at the stores would be interconnected with
each other through Common Gateway Interfaces (CGI), forming a Wide Area Network (WAN). (See
Exhibit 4 for a suggested plan for the communications network).

Application Integration and Information Sharing

The firm’s investigation revealed that DFG’s applications had developed over time, independent
of one another. Stove-piped applications all communicated with their own databases. Little attention
had been paid to the requirement to exchange information between applications, or to reliably create
new information from data sets derived from two or more applications. The firm recommended that it
was important for DFG to have an integrated set of applications within each business unit so as to
facilitate information interchange across business functions. In this regard, it was recommended that
store applications interface with all the operational systems, such as finance, merchandising,
warehousing and human resources.

Remote Access
DFG had three distinct classes of mobile users with three different requirements for mobile
services. They were the telecommuters, travelling employees and task-oriented mobile users working
for the warehouse, distribution, inspection departments and the stores. It was recommended that these
users be provided with secured, location-independent access to corporate information resources.
Such facilities had to be usable, secure, manageable and provisioned at acceptable cost.

Data Warehouse and Data Mart

Like most organisations, DFG only stored transaction records arising from inputs to the
operational systems in the course of daily business. It was the only repository of raw data. Analysis
of raw data was a time-consuming and tedious process. Data aggregation, collation etc. was a repetitive
process in such analysis. The consulting team recommended that DFG should develop Data
Warehouse and Data Marts to facilititate data analysis and decision-making.

Inventory Management
Firm A found that inventory was the largest single cost-factor in DFG’s retail operations. DFG
had an average inventory holding of 35 days, as against a norm of seven days for the industry. The
high stockpiling was attributed to delayed processing of purchase orders. It was recommended that
access points on the proposed corporate intranet be provided to the vendors so that in cases where
direct buying by the stores was involved, store orders could be sent to the vendors in EDI formats.
Similarly, vendor invoices could also be sent to the Central Office in EDI formats. The method would
facilitate faster processing of orders, leading to reduced inventory at warehouses. Additionally, it
would enable computerised matching of orders with invoices and thereby significantly reduce
manpower overheads.

Development of Core Competencies

Firm A believed that in seeking to maximise IT effectiveness, an organisation should not
seek to minimise the cost of its technology but maximise the effectiveness of its staff. To this end,
it recommended that a systematic assessment of the required technical skills be made, and
 The Dilemma of Dairy Farm Group 7

necessary training plans and recruitment schemes be charted out so as to have core competence
within the organisation.

Firm B
Firm B believed that technology alone could not bring competitive advantage unless it was
planned in the context of an organisation’s present and future business needs. In addition to
technology, it placed emphasis on business processes, viewing them as major determinants of an
organisation’s ability to develop and retain competitive advantage. Accordingly, the identification
and re-engineering of business processes supported DFG’s business strategy while having IT as the
essential enabler (Hammer & Champy, 1993). The ultimate goal is not just to cut cost but to reduce time
and improve quality (O’Neill & Sohal, 1998). In this regard, it recommended a technology planning
process, the output from which was to be known as “DFG’s Technical Architecture”, essentially a
framework enabling rapid changes in DFG’s business processes and its supporting applications by
providing a clear definition of endorsed standards, technologies and policies governing their use for
the whole DFG rather than individual business enterprises. [A schematic representation of the
Technology Planning Process is shown in Exhibit 5].

Technology Planning Process

The recommended technology planning process comprised of a business component and a
related technical component. The business component consisted of the identification of business
processes and the re-engineering of business processes considered critical to the successful pursuit
of DFG’s business strategy. The technical component pertained to the identification of technologies
to support the business processes and an implementation plan.

Business Component
The business component included the identification and re-engineering of crucial business
processes. In trying to address this issue, Firm B viewed the entire set of operations within DFG’s
business units as a set of Business Process Domains (BPDs). These were essentially the logical
grouping of business processes and their associated systems dedicated to a common purpose,
with the possibility of such grouping being geographically dispersed. Five such BPDs were
identified: In-Store Systems, Business Unit Operational Systems, Business Unit Analytical
Systems, Group Systems and Core Infrastructure Services (see Exhibit 6 for a schematic view of
the BPDs and associated processes). The primary purpose of grouping the processes under BPDs
was the ability to specify the desired system characteristics for a BPD as a whole, as opposed to
individual processes. Specifically, the following characteristics were considered crucial for
success of systems within each BPD.
• Availability, specifying recovery plans, tolerance for system outages, etc.
• Assurance, specifying security, integrity and credibility requirements
• Usability, specifying user interface requirements
• Adaptability, specifying interoperability and porting requirements
The following systems and business processes were identified for re-engineering:

Store Systems
In respect of store applications, the recommendation was that common store applications be built
around standardised technology. The store applications would be resident on a back-end server,
which would also store transaction data so as to facilitate stock monitoring at the store level. Store
LANs would be networked with the data centres and the central office at Hong Kong for data
transmission. In order to have scalability, the client-server architecture was proposed for its
deployment. (See Exhibit 7 for the suggested application partitioning logic). It was also recommended
8 Ng, Farhoomand & Banerjee

that the store applications be redesigned to ensure that all data conducive to decision-making was
captured at the transaction points. The application would be extended to support new channels of
marketing, such as facsimile and telephone, IVR and ITV.
It was suggested that Store Systems have the following attributes:
• Share a common information base
• Be integrated
• Support coordinated actions. In-store systems needed to support distributed transactions
• Interface with systems external to the Store Systems
• Be flexible to accommodate changing business requirements and operation in multiple geo-
graphic territories
• Be scalable from a minimum of two to a maximum of 50 shopping lanes
• Be adaptable to operate across DFG’s multiple retail formats
• Be extensible to accommodate new technologies and releases
• Be remotely maintainable
• Integrate with standard DFG management mechanisms

Inventory Management
It was felt that the suggested business strategy of operating as a single entity in a de-federated
organisational structure would enable DFG to achieve economies of scale in terms of inventory manage-
ment. It was recommended that store systems would integrate with operational systems and also be
extended to include the buyers and suppliers. A central merchandising system within each business unit
would monitor the inventory levels at each store and generate individual store orders. The store orders
would then be routed to the respective stores for their approval. Approved orders would be consolidated
and purchase orders generated to suppliers. For example, if a certain soft drink is running low at some 7-
Eleven store and at Wellcome Supermarket, an order will be put together but goods will be delivered to
respective stores. In generating purchase orders, leverage would be obtained in respect of the terms of trade
with different suppliers. (A descriptive model of the suggested method is shown in Exhibit 8).
Significant benefits were expected to accrue from such a process. While stock outages at stores
would be minimised, it would also ensure that the stores maintained optimal stock levels. It would also
provide DFG with additional power to negotiate terms of trade with its suppliers and substantially
reduce the number of purchase orders and invoices. The process entailed the integration of the POS,
merchandising and the warehousing functions across the in-store and the operational BPDs. A future
direction recommended in this regard was the integration of the supply chain across business units
(Copacion, 1997), and continual stock level monitoring at individual stores directly by the suppliers,
who would then supply stocks as necessary.

Category Management
Traditionally, DFG, like all retailers, maintained separate buying and selling functions. Buying
was not fully geared towards customer requirements. The selling function entailed selling whatever
was available in the stores. The result was warehouses carrying large inventories of slow-moving
stocks and stock outages at stores for fast-moving items. The establishment of a common process,
one that would enable customer requirements to be sensed and catered to, depended to a large extent
on detailed, accurate and timely information on customer transactions. While the suggested changes
in the store operations would enable detailed data capturing on customer transactions, it was
recommended that data warehousing technology be adopted to facilitate organisation and analysis
of data for marketing to customer segments.

Electronic Commerce
The firm felt that DFG could benefit from advertising its products on the Web. They however
expressed reservation in regard to buying and selling through the Internet, particularly because of the
 The Dilemma of Dairy Farm Group 9

security problems inherent in electronic transactions. It would be a long time before consumers would
feel comfortable with giving their credit card information on the Internet for the purpose of settling
Internet-based transactions.

Technical Component
For DFG to evolve from a federation to a group business structure as per its business strategy,
significant additional investment in a common supporting infrastructure linking the various business
units was required. The level of linkage required between the business units and the support required
to integrate the supply chain across business units depended upon successful deployment of the
services under the Core Infrastructure Services. (See Exhibit 9 for the applications planned for
deployment within this BPD.) A corporate-wide area network to provide group-wide information
systems through interconnections across the various BPDs identified within DFG was recommended.
Over time, the Core Infrastructure Services BPD was seen to develop as the foundation for distributed
computing within DFG and hence provide group-wide information management capability. It was
initially planned to extend only up to the boundary of each business unit so as to provide inter-
business services. As the functions available within the BPD became more relevant to the
information systems within business units, the domain was planned to be extended to provide
intra-business unit services. To facilitate this progression, all internal services pertaining to a
business unit were required to be provided in accordance with standards and technologies
selected for the Core Infrastructure Services BPD.
A key function of the Core Infrastructure Services was to provide enterprise-wide system
security, integrity and credibility, particularly within the In-Store BPD. Some of these services were
to be invoked explicitly by application programmes, while others were to be used implicitly through
the use of operating systems, databases, communications, security or message-based components.
In respect of each BPD, continuous or near continuous availability of systems, interoperability with
other systems, usability in terms of user interfaces, etc., were other functions provided by the Core
Infrastructure Services.

Technology Planning Team

To carry out the recommended technology planning, it was proposed that a Technical
Architecture Programme Group (TAPG) be established under the auspices of a Technology Strategy
and Architecture Group (TA Team) which would be the body formally established to conceive, develop
and maintain DFG’s Technical Architecture. TAPG membership would be drawn from three groups:
the DFG TA Team, DFG’s Technology Partners and the consultant organisations with specific
technology expertise.

CURRENT CHALLENGES/PROBLEMS FACING THE

ORGANIZATION
Both consulting firms had a successful track record. Firm A stressed primarily the development
of a management information system and use of emerging trends in technology, but firm B focused
on the re-engineering of crucial business processes having IT as the enabler. There were advantages
and disadvantages of both proposals and some of the recommendations might not be mutually
exclusive. Furthermore, it was difficult to put quantitative values on some of the qualitative benefits
accruing from such projects. For example, Firm A’s solution has less disruption to the existing
organizational structure with a good potential for reducing cost if e-commerce will be developed for
B2B business (Fox, 2001). Re-engineering fits the vision of DFG to be the leader in food and drugstore
retailer in the Asia Pacific Region (Whitman & Gibson, 1997). The high failure rate of BPR (Kliem, 2000)
requires organisational and culture change (Olalla, 1999) which are of great concern. Even though most
10 Ng, Farhoomand & Banerjee

of the employees were ready for adopt IT widely, they were not too comfortable to have drastic job
nature changed. Therefore, quantitative analysis such as cost benefit analyses such as payback
periods, net present value of expected future cash flows etc. were only gross approximations. DFG’s
management team faced this dilemma of selecting the proposal which would achieve customer
satisfaction in an affordable and feasible way and yet accountable to shareholders. If you were one
of the management team, what and how would you evaluate and recommend the proposal?

ENDNOTE
1 US$1=HK$7.74

FURTHER READING
Altinkemer, K., Chaturvedi, A. & Kondareddy, A. (1998). Business process re-engineering and
organizational performance: An exploration of issues. International Journal of Information
Management, 18(6), 381-392.
Caron, J. R., Jarvenpaa, S. & Stoddard, D. (1994). Business reengineering at CIGNA Corporation:
Experiences and Lessons Learned from the First Five Yeas. MIS Quarterly, l8 (3), September, 233-
50.
Cooper, R. & Markus M.L. (1995). Human re-engineering. Sloan Management Review, 36(4), 39-50.
Dairy Farm Group (http://www.dairyfarmgroup.com/dfarm_graphic/corporate/default.html)
Davenport, T.H. & Short J.E. (1990). The new industrial engineering: Information technology and
business redesign. Sloan Management Review, 31(4),12-26.
Dewar, R.D. & Dutton, J.R. (1986). The adoption of radical and incremental innovations. Management
Science, 32(11), 1422-1433.
Grover, V. & Kettinger, W.J. (1995). Business Process Change: Concepts, Methods and Technologies.
Harrisburg, PA: Idea Group Publishing.
Hammer, M. (1990). Reengineering: Don’t automate, obliterate. Harvard Business Review, 68 (4), 104-
112.

REFERENCES
Copacino, W. C. (1997). Supply Chain Management: The basic and beyond. Boca Raton, Floria: St.
Luci Press.
Fox, P (2001). B2B: You can find success in private sites. Computerworld, 35(19), May 7, 24-25.
Hammer, M., & Champy, J. A. (1993). Reengineering the Corporation: A Manifesto for Business
Revolution. New York: Harper Collins.
Hong Kong (1999). Hong Kong Year Book. Retrieved May 19 2001 from the World Wide Web: http:/
/www.info.gov.hk/hkar99/eng/18/18_11.htm.
Kliem, R. L. (2000). Risk management for business process reengineering projects. Information Systems
Management, Fall, 71-73.
Olalla, M.F. (1999). Information technology in business process reengineering. Proceedings of Forty-
O’Neill, P., & Sohal, A.S. (1998). Business process re-engineering: application and success – an
Australian study. International Journal of Operations and Production Management, 18, 832-
864.
 The Dilemma of Dairy Farm Group 11

APPENDIX

Exhibit 1: Summary By Regions

12 Ng, Farhoomand & Banerjee
 The Dilemma of Dairy Farm Group 13

Exhibit 2: Five Year Summary of Financial Statements

1993 1994 1995 1996 1997

US$m US$m US$m US$m US$m

SALES AND PROFIT

Sales 4,979.6 5,585.3 6,235.5 6,968.4 6,888.3

Sales including associates 9,605.1 10,402.7 11,695.4 12,766.8 12,658.1

Profit after taxation,

minority interests and 188.8 213.8 135.2 27.9 115.7
preference dividends

Net profit excluding

discontinued activities and 197.1 187.6 192.4 138.3 154.1
exceptional items

Earnings per ordinary share

11.28 12.52 7.86 1.60 6.45
(US¢)

Earnings per ordinary share

excluding discontinued
11.77 10.99 11.18 7.94 8.59
activities and exceptional
items (US¢)

Dividends per ordinary share

5.65 6.00 6.00 6.00 6.00
(US¢)

BALANCE SHEET

Intangible assets -- -- -- 1.4 1.1

Tangible assets 967.2 1,105.9 1,221.8 1,369.3 1,267.6

Associates and other

234.3 284.5 332.1 338.4 333.0
investments

Net current
(28.8) 131.1 (170.9) 160.7 61.4
assets/(liabilities)

Term Loans (159.0) (334.0) (162.9) (602.4) (422.5)

Other non-current liabilities (9.2) (12.6) (16.5) (14.2) (1.7)

Net operating assets 1,004.5 1,164.9 1,203.6 1,253.2 1,238.9

14 Ng, Farhoomand & Banerjee

Exhibit 3: Electronic Store Application–Schematic View

Electronic Store

ESTORE
Data Store

Customer

MIS CSR/ Store

Customer CIS Management
Customer
Interface

ESTORE
Communication

Courier
Banks

Fulfillment Center Head Office

Suppliers

Key:
CIS - Customer Interface Server MIS - Management Interface Server
CSR - Customer Service Representative

Source: Technical Architecture document (v 1.0) of Dairy Farm Group

 The Dilemma of Dairy Farm Group 15

Exhibit 4: System Schematic of Proposed Communications Network

Leased Circuit
Frame Relay Permanent
Internet Circuit (PVC)

OpenNet
Hong Kong Convenience
Stores Ltd.

Dairy Farm Group

Country Hub Country Hub Country Hub Sims Trading Company Ltd.
Australia Singapore HK

Australia Office Manning Retail Ltd.

Singapore Office Wellcome Company Ltd.

Oliver's

MDNS
New Zealand Office

Indonesia Office 3 Taiwan Office

2
Malaysia Office

Traveling Users PRC Office*

Japan Office
*refer to section 2.5 for details in China connection

Source: Technical Architecture document (v 1.0) of Dairy Farm Group

16 Ng, Farhoomand & Banerjee

Exhibit 5: Recommended Technical Planning Process

D F G D ire c tio n
a n d B u s in e s s
R e q u ire m e n ts

S ta n d a rd s

P rin c ip le s F u tu re T e c h n ic a l
A rc h ite c tu re
In v e s tm e n t
A p p lic a tio n s D e c is io n s
H a rd w a re
C u rre n t S o ftw a re
(d e fa c to )
A rc h ite c tu re s
C o m m u n ic a tio n s
P ro d u c t
S e le c tio n

In d u s try
T e c h n o lo g y
T re n d s

Source: Technical Architecture document (v 1.0) of Dairy Farm Group

Exhibit 6: Business Process Domains

GROUP BUSINESS UNIT
Analytical Operational In-Store

! Executive ! Data ! Financial ! POS

Information Warehouse
Systems
! Data Marts ! Human
Resource
! Analytical ! Merchandising ! In-Store
Applications Merchandising
! Warehouse ! Labour
Scheduling
High Very High
Availability Availability
! Time &
Attendance
Disaster
Recovery ! Loyalty
! Directories ! Enterprise ! Transaction ! Management ! Security
! File & Print
• DNS Application Management • Network
! Office • DHCP Integration • System ! Time
Automation • Email (EAI) • Application
• LDAP
CORE INFRASTRUCTURE SERVICES

Source: Technical Architecture document (v 1.0) of Dairy Farm Group

 The Dilemma of Dairy Farm Group 17

Exhibit 7: Electronic Store Application–Suggested Partitioning Logic

User Interface
L Application
L Data & Transaction
L

Remote
Application
Services

SSL / HTTP Active X Application

Browser Web Server
Services

Data

Source: Technical Architecture document (v 1.0) of Dairy Farm Group

18 Ng, Farhoomand & Banerjee

Exhibit 8: Store Replenishment–Suggested Logistics

6a

1
STORE 1
3
SUPPLIER 6
1a

2 STORE 2 7

4 2a
MERCHANDISING
5 SYSTEM
7a

TRADING TERMS

N
STORE N n
WAREHOUSE
Na

na

LEGEND:

1, 2, n Suggested orders for stores 1, 2 … N (raised by merchandising system)

1a, 2a, na Confirmed orders (Confirmed by stores 1, 2 … N)
3 Supplier wise orders (raised by merchandising systems with leverage of trading
terms)
4 Supplier delivery
5 Warehouse delivery receipt
6, 7, n Store delivery of allocated orders
6a, 7a, na Store delivery receipt

Source: Technical Architecture document (v 1.0) of Dairy Farm Group

 The Dilemma of Dairy Farm Group 19

Exhibit 9: Core Infrastructure Services–Suggested Application Topology

Standard Client Application Services Core Systems & DBMS

User Interface Data Management

Application Business Logic
Software Engineering

Application Application
Business Logic Business Logic
Software Engineering Software Engineering

Infrastructure Infrastructure Infrastructure

Data I/C - IBM MQSeries
Dist. Computing & Objects
- Microsoft DCOM
Network - TCP/IP
Transaction Process - Nil
Security - IBM Tivoli
Network, System &
Application Management
- IBM Tivoli
Data Interchange - IBM MQSeries Data I/C - IBM MQSeries
Distributed Computing & Object Services Dist. Computing & Object
- Microsoft DCOM - Microsoft DCOM
Network - TCP/IP Network - TCP/IP
Transaction Processing - Nil Transaction Process - Nil
Security - IBM Tivoli Security - IBM Tivoli
Network, System & Application Network, System &
Management - IBM Tivoli Application Management
- IBM Tivoli

PLATFORM PLATFORM PLATFORM

WAN LAN or WAN

Source: Technical Architecture document (v 1.0) of Dairy Farm Group

BIOGRAPHICAL SKETCHES
Eugenia Ng is the Deputy Head of the Department of Information and Applied Technology,
the Hong Kong Institute of Education. She is responsible for teaching information technology
modules, ranging from the sub-degree to post-graduate diploma level. She has taught diverse
learners ranging from primary school to master’s level locally and overseas. She is interested in
various research areas and has had more than 40 articles published in conference proceedings,
journals and as book chapters in the area of Web-based learning, Decision Support Systems,
Information Systems Education, Information Systems Skills and Career Development. More infor-
mation can be found at: http://www.ied.edu.hk/iat/staff/eugenia.htm.

Ali F. Farhoomand is Director of the Centre for Asian Business Cases (CABC) at the University
of Hong Kong School of Business (http://www.business.hku.hk/research.centres/cabc). He is the
author of numerous academic articles and books, including Global e-Commerce: Text and Cases
(Prentice Hall, 2001).

Probir Banerjee is a graduate research student at the City University of Hong Kong (CityU).
He has over 25 years of experience in a wide range of business and IT functions in India, Hong Kong
and Canada. He has co-authored several business cases as a Senior Researcher with the University
of Hong Kong and is currently actively engaged in research in the area of electronic commerce
adoption. He has a B.Sc. (Engineering) from India and an MBA from Fort Hays State University,
USA.