Chapter 2 Retailing in Electronic Commerce

Learning Objectives Define the factors that determine the business models of electronic marketing Identify the critical success factors of direct marketing Design the desirable relationship in a direct marketing setting Analyze the critical success factors of electronic intermediaries Identify the typical products that sold well in the electronic market

Learning Objectives (cont.) Observe the reactive strategy of traditional department stores Discuss whether electronic commerce should always target global markets Describe the consumer’s shopping procedures on the Internet Discuss the types of aiding-comparison-shopping devices Describe the impact of EC on disintermediation and re-intermediation in retailing

Overview of Electronic Marketing Structure Consumer-oriented Electronic Marketing (B2C) Mostly online; on the Internet Growing offline too, mainly by using smart cards, although it is still experimental Business-oriented Electronic Marketing (B2B) Needs more precise record keeping, trackability, accountability, and formal contracts, usually with high volume of transactions and large amount payments

Advantages of Electronic Marketing Customers can order from cyberstores 24 hours a day, 7 days a week from any place in the world Direct marketing Customization Online customer service Electronic shopping malls: Intermediaries (e.g. Internet Mall) Stores (e.g. Amazon, J.C.Penney Online) Electronic intermediaries Global marketing

Forecast of the B2C Electronic Markets Forecasting Institutions 1997 2000 IDC 1,000 117,000 VSAComm 48 3,500 VeriFone 350 65,000 Actif Media 436 46,000 Killen & Assoc. 775,000 Yankee 850 144,000 Jupiter 45 580 E-land 450 10,000 EU 228,000 USA 200 EITO 363 200,000 AEA/AU 200 45,000 Hambrecht & Quest 1,170 23,200 Forrester 518 6,579 [Source: OECD, 1997] Initial Forecast of B2C Electronic Market Size

Forecast of the B2C Electronic Markets (cont.) Kinds of items sold (Unit: Millions of U.S. Dollars) Items 1997 2000 Apparel 46 322 Gifts/flowers 45 658 Books 16 Not available Food/drink 39 336 Clothing 89 322 Entertainment 85 1,250 Subscription services 120 966 Pornography 52 Not available Music 9 186 Online games 127 1,013 Consumer finance 68 Not available Consumer insurance 30 1,110 [Source: OECD, Sept. 1997] Initial Forecast of B2C Electronic Market Segments

Forecast of the B2C Electronic Markets (cont.) What sells on the Internet? Items with high brand recognition Goods that can be transformed to digitized goods like books, music, and video Items with security guarantee given by highly reliable or known vendors Relatively cheap items Repetitively purchased items such as groceries Commodities with standard specification Items whose operating procedures can be more effectively demonstrated by a video Packaged items which are well known to customers and which cannot be opened even when customers physically visit the store

Business Models of Electronic Marketing Direct Marketing Manufacturers Vs. Indirect Marketing Manufacturers Electronic Mall Vs. Electronic Store Active Strategic Posture Vs. Reactive Strategic Posture Sales Vs. Customer Services Global Marketing Vs. Regional Marketing Full Cybermarketing Vs. Partial Cybermarketing Electronic Store Vs. Electronic Broker Generalized Mall Vs. Specialized Mall/Store

Business Models of Electronic Marketing (cont.) Proactive Vs. reactive strategic posture toward cybermarketing Proactive strategic posture toward cybermarketing a company’s main distribution channel is the Internet, and internal management such as inventory and operations management is focused to affect the benefit of cybermarketing Reactive strategic posture toward cybermarketing the traditional physical distribution channel is left as the company’s main distribution channel even though the company has opened an online distribution channel Global Vs. regional marketing Sales Vs. customer services © Prentice Hall, 2000 10

Dell Computer Corporation Case Direct Marketing Active and full direct Marketing Dell Computer Corporation Case Founding spirit of dell: telemarketing Astonishingly high growth and returns Revenue via the Internet Dell’s products on the Internet

Direct Marketing (cont.) Dell’s Critical Success Factors Price competitiveness owing to mass-customization and direct marketing Database marketing and customer intimacy Global reach and value added services at a single contact point High reliability and reputation Delivery support Advanced web applications

Direct Marketing (cont.) Reactive and Partial Direct Marketing Sell their products mainly through traditional channels like department stores, discount stores, and franchises Ford Case including dealers as partners is optimal because orders that are received directly by the automakers may not be physically fulfilled without the cooperation of dealers the received orders can then be assigned to the nearest dealer who owns the desired car in the inventory the dealer’s inventory information should be shared by automakers through a common network

Direct Marketing (cont.) Reactive and Partial Direct Marketing Ford’s reactive direct marketing model (procedure) Decide whether to lease or buy, with the aid of Payment Calculator System You can change options to accommodate the budget, and finalize the configuration Search a dealer online by dealer name, city, or state The dealer will contact you with a price and availability of the vehicle you configured Apply for financing Then the Online Shopping Service System will provide you with a “Vehicle Summary” Send the “Vehicle Summary” to the dealer Choose the body style you most desire Pick the interior upholstery that suits your taste Select the option package(s) that appeals to you Select the brand of car or truck that interests you Pick your favorite exterior paint color Add other individual options to build your most comfortable, useful customized vehicle Ford supports a pre-owned showroom in the following way : Print your order Confirm your order Test drive and accept delivery Explore leasing or financing options Confirm you delivery Search the inventory Enter your ZIP code Enter your personal information Secure your vehicle Select a dealership for test-drive and delivery Choose a Ford Extended Service Plan

Online Customer Service Provided in conjunction with online sales Provided to products which are sold offline Example: service and support homepage of Hewlett Packard (HP) By using computer telephone integration (CTI) technology, the same screen that a customer sees can be automatically displayed to the human agent (and vice versa) who responds to the customer’s call watching the online data about the customer

Active Electronic Intermediaries Pure electronic mall Company’s retailing business exists only on the Internet Electronic distributors take full responsibility of fulfilling orders and collecting payments Electronic brokers assist the search process of finding the appropriate products and their vendors Partial electronic mall Electronic mall as one of existing distribution channels

Active Electronic Intermediaries (cont.) Generalized Electronic Intermediaries Examples : Choice Mall, and iMall Provide a directory, keyword search engine, message encryption, optional Web site hosting service and a common platform of electronic payments Necessary factors to make shopping successful Screening quality and reliability for assurance customers need a reliable screening capability of quality and reliability of brands and companies e-brokers should create a trusted third party Competing electronic channels several electronic channels help in finding the items needed e-brokers should provide some differentiated attraction

Active Electronic Intermediaries (cont.) Specialized Electronic Distributors Cyber Bookstores Amazon, Barnes and Noble Cyber CD Stores Columbia House, Music Boulevard, CD Universe, and CDNow Digitized Products and Services Stores Software, games, CDs, and videos Cyber Flower Stores 1-800-FLOWERS

Reactive Electronic Department Store The J.C. Penney Case The Internet-based revenue amounts to only 1 to 2% of $30.5 billion total sales of 1997 (3.5% in 1999) Updating prices and adding new items to the electronic catalogs is convenient and inexpensive Overcoming the limitations of paper catalogs without incurring extra distribution cost

Reactive Electronic Department Store (cont.) Electronic Department Stores Worldwide Marks & Spencer in the U.K., La Redoute in France, Jusco in Japan, Nordstrom in the U.S.A., and Lotte and Hyundai in Korea Common strategy is finding significant benefits from merchandising online Offering electronic service on the Internet is a supplementary channel of advertisement By 2000, 3.5% of all U.S. major retailing will be done online

Regional Shopping Service Peapod Case The leading Internet supermarket, providing consumers with broad product choices and local delivery services Provide pictures of items, nutritional contents, past purchase records Users: middle and upper class people, some of whom are single parents, and all of whom are very busy. Also sick and elderly people or those without transportation. $4.95/month membership fee, and $6.95 service free + 5% of the purchased amount = cost of delivery service

Procedures for Internet Shopping : The Consumer’s Perspective Preliminary requirement determination to meet the needs Search for the available items that can meet the requirements Compare the candidate items with multiple perspectives: specification, price, delivery date, and other terms and conditions

Procedures for Internet Shopping : The Consumer’s Perspective (cont.) Place an order Pay the bill Receive the delivered items and inspect; possibly while using Contact the vendor to get service and support, or to return if disappointed

Aiding Comparison Shopping Search hypertext files by agents Search in a web-based database both by human and software agents within an e-mall Comparable item retrieval and tabular comparison Comparisons over multiple malls Comparisons as a multiple criteria decision making

The Impact of EC on Traditional Retailing System Disintermediation and Re-intermediation Disintermediation — the removal of organizations or business process layers responsible for certain intermediary steps in a given value chain eliminating the traditional intermediaries, such as wholesalers, distributors, and retailers, to reduce the cost Re-intermediation — the shifting or transfer of the intermediary functions, rather than the complete elimination intermediation such as electronic shopping malls, directory and search engine service, and comparison aids using agents creates the role of re-intermediation

The Impact of EC on Traditional Retailing System (cont.) Impact on Manufacturer’s Distribution Strategy Manufacturer’s monopolistic Internet-based distribution: Levi’s does not allow any one else to sell the Levi’s product on the Internet (policy changed in 1999). Coexistence with the dealers: This is the case in car distribution. Regionally mixed strategy: Nike sells on the Internet, but only in the U.S.A. Mass Customization for Make-to-Order: Manufacturers have to be adaptive to the customized orders of ultimate consumers. This means the manufacturer should be ready for mass customization.

current manufacturing and distribution systems channel of distribution Managerial Issues From a manufacturer’s point of view: Fully committed to direct marketing, restructuring the current manufacturing and distribution systems Regard the electronic store as an additional channel of distribution OR

Managerial Issues (cont.) From an intermediary’s point of view: Commit to the directory service Retailing a specialized breed of items OR For existing retailer in the physical space: How to transform its business posture to get the highest possible customer satisfaction at a minimum operating cost?