IT Use in the Retailing Industry Companies - Essay Example

Comparison of IT Use: Small vs. Large Companies in the Retailing Industry The paper discusses the differences between the use of IT by large and small companies. It would be wrong, however, to compare the companies from different industries; therefore a retailing industry was chosen to illustrate distinctions and similarities of large and small companies. The context of retailing industry is set in the introductory part. The main body of the paper analyses four aspects of IT use, that is: infrastructure, strategy, global operations, and outsourcing. General presumptions for the essay is that large companies have vast resources and complex structure, while SMEs make the use of limited resources and more transparent internal system. The aim of the paper is to present findings of previous researchers in a structured form, which will to draw further conclusion or will make it able to predict a general trend. New outcomes of the paper come from the analysis of those findings and result in the connection between the emergence of born global companies and the extensive use of IT strategies by small companies. Additionally the situation with SMEs' integration into e-business presents interest for the development of national economies: the paper indicates weaknesses in the current IT development of SMEs. 1. INTRODUCTION The development of information technologies (IT) has stretched the horizons for almost every business. Small companies have got the opportunity to open themselves to the world, large companies have used their chance to strengthen their competitive advantage through the use of increasing their internal effectiveness with the help of IT solutions. The paper is set in the context of retailing industry, which implies a small buyer power, fierce competition, and most importantly the urgent need for diversification. Due to the fact that retail companies have developed in similar ways during the past century, they offer the same services to customers. The only way to get a company out of this dullness is to diversify itself. Diversification is extremely important for both large and small companies in retailing industry. Previous researches of Miller (2000), Rossi and Tuunainen (2002), and Evaristo and Kaarst-Brown (2004) have observed the changes made by IT in large and small retailers' strategies and infrastructure (Section 3 and 2 correspondingly), while the framework of Brown, Seltsikas, and Tailor (2003) devotes much attention to issues of outsourcing (Section 5). Rapid internationalization of small-to-medium enterprise (SME) also presents academic interest: papers of Malhotra (2000), and Abbot and Stone (2003) concentrate on the difference of development of large and small firms in the context of IT implementation (Section 4). Differences in the use of large and small businesses are seen most vividly in the infrastructure and strategy of companies. Smaller companies seek for strategies and IT tools that will help them to seize new business opportunities (Miller, 2000), while large retailers use IT solutions to enhance their internal effectiveness (Rossi, Tuunainen, 2002). The next section starts with a detailed comparison of the internal infrastructure of large and small retailers. 2. DIFFERENCES IN INFRASTRUCTURE 2.1 Differences in the internal infrastructure Internal infrastructure ensures the flow of information inside the company (e.g. from one department to another). It is the most 'invisible' part of companies' operations from the customer's perspective, and at the same time internal effectiveness is vital for both large and small businesses. That is why the implementation of IT in the internal infrastructure is a common practice in retail businesses regardless of their size. Even the smallest companies, which do not make the Internet their first priority, use information systems (IS) for quick and easy access to prices, inventory and delivery times to follow through with customers' requirement (Miller, 2000). IS can enhance the internal infrastructure in two ways: increase the speed of information flow (appreciated by larger companies with complex internal interactions: IS help them to make their transactions more transparent and less intricate); and lower the transaction costs (which is important for SMEs that usually have a comparatively limited budget). Due to the latter effect IT is sometimes mistakenly perceived as the reason for general trend of 'shrinking' companies. For example, Sampson indicates (2003) the publication of 'The Economist' E-Trends, where the notion of "parts of established companies are vulnerable to being blown to bits" (2001) is expressed. With transaction costs lowering smaller companies get the access to operations which were available before only to large corporations (e.g. well-coordinated functioning of geographically distant stores joined in one network). However IS affect not only transaction costs, but also organizational expenditures, so there is no clear reason for large companies to reduce their size (Sampson, 2003). There are simply no reliable evidences of IT reducing the size of retail companies. Probably the most significant and powerful class of business software applications able to help companies to enhance their internal infrastructure is enterprise resource planning (ERP) systems. Integrating information between the individual IS increases its value, which along with cost reduction comprises the main benefits of ERP implementation (Al-Saud, 2004). The situation on the ERP market has changed from the past, when ERP solutions were available only to large companies because of the enormous price and rigid structure of ERP systems. There are plenty of ERP solutions for small businesses on the market today (Brown, Seltsikas, Tailor, 2003). Nevertheless, SMEs in retail industry still express doubts about the effectiveness of ERP. Most of the small companies cannot allow themselves their own IT crew needed for maintenance of ERP. Thus, even if the company is deeply integrated into e-business it prefers to outsource ERP implementation and support. 2.2 Interaction with customers One of the peculiarities of e-business is that it is very easy for customers to switch between e-tailing companies. In this context the importance of customer loyalty can hardly be underestimated both by SMEs and large companies. Strategies of differentiating yourself from competitors are the key to getting customers (Rossi and Tuunainen, 2002). For instance, properly designed web-portals can provide customers and partners with a secure flexible environment for activities ranging from self-service to collaborative commerce (Budhwani, 2001), which will lead to the increase of customer retention, as the convenience of service offered is another critical factor, needed for successful e-business. However as can be seen below, large companies and SMEs use different approaches when chasing after their customers' loyalty. Customer relations management (CRM) systems are usually implemented by smaller companies in order to reach narrow market segments. CRM systems allow keeping focus on small customer groups (Bolloju et al, 2001) - such niche strategy gives all that is needed to hold their loyalty tight: differentiation and convenience to both companies and customers. However this way of mass-customization becomes ineffective when trying to take wider customer groups. Although CRM systems allow customizing the offering with relatively low costs, it implies large investments into research to find out what exactly a company should customize to get a certain group of customers. And that is why the small niche companies prefer to stay with a small number of loyal customers. In contrast larger retailers do not concentrate on differentiation. Instead they put their efforts into wider scale of their offerings, implementing a multi-channel approach. Multi-channel approach to retailing assumes the view of Internet not as the new market environment, but only as another channel. Large companies try to get wider customer groups by reaching them both on the net with their e-tailing businesses and in real world with their bricks-and-mortar stores (Budhwani, 2001), while SMEs when considering e-tailing as their core activity usually put all their efforts into it. Customer loyalty is achieved by large retailers through ensuring all-round access to their services and providing benefits (e.g. loyalty cards, discounts) for the use of them. 2.3 Supply chain infrastructure It would be wrong to say that large companies do not need to differ themselves from competitors. A lot of major retailers' attention is devoted to shipping policies, which is also considered to be one of the key points in e-tailing. "Large firms differ considerably in the qualities of shipping they offer and the shipping fees they charge. Lower base prices are associated with lower shipping prices and faster delivery time." (Dinlersoz, Li, 2005) To achieve better quality of delivery services large companies integrate their ERP systems further from consumer-oriented online store fronts to extranets to facilitate communications and transactions with suppliers and other partners (Everdingen, Hillegersberg, Waarts, 2000). Thus, differentiation is achieved in large companies mainly through the creation of unique supply chain management strategies. Another important aspect of differences between large and small retailing businesses in using IT solutions for supply chain infrastructure deals with B2B activity. SMEs traditionally do not have enough influence and resources to promote and use their own B2B policies. With the help of IT B2B has become open for small companies through the marketplace approach, when intermediary dictates particular marketplace policies, provides infrastructure and ensures the virtual presence of the participants in the community (Butler Group 2000). While this approach has allowed the smallest companies to participate on B2B markets, it has certain drawback. The marketplace approach is very 'static' disallowing SMEs to vary their B2B policy depending on the current market situation and specific features of their businesses. They have to take what intermediary offers, or leave the market. Alternative approach to networking, B2B activities, and partners/suppliers relations bases on recent developments in P2P networking and is called request-based virtual organization (RBVO).Specifically it is described in the work of Matthews, Roberts, and Svirskas (2005), but what should be pointed out is that with the help of RBVO SMEs can react on the market changes more dynamically, with better possibilities for collaboration, and eventually better availability to business partners. 3. USE OF IT STRATEGIES 3.1 Modeling e-business infrastructure The first stage of business integration into IT is modeling, that is finding out what aspects of business should be enhanced with IT applications, what applications should a company use and for what reason. Particularly, the last question was extremely important for companies after the dot-com crash. Why a company (in the context of this essay, a retail business), should integrate into IT It is important to stress that there are plenty of e-business organizations, both large and small, that are healthy and making a good profit. "Modelling of e-business has reached a secure enough state to be able to predict benefits of adoption with some certainty and to determine a cost-effective way forward for the smallest businesses." (Corbitt, 2002, p. 20) Retailers can use Internet as a sales channel, a product-sourcing tool, or to provide information to the customer (Evaristo, Kaarst-Brown, 2004) - in any case the internet has become a keystone within the greater retail marketing mix. Modeling phase of e-business strategy for large company differs from SMEs. On average, larger companies take e-business integration more seriously and plan deeper integration than SMEs. That is why a thorough analysis of the company is performed including five key measures: perceptions about firm characteristics, Web retailing experience, the competitive environment, internal resources, and external resources (Dixon, Marston, 2005). Thus to design the proper business strategy for large company, we should look into what are the specifics of the business, was it successful in e-business previously, what position is taken by the competitors, what are the Web customers waiting for, and what resources do the company has to meet their expectations. Of course, one can agree that the same analysis should be made by all the companies regardless of their size. However, the reality is a little different then theory. SMEs perceive e-business is a technological and business innovation, which needs awareness creation and information provision (Saloheimo, 2005) As it was stated before, most of the SME retailing businesses do not invest largely into IT integration. That is why SMEs most often use a shortened version of the analysis given before, basing on four main issues: what technology will be used, what human resources are needed, what business practices will be enhanced, and what funds will be needed (Stone, 2003). Interestingly, SMEs do not make a thorough analysis market environment, instead focusing on what it takes from the company to enter e-business, and what the company will receive after implementation. 3.2 Implications of SMEs during implementation of e-business strategy As it was stated earlier implementation phase of IT strategy presents serious challenges for SMEs. Strategic adoption and diffusion of e-business technologies in SMEs is lagging in comparison to the large enterprises. The reasons for this can be attributed to SMEs weak structure and resources, technology, individuals (CEO, management) and their susceptibility to environmental forces (Papazafeiropoulou, Poulodi, Doukidis, 2002). Simply, large businesses have more resources and qualifications to implement a properly determined IT strategy. To improve the situation with SMEs many countries use different ways of promoting e-business. "It is a common practice in governments of many regions to help SMEs in adoption of e-business strategies in various ways: community networking, specific advice for individual companies, hands-on trials, tools assessment and training courses" (Al-Quirim, Corbitt, 2004). The attention to the use of IT strategies by SMEs is important for national economies because SMEs form the major part of enterprises in developed countries. The most popular strategy used by SME retailers entering e-business is tightly connected with customer retention. In the light of consumer-oriented strategy e-business can be very promising, as the technology gives much space to personalize relationships with customers (Budhwani, 2001). Due to the fact that customer retention is extremely important in e-tailing, SMEs often invest into CRM systems as their main IT application. CRM promises to streamline processes, lower costs, and enhance customer loyalty (Lowson, 2002). It is important to stress, that SMEs indicate their priority requirements to CRM as: rapid implementation, affordable pricing, and fast return on investments (Lowson, 2002). Needless to say, that larger companies can allow themselves to implement more lasting and future-oriented IT strategies, which gives them more options of choice and opportunities. Most of SMEs cannot allow themselves to use their own team of developers, preferring to outsource implementation processes, though participation in joint application development (JAD) is commonly used. Finally, the crucial part of every implementation in both large and small companies is looking back on the result, and analysing if the initial requirements are met. 3.3 Benefits of use of IT strategies What benefits does a company get after IT implementation Do they differ depending on the size of the company It appears that there is a certain difference, and as written below in this subsection, it is mainly entailed by the difference in primary goals of IT strategy implementation. But before pointing out the differences, let us dwell on the similarities of IT implementation by SMEs and large companies. First of all it is important to understand that benefits of IT are not about the technology itself, but about how technology allows a company to understand its clients' needs better. "Proper strategic positioning, meaning different set of features, different array of services, or different logistical arrangements, can lead even the smallest companies to prosperity in the Internet" (Crocker, Schlenker, 2003, p. 8). Therefore, the success of a company, large or small depends on how it evaluates its current position, what is wants to achieve, and how. Both large and small businesses benefit from the reduction of costs after successful IT implementation. In a competitive market cost reductions are primarily transferred to customers and the associated prevented competitive loss may also not show up in the accounting numbers of the firm (Porter, 2001). Additionally both large and small companies perceive the increase of customer loyalty as the benefit from IT implementation. The difference is in placing the priorities from benefits. For large companies the most important issue to resolve is the complex internal system, inevitably decreasing efficiency in every large corporation. For smaller companies the main benefit lies within the support of their offline sales. Sustainable competitive advantage in the Internet can hardly be achieved by SMEs through operational effectiveness, because larger companies are able to copy best practices quite easily (Gribbins, King, 2004). That is why small companies get only soft or intangible benefits for SMEs, which will make life easier in the organisation, however, will not directly lead to identifiable performance improvements (Remenyi, 2002). Thus, although both large and small companies receive the same benefits, they are valued differently depending on the size of the company. 4. GLOBAL STRATEGIC ISSUES 4.1 Technical implications on infrastructure Internationalisation is a path taken by different companies in very different ways regardless of their size. Large companies usually go through a gradual process of internationalization, while small companies previously had followed their path. However IT technology has allowed a phenomenon called "born global" - a small company operating globally from the first day of its inception. That is why the way a retailing company internationalizes is more dependant from the specifics of the business, than from the size of the company (eBusiness W@tch, 2004). Nevertheless, there are some technical implications on IT infrastructure of multinational companies, related to their geographical diversification and supply chain. Let us look more closely on each of these aspects. The complexity of internal infrastructure is affected by the number of countries a company operates. Obviously geographical diversification is greater in large multinationals, as they usually operate on more markets than SMEs can afford (eBusiness W@tch, 2004). Although some smaller retailing companies join into united IT network to use the effect of economies of scale operating in lots of countries around the world, on average only 'pure' online SME retailers operate worldwide. Eventually, the more countries retailer operates, the more offline facilities in different countries it has, the more market environments require to be constantly observed to ensure a holistic strategy of the company is followed, and finally, the more complex network infrastructure is used. For instance, each country department requires the whole IS to be translated into the national language. Thus large companies usually have more technical problems related to geographical diversification than smaller ones. Supply chain integration, an extremely important part of the global strategy, as the worldwide e-tailing requires a worldwide delivery, also presents challenges for international businesses although the situation is quite opposite in this case. Large companies have the required resources to ensure the integration of their supply chain, while SMEs often have difficulties when investing supply chain integration technology. IT tools used by SMEs for supply chain management can be divided into three groups: web-based, turnkey, and XML-based - more explicitly they are observed in the work of Chen, Chiu, and Themistocleous (2004). They also state that the technology most frequently used by SMEs is web-based. More effective turnkey or XML-based technologies are more costly (Chen, Chiu, Themistocleous, 2004).Therefore it is harder for small retailers to integrate their international supply chain into a single entity. 4.2 Strategic issues of global companies Companies that are operating worldwide have to develop and use quick and easy to change strategies to be able to make important corrections in every second of their functioning. The reason lies within the fact that international companies regardless of their size have to face constraints of several markets, which implies greater divergence between strategic theories and real functioning. "International knowledge management in e-business strategies requires both small and large companies to react much faster on the environmental changes and to correct their strategies in real time" (Malhotra, 2000). However, due to the difference in strategies, it requires different strength of efforts put into strategic changes. The main reason most of the firms enter foreign markets is reaching new opportunities. Their foreign strategy is based on the environmental variables: market changes and retail industry norms; and three firm factors: technical capability, cultural capability, and firm size (Tiessen, Turner, Wright, 2001). SMEs in the case of dynamic international operations have their size as advantage, and their limited resources as a drawback. It is easier for smaller companies to implement changes because the scale of those changes is comparatively small. However, lack of technical and cultural capability makes it hard for SMEs to implement even those small changes. In contrast, large firms are able to react on market changes more dynamically, in spite of larger scale of changes that need to be done. Large companies are able to implement dynamic models of e-business strategies, which in turn provide enough space for dynamic changes. For example, these models can help to improve B2B interaction (employee empowerment in particular) through the use of integrated ERP implementations for large companies (Ash, Burn, 2005). Through the use of ERPs employees of regional departments are able to react quickly on market changes, bringing the needed corrections into strategy when it is required. Thus, in spite of their size, large companies use more dynamic approaches in global strategies, then SMEs. 4.3 Global business in the global world - implications Globalisation of the world and integration of national markets has irreversibly changed the world market. The development of IT has made it possible for small retail companies to use the benefits of international operation. Due to cultural changes, and the dissemination of Western culture and way of life in particular, it is easier to perform on the worldmarket as never before. The uptrend of consumerism has positively influenced the retail industry, and made market environments of less developed regions like Asia, Africa, and South America less hostile towards Western companies (OECD, 2004). Eventually small businesses have successfully entered a global arena. With the increase of activity of international SMEs and customers around the world getting used to online retailing, diversification has become important as never before. Large companies are equal to SMEs on the arena of virtual online markets (OECD, 2004). Therefore the increase of competition in retail industry throughout the world has made a customer-based approach to retailing crucial for a global business to survive. Obviously, large and small firms behave in different ways when defining their customer groups. Large multinational companies use their extended capabilities for mass-customization, reaching as many customers in different countries as possible. They try to operate on different national market, which becomes easier due to further integration of those markets. Unlike large firms, SME retailers operating globally seek a global niche market, a group of customers united not with nationality, but with other characteristic (e.g. profession, interests, affiliation to certain social group, etc.). Such strategy allows SMEs to focus directly on their target audience perfectly meeting the needs of a certain customer group and eventually increasing competitive advantage. 5. USE OF OUTSOURCING: LARGE VS. SMALL 5.1 Current use of outsourcing The spread of IT has affected another aspectof business - outsourcing. Cultural trends discussed in 'Globalisation issues' subsection, such as the growth of global competition along with the dissemination of consumerism, have entailed the increase of customers' demands. Goods are sold at cheaper prices with faster deliveries to saitisfy customers' needs (Kalakota, Robinson, 2004). Customers have more power today, and retail companies have found another way to meet their requirements, once again due to the spread of IT. Decreasing costs requires from both large and small companies to outsource all non-core activities, and focus on their core operations. Large companies have to compete with small ones on the web. Increased competition is another reason for strengthening competitive advantage (Aminoff, Auramo, Punakivi, 2002). For, instance, along with cost reduction companies benefit from the increased quality of delivery, when outsourcing their delivery services to companies specialising int that field. A lot of attention in this paper is devoted to the impact of IT on retailing business. Meanwhile the development IT itself is usually being outsourced by retailing companies. Only 'pure' online retailers, which find their IT infrasturcture among their core activities, use their own developers. Others usually outsource the development and maintenance of IT applications to external professionals in order to decrease the time for developing IS, and increase the quality of web-services provided to customers (Aminoff, Auramo, Punakivi, 2002). Although the current use of outsourcing is a common practice, still there are some important differences in the use of outsourcing by large and small companies. But first, let us look on the similarities of outsourcing in large and small retail businesses. 5.2 Similarities of use: large and small companies All the retail companies regardless of their size perceive cost reduction as the main benefit of outsourcing. Large pool of skilled labor in developing countries is ready to work with better quality on smaller wages, then professionals from the US and Europe. Customer pressure affects both small and large companies. Both large and small companies tend to outsource everything that is out of their core competencies (Aminoff, Auramo, Punakivi, 2002). Usually outsourcing service buyers reduce mainly their fixed costs in such a way that they are more capable in dealing with fluctuation in demand And the main challenge seen by retailers is also the same for companies of every size: outsourcing of business activities requires reengineering of a business srtucture model (Wright, 2005). It is impossible to imagine a company with the effective internal structure universal for both outsourced and core services. For example, during the use of JAD a company needs to assign the team of experts that will help the developers to understand the needs of the company, to define the goals of the application, and to test the developed application. Reengineering process most often leads a company to take the enterprise strcuture model, which is seen as the most effective when outsourcing services. Enterprise structure model implies that a central organization stays at the corporate level and focuses on providing support across various aspects of the outsourcing lifecycle throughout the enterprise (Brown, Seltsikas, Tailor, 2003). Such structure model allows the central organisation to put all its efforts into its core services, while providing the needed control over the outsourced activities. Summarising, it can be concluded that both large and small companies will have to change the structure of the company before outsourcing. 5.3 Differences of use: large vs. small companies Talking about differences in outsourcing practices one should consider that large companies use outsourcing more actively than SMEs. The reason is that large companies are in greater need of outsourcing, as they as a rule are more dependant on the numerous non-core activities, and their field of operations affects more activities than that of SMEs (UNCTAD, 2005). Additionally large companies have more capabilities for outsourcing, including financial and human resources needed for control of outsourcing. Finally, large companies haver better abilities to avoid the risks of outsourcing, which can seriously harm SME if left uncontrolled. Outsourcing needs control. It is important not lose knowldege of strategically critical elements when outsourcing activities to third parties. Sometimes, it occurs due to insufficient protection of intellectual property rights. Next, outsourcing is often accompanied with higher employee turnover rate. Employees who take advatage of high demand of their skills can be a problem to a client company. Further on, quality sometimes decreases, quite opposite to expectations, after outsourcing. (UNCTAD, 2005) The reason is that quality standards can vary greatly from country to country, so a client company could simply have higher demands of quality than a service provider can offer. As it was stated earlier, outsourcing requires reengineering of business structure, which can be costly to small retailers. "To minimize risks a company should invest largely into reengineering for increasing control of the company. Small companies often cannot afford such reengineering" (Holmstrom, Karkkainen, 2002, p. 245). Therefore SMEs have to seek alternative solutions of outsourcing. One of such solutions is so-called flexible outsourcing. It implies that processes are not completely outsourced to third-parties but a cooperative model is used. SMEs more often use flexible outsourcing for improving supply chain operations, necessary to provide a satisfactory speed of delivery to customers (Holmstrom, Karkkainen, 2002). Thus, while larger companies take the full effect from outsourcing, smaller companies have to use a half-way measures for cost reduction and the increase of quality. 6. CONCLUSION In this essay small and large retailing businesses were compared in the light of using IT to enhance their operations. Specifically four main aspects were observed: infrastructure, strategy, international operations, and outsourcing. The main preassumption of the paper was that large companies usually have vast resources and a complex structure that leaves much space for improvement. Small companies on the opposite, have limited resources for implementation of innovative solutions and smaller organisational costs. Therefore, two main goals of using IT can be concluded from the essay: large companies use IT to simplify their structure and to minimize their internal costs; SMEs use IT to reach new market opportunities and to strengthen their competitive position. Looking particularly at the summary of each of the observed aspects the following findings should be noted. While larger companies actively use IT solutions (such as ERP) to enhance their internal structure, and integrate it to networks of customers, partners and suppliers, small companies take the initial position of e-business integration, using IT to get the information about the market. Large retailers look at the Internet as on another sales channel, when SMEs use a single channel approach, either using Internet for infromational purposes only, or going into 'pure' online business. Large companies have a number of IT strategies to choose from, while small retail firms often have limited number of suitable solutions, due to the lack of resources. Both large and small companies perceive the retention of customer loyalty as an important part of their strategies. Regardless of size international companies use IT infrastructure to synchronize processes in geographically distant regions, although large companies have more options. Finally, outsourcing is used with both large and small customers for cost reduction. Summarising all that was said before, SMEs do not use the same path of large companies. They are not just smaller companies; IT allows SMEs to compete with large giants as equals on every single market. Some small companies will never become large, but not because they cannot. They simply do not need to grow. Therefore observation and systematization of the previous findings on the differences between the IT use of large and small companies have led us to the connection to emergence of the born global phenomenon: small companies that operate globally from the day one and use IT strategies effectively to compete on the global market arena. It was previously unclear why the born globals emerged in the 1990-2000. Findigns of this paper allow us to suppose that born global companies evolved in the process of extensive use of IT strategies from the beginning. 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