The Retail Environment and the Supply Chain of Online and Offline Retailing of the Music Industry - Assignment Example

E-business Music Contents Introduction 2 Offline retail environment for Music 2 Retail Supply Chain 2 Product tracking to track and compare all the titles 2 Benchmark assortment against competition 2 Promotion Analysis 3 Alerts on critical products 3 The Shifting Music Supply Chain 3 Online Retail Supply Chain 5 Value Creation 6 Amit and Zott Value Creation Model 7 Efficiency 7 Complementarities 8 Lock-In 9 Novelty 10 Recommendations 11 Developing Technologies 11 Develop Strategic Alliances 11 Develop the Site 12 Conclusion 13 Reference List 14 Bibliography 16 Introduction The current project analyses the retail environment and the supply chain of online and offline retailing of the music industry. A detailed analysis of value creation along the process has been conducted by using Amit and Zott Value Creation model. In the end, recommendations have been provided for betterment of the online music industry, along with measures to be adopted so as to induce the customers to make greater purchases. Offline retail environment for Music Home stereos had initially become popular and truly affordable during the 1980s, which brought about a boom in home entertainment devices. At that period of time, it was unimaginable that in the following two or three decades, record shops would barely exist anymore (Grewal, et al., 2010). However, the shift in buying patterns of the consumers from offline to online retail has led to the stark reality where physical shops have nearly disappeared from the retail panorama. With fewer shops, there is even lesser number of distributors catering to the offline retail chain. Retail Supply Chain Product tracking to track and compare all the titles The prices should be compared against that of competitors and price adjustments should be made accordingly. A product tracking interface could be developed in order to track and assort all the titles so that those can be stacked in one place. Comparing products against those of the competitors helps the retailer to gain better knowledge pertaining to product positioning strategies. Benchmark assortment against competition The products assorted can be further filtered in terms of discount range, price range, publisher and genre. The retailers can make use of advanced technological developments to analyze the assortments by genre, music company, price range, singers or other dimensions that is deemed fit. The gaps, thus, discovered in the product catalogue will help strengthen assortment structure of the retail shop and the weak categories can be developed by benchmarking assortment against that offered by the competitors (Mintel Group Limited., 2013). Promotion Analysis Keeping tabs on the competitor’s product strategies is an important part of successful retailing. The music albums that the competitors are featuring as well as the genres wherein heavy discounts are being offered should be researched. Apart from being up-to-date with the competitor knowledge, the retailer must also upgrade his stocks appropriately such that titles and albums promoted by the competitors are available and priced attractively (Grewal, et al., 2010). Alerts on critical products The retailer should be able to receive alerts on stock outs, price changes, promotions for the key titles and new introductions. The alerts will help the retailer undertake appropriate actions on the alerts in real-time. The Shifting Music Supply Chain The former music supply chain comprised physical media implying physically storing, distribution and selling through the retail outlets. The decline in physical media has led to a subsequent reduction in the goods and services that are required along the traditional music supply chain. A visual depiction of the traditional music supply chain is given below. (Source: Moss, 2010). During the 1980s, competition was fierce among the retailers and numerous offers were made to render the shopping experience for customers worthwhile and inexpensive. However, the scenario changed and the first to disappear was the independent shops. The profit margins for retailers declined with fall in the sales of cassette and records. With the emergence of CD-Rs in the late 1990s, CD sales plummeted. Survival of small retailers against the supermarkets, that were also selling CDs, required the shops to expand product portfolio, which was unaffordable to many. As a result, several shops had closed down (BBC, 2011b; Stein and Evans, 2009). Although MP3 technology was a new concept, it was fast being accepted by the general public due to the popularity of home computers, broadband Internet and Napster. Soon enough, Apple Inc. entered the music industry and revolutionized the music supply chain so as to make it entirely electronic by way of introducing iPod and iTunes. Such tools helped the company to control the distribution as well as the supply of music to consumers. Illegal download has become a dominant problem in the history of piracy; however, the trend is changing with more consumers preferring to buy the tracks rather than obtaining them illegally owing to industry pressures and lower tolerance towards piracy (BBC Newsbeat, 2011; British Phonographic Institute, 2010). Germany and France have already set legal pressure on the general public in order to prevent piracy. Britain also needs to adopt such measures so as to retain its position as the world’s third largest music market. The legal download music supply chain is shown below. (Source: Moss, 2010) The first step in the legal download music supply chain is similar to that of the traditional one, where composition, recording, engineering and remixing of the music is done. The next step constitutes aggregators or specialist service providers. Their task is to assign a Universal Product Code that is equivalent of a bar code to each individual music track in order to maintain specific identity for each track. Thereafter, the tracks are uploaded on major music retail websites such as, Amazon and iTunes, for sale. The continuous growth in download sales is expected to bring in larger number of retailers and aggregators in the music industry, much in the same way that it had led to the decline in offline retail shops and distributors. The proliferation of Internet into the music supply chain as well as technological developments in the music producing software would result in continuous growth in the number of independent labels in future, thereby benefiting both the artists that are signed as well as the music industry to realise greater profits. Online Retail Supply Chain (Source: INSEAD, 2002) The online supply chain consists of more elements than the offline one. The offline supply chain comprises the artists, publisher, label, manufacturer, distributor, retailer and consumer. For example, content providers implying the suppliers that provide digital content, encompassing not only music, but also other complementary contextual material such as, news of the artists, video clips and photos. Following are the service providers who are engaged in the supply of various services. 1. Storage: There is a provision for networked memory space that would help amass the huge amount of data, which is accessed by consumers. 2. Format Conversion: The ability of the music tracks to be store in a fraction of portion in a CD requires the use of several encoding formats. The process demands few of the digital information on a CD to be discarded, thereby resulting in degradation of sound quality. Existing formats such as, MP3 (MPEG open standard), is the most popular one, besides RA (RealNetworks), WMA (Microsoft), AAC (Dolby) and SAF (InterTrust). 3. Security and Digital Right Management (DRM): DRM is related to protection of the copyright nature of music content. 4. Packaging, Bundling: The packagers help compile a variety of music tracks from different content providers so that a combined package can be produced that proves more alluring to consumers (INSEAD, 2002). 5. Online Distribution: The section that undertakes the online distribution of music content to different retailers operating in the e-business is known as the online distributers (Sparks, 2010). An online value chain allows the artists to gain a stronger position since they are provided with the option of marketing and distributing own products without dealing with the Publishers/Labels. Value Creation Marketing strategy has been influenced by technological advancements and has played an important role in the positioning of a company’s products. The advent of the television, printing press, computers and radio has affected the course of marketing in a gargantuan manner. The recent developments have led academicians and other marketers to develop strategies that would help determine value creation in the e-business as it is not yet fully explored. The interaction between human capital and organizational structural capital, implying the research and development processes, helps in value creation. Different organisations associated in e-business foster value creation by way of introducing appropriate drivers for the same (Amit and Zott, 2001; Low, 2000). Amit and Zott had created a value creation model, which is based on Porter’s Five forces value creation framework as well as Schumpeter’s theory of creative destruction. The model constitutes four sources of value creation such as, efficiency, complementarities, lock-in, and novelty. This model is a development over the other two and hence, has been chosen for analysis of the current project. It creates an overview of the strategic network theory, resource-based view of a firm and also takes into account transaction cost economics. An analysis of the value creation model is presented below. Amit and Zott Value Creation Model (Source: Emarketing photo, n.d) Efficiency The transaction efficiency has been determined as one of the major determinants and value drivers for e-business. It is an element that is closely related to the transaction cost theory. Researchers have stated that there is an increase in transaction efficiency with a subsequent fall in the costs per transaction. Cost reductions have been defined as those achieved by lowering the search costs, gaining economies of scale in the production process and reducing asymmetric information between buyers and suppliers. In a world of internet where information is easily available and exchanged between the trading partners, the problem of information asymmetry is solved. Hence, it can be safely concluded that an e-business organisation would be able to create value along its processes by maximising the transaction efficiency profits, which is enabled with minimisation of the cost incurred. The costs incurred due to the idiosyncratic transactions between firms can be lowered by developing trust between the organisations, building a reputation and developing a transactional experience. The transaction efficiency can be calculated by evaluating and comparing the costs related to different online and offline channels of transactions. Online transactions greatly affect the transaction costs because direct and indirect costs are inversely related to the volume and frequency of transactions as well as decline in asset specificity, thereby largely lowering uncertainty. Customers’ searching costs are considerably reduced by transmission of information over the internet. Moreover, a customer is able to obtain the best bargain with presence of efficient coordination and execution of the transaction process. Complementarities Complementarities are considered as another major value driver in case of e-business. These are observed when a bundle of goods is capable of providing greater value than the combined value of consuming the individual goods separately. The concept of complementarities changes dynamics of the value creation system from a linear value chain that concentrated on profit maximization to a value added network of interrelationships focusing on maximizing the customer value. It also helps to generate the revenues and distribute those among the entire network of organisational members. Furthermore, complementarities are said to affect the demand positively, thereby causing a rightward shift in the demand curve. This is because complimentary attributes of a product attract new consumers and boosts its demand. Researches show that there is a level of interdependency between all sources of value creation. Information technology has made way for acquiring efficiency gains as explained in the previous section. Greater efficiency gains in turn facilitate the generation of complementarities in the e-business. Weaving together the capabilities and resources of distinct organisations is a hallmark of e-business. Such compilation of the resources is economically viable only when transaction costs are low, which cuts down the opportunity costs as well (Vogel, 2010). From a customer’s point of view, there is a reverse situation implying that the complementarities lead to increased efficiencies by way of enhancing utility of a particular product because of the complimentary products as well as reduced search costs. Such experiences enhance the customers’ experience and induce repeat purchase in future, thereby allowing the online site to retain its customer base. For example, Amazon can offer free pen drives or other complimentary items along with the music CDs, which will contribute towards improving the shopping experience. Flight of customers to rival organisations is reduced by implementing such strategies. Lock-In As stated by Amit and Zott (2008), third component of the value creation model in e-business is lock-in. It refers to unwillingness of a consumer to conduct business with other service providers. The extent to which customers are ready to repeat transactions determines the value-creating potential of an e-business, which also increases the transaction volume. Lock-in is also influenced by the incentives available with strategic partners so as to improve and maintain the association with a particular organisation. It represents the increased willingness to pay in order to continue the association with a particular organisation as well as the lowered opportunity costs of firms. Thus, lock-in is a method of preventing flight of customers and migration of the strategic partners to the competitors. Researchers have found various methods of customer retention. Firstly, loyalty programs rewarding repeat customers with special bonuses. Collaboration with MasterCard is a good way of ensuring customer loyalty. Bonus points that are earned by paying through MasterCard can later be redeemed. Firms can also develop design proprietary standards that would be dominant and able to capture the consumers’ attention. For example, the shopping cart patented by Amazon. Maintaining trustful relationships with the consumers is also very important in ensuring consumers’ satisfaction. Safety must be ensured in the online transactions as these sites are privy to personal financial details of the customers. Hence, the data gathered must be protected so as to prevent information misuse. Familiarity with the interface design of a website helps to retain customers, despite being a time consuming learning process. This time consuming process also prevents the customers from shifting to other organisations as the process has to be repeated. Moreover, a very essential aspect of customer retention is integrity of a firm. Portraying that honesty and integrity are of foremost importance to a firm is quite necessary, which often wins over customers’ loyalty more effectively than marketing strategies. Amazon uses this strategy to its advantage by notifying the customers about any price reduction even if it is nominal and that might occur after the product is ordered. This measure ensures that customers are satisfied with honesty of a firm and is willing to place future orders with the same. Novelty The fourth and the last concept of value creation is novelty, which is closely related to the other three. It helps to enhance the market share of an organisation. Presenting original ideas in the realm of e-business presents a firm with the opportunity of gaining the first mover advantage. Besides introduction of new products and services or new methods of distribution and marketing, novelty also includes restricting old transactions in such a manner that it boosts the company sales. For example, e-Bay was one of the first companies to introduce customer-to-customer auctions. Such restructuring was adopted by the company on a large scale, which also helped the sale of low value items at higher prices among individual customers. For innovators in the e-business, there can be substantial first-mover advantages. Introducing a novel idea in the realm of e-business would help create “switching costs” by way of capturing the “mindshare”. It also contributes towards developing brand name and reputation of the firm. The innovators can also learn about better methods by way of accumulation of proprietary knowledge as well as pre-empting scarce resources. Markets that are characterised by increasing returns work in favour of the innovators as the first mover advantage pays off. First movers are in a better position to commence positive feedback dynamics that are derived from network externalities. Therefore, attracting and retaining customers becomes easier for the market entrant. First movers also gain a better hold over the distribution networks and are able to develop positive relationships with the suppliers. The concept of novelty is also linked with complementarities as the advantage gained by a company over others is estimated by the level of innovation reflected in development of the complementary products. Warranty options are possible complementary solutions that set a company apart from the others. Strategic alliance with other firms also enables an organisation to develop novelty in business. Amazon has made the strategic choice of managing warehousing of the products internally. Nonetheless, along with self-reliability, the company also relies on other inter-firm cooperative arrangements that are increasingly gaining importance in the virtual markets (Zott, Amit and Massa, 2011). Recommendations Developing Technologies The MP3 format is still popular as a stand-alone entity and promotes creative destruction. Nevertheless, there is hope for future developments in the music industry. A recent album named Biophilia released by Icelandic artist, Björk, is one of its kind and such developments will soon help revolutionise the music industry. The new album has a digitalised and format-less version and is available for download as a deluxe edition for iPad and iPhone. It also provides an interactive experience to the listeners in form of songs, narration, videos and graphics. The album also has a guest appearance by naturalist, David Attenborough. It has become the world’s first “app” album coupled with updates that would release in future. Additional features such as, exclusive remixes, photographs, artwork, videos or even Christmas / Birthday cards as dates, can be saved in the app. From a commercial perspective, it is a very exclusive form of service offered to the listeners, which can even include push messages from the singer or band to notify the user of exclusive links about new songs and merchandise, thereby building on the “you heard it here first” strategy. Therefore, such developments can also be followed by other artist and music companies to improve sales and value proposition of the music industry. Such advancements will also entice customers into availing of these services (UK Music, 2011). Develop Strategic Alliances Apple’s dominant position as a supplier of online music has already been challenged by Amazon, allowing unprotected downloads to be copied and transferred in other media, unlike iTunes. The prices offered are also lower than that of Apple. Moreover, the biggest search engine, Google, can also venture into the music industry and revolutionise the same (BBC, 2011a). The company would have an additional advantage of directing the billions of Google users to its downloading site, as opposed to that of competitors. Since Google is a more popular platform that is used by a larger number of individuals, the music downloads provided would be more famous among listeners, which in turn will yield more revenue for the company. There are moral issues related to such a system as Google is the largest search engine. Therefore it stands to benefit by way of having the upper hand in influencing customers to download music from its site thereby earning more revenue. Also, the site can develop extra features that would provide listeners with a better shopping experience. YouTube can develop technologies that would prevent users from being able to convert audio and video files into MP3s ones. This development, however, has a chance of triggering a price war between the major market players, which will subsequently compel the customers to buy original music tracks. Similarly, the companies would then fiercely compete to ensure customers are given the best offer. Facebook has previously developed many innovative marketing strategies, which have successfully targeted the right audience with tailored advertisements. Facebook knows about the consumer’s “likes” and also the consumer preferences through the discussion forums. Hence, it can team up with companies such as, Microsoft and develop strategic alliances that would help in developing a music download store whereby it can focus on the current favourites of customers. Facebook can also develop alternative business models in collaboration with other companies, which would provide the customers with an opportunity to access the music tracks, rather than owning the same. In lieu of a subscription amount, the listeners may listen to music online as opposed to saving those on their devices. However, for these initiatives to be a success, internet access and connectivity needs to be global. Offering access at reduced prices, rather than ownership, to the tracks would prove more attractive to the consumers and be able to rival iTunes. Develop the Site Even in the present scenario, there are several people who are hesitant to use the online shopping option, fearing complexities and uncertainty associated with delivery. Hence, the sites need to be easily accessible and should help lead the customer to the desired destination without facing hassles. Furthermore, the post sale service related to such sites must be very customer friendly such that customers do not encounter any difficulty dealing with product complaints. At times, certain online sites provide deferred service to the customers due to delays in shipping the consignment. Such delays cause immense customer dissatisfaction and negative word-of-mouth spreads among other users. Unsatisfactory shopping experiences deter customers from renewing their orders and bad reviews subsequently prevent many from visiting the sites. As a result, best and fair practices should be followed by the owners so as to induce customers to buy from these sites. The sites should be designed such that the products are showcased properly and the important ones are highlighted. Recommending engines introduced by Amazon has boosted cross-selling and up-selling of the products by using users’ product history, thereby appropriately recommending products. Even so, a more effective way to drive up sales would be to use the site’s analytics team to understand the consumers’ tastes and preferences and the buying patterns to realize the prevalent trends. When this pattern is coupled with a unique product knowledge and logic, product recommendations can be proposed in a better manner. Advertisements can also be modelled based on such predictions, thereby instilling a sense of urgency in the buyers through the “buy now” strategy (Koo and Lee, 2011). Conclusion The rapidly developing technology has facilitated the growth of e-business and online retailing of music has gained impetus owing to the same. The value created along the retailing process must be realized as it would help an organisation to further develop its marketing and retailing strategies. Therefore, in order to gain an understanding of the value chain, understanding of the supply chain pertaining to offline as well as online retail is necessary. Reference List BBC Newsbeat, 2011. Music festivals struggling due to overcrowded market. [online] Available at: [Accessed 19 August 2014]. BBC, 2011a. London riots: Enfield fire hits Machester's music scene. [online] Available at: [Accessed 19 August 2014]. BBC, 2011b. Jeremy Hunt urges web firms to join anti-piracy drive. [online]. 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Online sales, Internet use, file sharing, and the decline of retail music specialty stores. Information Economics and Policy, 20(3), pp. 288-300. Read More