Judith Molka-Danielsen, Høgskolen i Molde1 Chapter 2 Retailing in Electronic Commerce

Judith Molka-Danielsen, Høgskolen i Molde2 Learning Objectives l Define the factors that determine the business models of electronic marketing l Identify the critical success factors of direct marketing l Design the desirable relationship in a direct marketing setting l Analyze the critical success factors of electronic intermediaries l Identify the typical products that sold well in the electronic market

Judith Molka-Danielsen, Høgskolen i Molde3 l Observe the reactive strategy of traditional department stores l Discuss whether electronic commerce should always target global markets l Describe the consumer’s shopping procedures on the Internet l Discuss the types of aiding-comparison- shopping devices l Describe the impact of EC on disintermediation and re-intermediation in retailing Learning Objectives (cont.)

Judith Molka-Danielsen, Høgskolen i Molde4 Overview of Electronic Marketing Structure l 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 l Consumer-oriented Electronic Marketing (B2C) –Mostly online; on the Internet –Growing offline too, mainly by using smart cards, although it is still experimental

Judith Molka-Danielsen, Høgskolen i Molde5 Advantages of Electronic Marketing –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 l Customers can order from cyberstores 24 hours a day, 7 days a week from any place in the world

Judith Molka-Danielsen, Høgskolen i Molde6 Forecast of the B2C Electronic Markets Initial Forecast of B2C Electronic Market Size Forecasting Institutions IDC 1, ,000 VSAComm 48 3,500 VeriFone ,000 Actif Media ,000 Killen & Assoc. 775,000 Yankee ,000 Jupiter E-land ,000 EU 228,000 USA 200 EITO ,000 AEA/AU ,000 Hambrecht & Quest 1,170 23,200 Forrester 518 6,579 [Source: OECD, 1997]

Judith Molka-Danielsen, Høgskolen i Molde7 l Kinds of items sold Forecast of the B2C Electronic Markets (cont.) (Unit: Millions of U.S. Dollars) Items Apparel Gifts/flowers Books 16 Not available Food/drink Clothing Entertainment 85 1,250 Subscription services Pornography 52 Not available Music 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

Judith Molka-Danielsen, Høgskolen i Molde8 l What sells on the Internet? Forecast of the B2C Electronic Markets (cont.) – 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

Judith Molka-Danielsen, Høgskolen i Molde9 Business Models of Electronic Marketing Direct Marketing Manufacturers Vs. Indirect Marketing Manufacturers Full Cybermarketing Vs. Partial Cybermarketing Electronic Store Vs. Electronic Broker Electronic Mall Vs. Electronic Store Active Strategic Posture Vs. Reactive Strategic Posture Global Marketing Vs. Regional Marketing Sales Vs. Customer Services Generalized Mall Vs. Specialized Mall/Store

l 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 l Global Vs. regional marketing l Sales Vs. customer services Business Models of Electronic Marketing (cont.) © Prentice Hall,

Judith Molka-Danielsen, Høgskolen i Molde11 l Active and full direct Marketing 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

Judith Molka-Danielsen, Høgskolen i Molde12 l Dell’s Critical Success Factors Direct Marketing (cont.) –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

Judith Molka-Danielsen, Høgskolen i Molde13 –Ford’s reactive direct marketing model (procedure) Direct Marketing (cont.) l Reactive and Partial Direct Marketing Select the brand of car or truck that interests you Choose the body style you most desire Select the option package(s) that appeals to you Add other individual options to build your most comfortable, useful customized vehicle Pick your favorite exterior paint colorPick the interior upholstery that suits your taste Then the Online Shopping Service System will provide you with a “Vehicle Summary” You can change options to accommodate the budget, and finalize the configuration Decide whether to lease or buy, with the aid of Payment Calculator System Search a dealer online by dealer name, city, or state Send the “Vehicle Summary” to the dealer The dealer will contact you with a price and availability of the vehicle you configured Apply for financing –Ford supports a pre-owned showroom in the following way : Enter your ZIP codeSearch the inventoryEnter your personal informationSecure your vehicleSelect a dealership for test-drive and deliveryChoose a Ford Extended Service PlanExplore leasing or financing optionsPrint your orderConfirm your orderConfirm you delivery Test drive and accept delivery

Judith Molka-Danielsen, Høgskolen i Molde14 Online Customer Service l Provided in conjunction with online sales l Provided to products which are sold offline l Example: service and support homepage of Hewlett Packard (HP) l 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

Judith Molka-Danielsen, Høgskolen i Molde15 Active Electronic Intermediaries l 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 l Partial electronic mall –Electronic mall as one of existing distribution channels

Judith Molka-Danielsen, Høgskolen i Molde16 l Specialized Electronic Distributors Active Electronic Intermediaries (cont.) –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

Judith Molka-Danielsen, Høgskolen i Molde17 l Generalized Electronic Intermediaries Active Electronic Intermediaries (cont.) –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 l customers need a reliable screening capability of quality and reliability of brands and companies l e-brokers should create a trusted third party »Competing electronic channels l several electronic channels help in finding the items needed l e-brokers should provide some differentiated attraction

Judith Molka-Danielsen, Høgskolen i Molde18 l Specialized Electronic Distributors Active Electronic Intermediaries (cont.) –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

Judith Molka-Danielsen, Høgskolen i Molde19 Reactive Electronic Department Store l 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

Judith Molka-Danielsen, Høgskolen i Molde20 l Electronic Department Stores Worldwide Reactive Electronic Department Store (cont.) –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

Judith Molka-Danielsen, Høgskolen i Molde21 Regional Shopping Service l 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

Judith Molka-Danielsen, Høgskolen i Molde22 Procedures for Internet Shopping : The Consumer’s Perspective y Preliminary requirement determination to meet the needs y Search for the available items that can meet the requirements y Compare the candidate items with multiple perspectives: specification, price, delivery date, and other terms and conditions

Judith Molka-Danielsen, Høgskolen i Molde23 y Place an order y Pay the bill y Receive the delivered items and inspect; possibly while using y Contact the vendor to get service and support, or to return if disappointed Procedures for Internet Shopping : The Consumer’s Perspective ( cont.)

Judith Molka-Danielsen, Høgskolen i Molde24 Aiding Comparison Shopping l Search hypertext files by agents l Search in a web-based database both by human and software agents within an e- mall l Comparable item retrieval and tabular comparison l Comparisons over multiple malls l Comparisons as a multiple criteria decision making

Judith Molka-Danielsen, Høgskolen i Molde25 The Impact of EC on Traditional Retailing System l 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

Judith Molka-Danielsen, Høgskolen i Molde26 l Impact on Manufacturer’s Distribution Strategy The Impact of EC on Traditional Retailing System (cont.) –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.

Judith Molka-Danielsen, Høgskolen i Molde27 Managerial Issues l 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

Judith Molka-Danielsen, Høgskolen i Molde28 l From an intermediary’s point of view: Commit to the directory service Retailing a specialized breed of items OR Managerial Issues (cont.) l 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?