Value Drivers of E Commerce Business Models - Essay Example

Introduction Information technology has changed the world; it has become infused with life and business. The new digital economy is not just about making microchips or super computers. It is a new way of doing things in every industry, in every government. It enhances speed, quality, flexibility, knowledge and networks (Collaborative Economics). In fact every aspect of business requires technology. E-commerce is an outcome of advanced technology which has helped business to come close to customers and promises new avenues for creation of wealth through its highly competitive characteristics. It is also based on the premise that competition is relentless and people are the most important raw materials (Morrison Institute). Today the internet is aggressively used as a channel for businesses both new and established ones; through entrepreneurial start-ups and corporate ventures. E-commerce firms are defined as those that derive a significant or rapidly growing proportion of their revenues from transactions over the internet but organizational and market phenomena have been just as influential as technology developments in the growth of e-commerce (Stace, Holtham & Courtney, 2001). Internet exchanges are beneficial not just for the customers or end users but it helps businesses to exchange and grow together. It is a platform to transact business, known as business-to-business (B2B), business-to-customer (B2C) and customer-to-customer (C2C) and has definite advantages over the traditional way of transacting business (Amit & Zott, 2000). Many firms have failed to harness the benefits of online business even though the retail segment has picked up rapidly in the last few years. The debate continues whether ecommerce complements fixed store retailing or replaces existing channels, namely the clicks and bricks channels. E-retailing has been constantly undergoing a process of innovation which has caused a threat to the established retail and distribution channels. This new form of commerce is laden with information and enables companies to speed up activities and increase their scope. The external and internal factors influence the firm’s behavior and companies can differentially obtain advantage depending upon their ability to conduct business (Burt & Sparks, 2003). A failure to operate would allow competitors to surge ahead. E-commerce can help to transform the traditional tasks and activities and the associated costs within the retain channel. The activities that are affected are the sourcing of products, stockholding, inventory and store merchandising, marketing effort including branding, customer selection including picking and payment and the delivery or distribution of goods to the customer. Understanding the environment is a prerequisite for ecommerce. It is essential to understand whether the environment is dynamic, simple, static or complex; it is also important to determine the internal and external environment (Edgar, n.d.). This would allow the firm to formulate its strategy. This requires an assessment of the political, legal, economic, socio-cultural and technological factors. Tesco is UK´s leading grocery chain and was ranked 8th by sales of the world largest retailers in 2002. It launched its online channel Tesco Direct in 1996 but faced the challenges of holding inventory and the distribution system. Merchandising becomes a considerable issue with e-commerce as the needs for stockholding and replenishment changes. Virtual retailing product representation and information also needs to be changed. From 2000 Tesco moved beyond online grocery retailing and offered a wide variety of products on their website. It capitalized on its existing brand name. This paper will discuss to what extent Tesco has been able to change its strategy and behavior to align with the needs of e-commerce. A virtual organization is a temporary network of independent companies – suppliers, customers even erstwhile rivals – linked together by information technology to share skills, costs and have access to each other’s markets (Byrne, 1993). Each partner contributes contributory resources that reflects its strengths and determines its role (Turban et al, 1999). The focus of e-business strategy varies according to the evolutionary stage of the ebusiness. The initial focus is on the sell side e-commerce followed by the buy-side e-commerce and then the value network is created (Barlow, n.d.). Digital business is turning the world upside down as it offers new business opportunities but there are several key drivers that pose a challenge to e-commerce in the digital economy. Burt and Sparks (2003) mention that e-retailing and the virtual store provide opportunity for 24 hours shopping which ridicules the laws dictating the opening hours for any store. Tesco has thus been able to widen its area of operation from the local to the global level. The store reach changes temporarily and geographically and it now relies on the customers ability to get “online”. Thus customers have access from anywhere whereas in traditional stores the location holds great importance. While location holds importance as a competitive advantage in traditional stores, new entrants have also made it equally successfully. Nevertheless, Tesco had the advantage of its own brand name when it started the new channel of distribution. The two most important characteristics of the virtual market place in the digital economy include the reach and the richness. This means the importance and value of reaching the customers and the richness of the information that the company provides to the customers. The sellers can now cross borders and reach customers across nations. Information can be reached to the customers inexpensively. The internet has eliminated the trade-off between reach and the richness because it brings rich information to a great number of people both simultaneously and cost-effectively (Tse, 2007). E-retailing also changes the way retailing marketing function is performed. Consumer trust becomes important in e-commerce. In the retail segment many have failed because they overlooked the social context and behavior of the customers. Costs apart, the consumers must be able to have confidence in making online purchases. Tesco, the giant retailer, has two distinguishing features – it is UK’s largest retailer in terms of market share and the world’s biggest e-grocer (Yoruk & Radosevic, 2000). Proper alignment is critical for success within any traditional business as well as with newer electronic format (Delaney-Klinger, Boyer & Frohlich, 2003). Gaining competitive advantage requires building on the proven principles of effective strategy (quoted by Porter, cited by Delaney-Klinger et al.,). Tesco did not try to attempt to build a new model of business but used existing assets to grow. Tesco has moved aggressively to improve SCM to balance customers’ demands with the need for profitable growth. This includes coordination within different functional levels, inventory management and cost control. The credit or debit card of the shopper is not charged until packing is done. This helps to keep the confidence level high among the consumers. There should be coordination of functional level strategies and trying to optimize individual functions can lead to failure. Theory suggests that facilities can be reduced in online business. In line with this, Tesco did not adopt the warehouse approach for effecting supplies like competitors did, but instead used its stores as distribution centers. Building a brand name is essential in e-retailing. New startups like Amazon.com met with unprecedented success but Tesco had the advantage off its existing brand name and hence benefited from the brand image when it shifted to the new business model of e-commerce. Perry (2002) says that there is more to e-commerce that meets the eye. The e-tailers with poor business model, no brand collateral and dependent solely on advertising revenue have collapsed. Many business models continue to fail because their business models are based on the belief that price and cost advantages are sustainable. It is thus essential for a company to first capture enough share of the market and then secure cost and price advantage. Only brand and innovation cannot lead to long-term success in the digital economy. The traditional brand owners avoided the first-mover advantage bit for retail brands it is essential to adopt the web strategy according to Perry. These retailers are under constant threat from the future dis-intermediators and external re-mediators who can take away their business in part or whole. Some first-movers suffered in e-commerce due to wrong strategy and always had the fear that new movers into the market would take away their business. Although not many, there are a few start-ups that have achieved success and significant positive brand awareness in the first few years. It has to be noted that web is not just another distribution channel. All companies are at some stage of technological development and Tesco was already an existing company with a certain brand image. Moving on to e-commerce was easier for them because they were already trading under a parent brand banner. Service quality for maintaining online brand reputation is important. Information needs to be updated daily, navigation has to be as simple as possible and information codified so consumers and visitors do not waste time. Today Tesco is dominating online groceries with its interactive web business. Micro-level marketing activities in e-commerce like individualized data collection allows for market segmentation (Burt & Sparks, 2003). Tesco has employed customer segmentation strategy by publishing newsletters for different segments. It has further added value by partnering with iVillage, which brings together content, community and commerce. iVillage is a web site owned by Tescos internet distribution division. It offers a large number of services for women like advices on health, beauty, work and leisure. The management is fully involved in the members of this virtual community. A great deal of conformation comes from the advice of the users’ which also serves to guide the management in taking further decisions. Tesco has thus been able to attain market segmentation and is able to offer its products in an economically viable fashion. In the traditional channels this may not only have been expensive but may not have even provided the same degree of awareness, globalization and variety as can be found on iVillage. The degree of involvement has led to creation of an emotional link with the brand. This has spread to the Tesco brand and is a direct consequence of the consumer perception. The company thus remains cognizant of the customer needs; it generates a better market image and has created product differentiation for itself against competition. Repeat visits and long stays are desirable in the virtual stores (Burt & Sparks). The techniques have to differ from the real world stores. Data generated is used to understand product cross relationships. In a digital economy it is very easy for the customers to get lured by the numerous offers available on the internet not to mention of the online auctions in the retail sector. Strategic Direction (2006) points out shoppers usually are free riders. Sophisticated shoppers browse through the informative website and then prefer to go and buy from regular stores. Hence lock-in is considered a driver for the success of e-commerce and is a challenge in the retail industry. Tesco has found ways to motivate the customers for repeated purchase. These companies must know how to lock-in the customers so that they would not have any incentive to switch elsewhere. The website should be able to provide the customers with the opportunity to tailor the products, services and information as per individual needs (Tse, 2007). This enhances the buyer-seller relationship and the customer is inclined to return to the website in future. Virtual communities require that values and ideas are shared by the members, and some degree of stability, growth, loyalty and commitment exists among the members (Flavian & Guinaliu, 2005). This gives the visitors a sense of belonging and increase customer loyalty. The internet is an inexpensive medium with a very high reach and brings together the customers. The more people interact with each other the richer the system becomes. Mutual trust and co-operation is essential for enhancing commercial competitiveness and advantage. There is a great deal of resilience and reliability on technology and this has led to the realization that in the digital economy there must be a shift towards people-oriented and process-oriented practices (Bryant & Colledge, 2002). To build trust regular clients are offered incentives or information is exchanged. The virtual shopping card at Tesco Direct is stored each time the shopper leaves the virtual store thereby making it easier for the multiple family members to contribute to the shopping cart. It also helps the shoppers to analyze their past purchases Frequent users are offered a registration which provides further incentives like discounts, special offers or access to more information. Relationship marketing has shifted the focus of the marketing exchange from transactions to relationships. A stable customer base is a core business asset (Rowley, 2006). Customer loyalty is essential to build relationships. This fact has been recognized by Tesco who introduced the Club Loyalty Cards. Loyalty of customers may be expressed in number of ways – either through frequent purchase or influence others’ purchase decision. Customer loyalty is affected by the satisfaction that a customer feels. Loyalty cards provide details of the customer’s purchase habits, weekly products purchased and how product associations are made. Through data mining techniques this data can be transferred into valuable source of information, for targeted mailing and personalized communications. The traditional selection and picking activities is another change that has been infused due to e-retailing. This amounts to order capture and order fulfillment in e-retailing. This process diverts the physical tasks and the associated costs back to the retailer. This is one of the major cost implications for the new business model and Tesco does this through the process of disintermediation and reinternediation. What differentiates Tesco from other online retailers is the fact that it does not operate its own warehouse but enables the customer to buy from their own local familiar Tesco store. Each store’s pricing and inventory system is directly linked to the main website so that customers can select from the line of goods with prices they are used to (Müller-Lankenau, Klein & Wehmeyer, 2004). E-retailing raises customer delivery expectations – e-retailing requires large number of small drops to the home and the scheduling and cost of the activity in e-retailing is passed on to the retailer. These can be outsourced but at Tesco the orders are composed in local stores and delivered by company vans and delivered with two hours of the order being placed (Müller-Lankenau, Klein & Wehmeyer, 2004). Online shoppers are charged GBP 5 per delivery which demonstrates that their price sensitivity is rather low compared to the average shopper. Technology is an enabler which leads to process innovation and the basic process for most products remains the same. A transaction is an economic exchange that leads to the fulfillment of a perceived customer need. The internet has reduced the complexity of the search process for the consumer. Customers are able to make faster and informed decisions than they could in the past. Improved information exchange mitigates the adverse and opportunistic behavior of the sellers. There is increased transparency in all dealings. Technological changes and advancements are taking place virtually on a daily basis and it becomes firms to develop and maintain full range of capabilities required to bring products to the market. While technologies have advanced at a fast pace, the enabling legal and procedural framework have not been able to keep pace. There should be better synergy between ebusiness and egovernance (Jauseelan, 2001). The e-market place poses challenge as the customer expectations keep changing, and the human interaction is almost negligible in such exchanges (Amit & Zott). A firm’s boundaries become blurred and the customer receives multiple offers through competition. There are a high number of failures in internet pure players in grocery retailing (Müller-Lankenau, Klein & Wehmeyer, 2004). This emphasizes the need for multi channel strategies. For most mainstream organizations e-commerce is another key or another channel to the market which adds to the revenue growth (Stace, Holtham & Courtney, 2001). Their channels complement their existing channels rather than replacing them. Tesco is using both online and offline channels as full-fledged equally promoted distribution channels. Both the channels are fully integrated and support each other. Tesco offers low as well as upscale products. Tesco has extensive customer knowledge which helps to assess the introduction of new services. They offer online orders, home delivery and extensive information services. Tesco does not allow customer channel switching at any point during the transaction. Tesco redefined its strategy to a customer centric approach with the core purpose of creating value for their customers to earn their lifetime royalty. Tesco’s loyalty scheme “Clubcard” has become a benchmark in the industry for customer profiling and CRM (Müller-Lankenau, Klein & Wehmeyer, 2004). Hence it works through different channels but channel integration is complemented by the Clubcard Loyalty Scheme. Consumer shopping behavior can be recorded in both channels and is used to optimize the personalized marketing activities. Value has been defined by Porter as ‘what buyers are willing to pay’. Firms create value for their customers either by lowering the costs or offering something different from the competitors (Bevan & Murphy, 2001). Customer’s value perception also depends upon the past association with the product or service. If the retailer can capture what creates value for their customer then they gain competitive advantage. This Tesco has been able to do through right merchandise and wide range of goods on offer. Tesco did not succeed merely being the first-mover in online business but it gained its market leading position by educating and empowering its customers to adapt the online channel (Tse, 2005). Internet is not a technology but a tool that encourages social interaction. Traditional brand owners cannot afford to ignore the benefits of the digital economy. At the same time, the digital economy poses great challenges to the firms that want to trade online. Although more prevalent in the existing companies, some firms have met with success even as start-ups. Existing companies have the benefit of the brand name and the existing customer base. They just need to make efforts to convert their customers to online customers. The firm has to take into account the social factors apart from technology and the economic factors. E-commerce changes the retailing marketing function and virtually 24 hours shopping is possible. Adopting a multi channel strategy is beneficial to service the society that does not have access to internet and Tesco has maintained that. Customer loyalty and retention is a big issue in e-commerce but Tesco has taken care of that too through special offers and loyalty cards. Tesco builds trust and does not charge the credit card unless the order is packed for delivery. Tesco is able to create value by offering new products and a wide range of goods. Tesco has expanded its reach and offers products beyond the traditional groceries, which also gave it a competitive edge. They have also expanded internationally and have met the challenges of e-commerce. Nevertheless, as the online retail segment in UK is growing, Tesco has to be cautious to sustain the competition. 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E., & Radosevic, S., (2000), International Expansion and buyer-driven commodity chain: The case of Tesco,27 Oct 2007 Read More