Economics of the Dot Com Model vs the Multichannel Mode - Essay Example

Economics of the dot com model versus the Multichannel mode Today we are in the era of globalisation, which calls for a universal approach towards business. No doubt, segmenting and target marketing are the key mantras of the marketing strategy, and such strategies are still being pursued, but it is equally true that multichannel mode of distribution marketing has a formidable competitor in the form of e-commerce. The Universal Declaration of Human Rights (UDHR)1, prepared after the end of the Second World War, explicitly lists that each citizen has certain rights. Human rights are the cornerstone of any civilized community in general. Today we are living in an era of technological influence in almost all walks of life like banking, communication, education, business, health services, and manufacturing. The positive impact of technology in general and information technology in particular is more than apparent. Therefore access to basic modern technologies should be regarded as human right and every effort should be taken to ensure that each human being has access to them. As technology develops in all walks of life, the availability and applicability of a number of facilities takes a new form. For example, the banking has acquired new dimensions after the arrival of features like, net banking, online trading, e-business etc. Online retailing is there for all of us to do shopping online, without any need to personally visit the stores. Video streaming and audio streaming provide the broadcasters, news channels and newspaper groups to register their presence online so that they may be able to reach out to a wider audience worldwide, with ease and much less amount of investment. In fact there are a host of such examples where the dot com era has gained acceptability far beyond the levels that one could comprehend a few years ago. Those were the days when a business was supposed to run its operations till the business operations keep earning the profits. Not any more, now for a sustainable business enterprise the business operations must be a partner in the sustainable development of society/ country. For any business to survive, Sustainable development is the development that keeps an eye on the present as well as on the future, and meets the needs of the present without compromising the ability of future generations to meet their own needs. E-business applications are also being devised in such a manner that the industry is able to find ways to match with the evolving demands of the customer with time. It can range from using e-mail to communicate with customers and/or conduct business to a web page promoting a company, from a full e-commerce retail site to the integration of procedures and processes using Internet based technology. It takes its cue from terms like e-mail, e-commerce, e-governance etc. The term2 "e-business" was coined by Lou Gerstner, CEO of IBM. Today leading online stores and companies have moved beyond the ‘one-size-fits-all’ approach to ‘customization’ and internet relationship. It is an electronic commerce application used for B2B or B2C. Online shopping has become popular mainly because of its speed and ease of use. Initially users were mostly computer literates, but now the universality of access has made paradigm shift in e-business operations. In line with the thought of providing easy access of technology to the citizens, the dot com model has gained wider acceptance of late. E-business is now a buzzword in the corridors of business and industry. In fact having an online presence is now being considered as a prerequisite for gaining wider acceptability. A report prepared by US Department of commerce in 1999 stated that digital economy is becoming a global phenomenon because of business imperatives and customer demand (Henry et al, 1999). The use of IT and internet in particular has been on an exponential rise after the acceptability of internet as a means of disseminating information in late 1980s. A survey by CBI and Google (2006) found out that ‘internet has indeed had a revolutionary or substantial impact for over half of UK businesses.’ This impact has been translated in the form of the influence in dealings with customers, B2B deals, communication within organisation and working practices etc. During the initial years internet was used as a means of providing information about products and services, but now a customer need not visit the showroom in the downtown, instead he can do the purchases at the click of a button. Now a person is escorted and courted on the ‘virtual store’ in the same manner as is possible inside the actual brick and mortar store. Amazon, OfficeDepot, Tesco, Wal-Mart etc. are some of the successful names in the dot com domain. In fact, when Bezos, the founder of Amazon, suggested to his employer that offering books through internet would make an interesting business proposition, his suggestion was not accepted as a sound one. But Bezos subsequently decided to take up the challenge and gave up a highly paid up job to set up Amazon in 1994. And today it is one of the finest examples of the potential and success of the dot com mode of delivery to the customers (Spector, 2000). The dot com system of marketing is generally divided into the following categories (Laffey, 2004); Business to Consumer (B2C): Such portals offer products and services directly to the consumers. This is in fact the most happening segment as far as the proliferation of e-commerce activities is concerned. Consumer to Consumer (C2C): It’s an online market place where consumers are allowed to interact and transact with other consumers by way of exchanging the products or auctioning. eBay is a classic example of the success story of this category. Business to Business (B2B): In this category, online outlets prefer to deal with other companies for their products and services, instead of offering it to the consumers. Such companies in turn become retailer for those products. Consumer to Business (C2B): This category of dot com venture allows customers to dictate price of any products or services. Reverse auction sites like Priceline.com. At times such dot com companies tend to offer a better bargain for a range of products and services. E-business is therefore, more than just e-commerce. It involves business processes spanning the entire value chain: electronic purchasing and supply chain management, processing orders electronically, handling customer service, and cooperating with business partners. How the company turns such facilities into competitive advantage depend upon the kind of strategies adopted by the company. As trade barriers fall and technology facilitates 24 X 7 operations, superstores are accessible to the customers round the clock. For the companies to identify their sustainable competitive advantage, Michael Porter developed a generic value chain with inter-related activities which are common in many firms. Porter identifies primary and support activities. Primary activities are the ones which generate a profit margin by adding value. These activities can be instrumental in providing a sustainable competitive advantage for the organisation either collectively or individually. Porter’s value chain framework (1985) in general is accepted as the language for representing as well as analyzing the logic of firm-level value creation. The customer will prefer to deal with the company which values its association with the customer. This will help in retaining the customer base. And loyal customers happen to be good brand ambassadors for a company/ product, which will ultimately help the company in sustaining its competitive advantage. Saren and Tzokas (1997) highlight the fact that relationship management is a dynamic process, the objective of which is to create a “relationship climate” which “sets the stage” for the nurturing of individual relations. For a customer, value proposition include, Access to products, need fulfilment, desire fulfilment, increased choice, new consumption patterns, Problem solving features, and interactivity. In the value chain, value is created in the goods or services through efficient production of goods and services based on a variety of resources. There has been a marked shift in the treatment of a supply chain over the last couple of decades, especially in retail and grocery markets. E-procurement has also become an integral part of the e-business arrangements. The driving force for adopting an e-procurement system includes use of internet as a means for transmitting order information. While on the other hand purchase through internet is meant for a customer. Now the internet e-business portals greet each customer by name and present targeted information and services that correspond to each visitor’s unique preferences and requirements. This type of personalized attraction increases customer’s loyalty, enhances revenue for the company and helps in establishing a valuable database of customers. Business on the move is the latest addition to the e-commerce era. Now mobile phones can also be used for marketing purposes. M-commerce, the new avatar of e-commerce, works by conducting business transaction via a mobile device. This facilitates features like ubiquity, personalization, dissemination and flexibility (Sun et al, 2005). Mobile gadgets have now become the devices to inform, educate, transact and interact with the consumer. It is the delivery of targeted qualified business offers to the consumers’ private mobile equipment from company’s website or centrally located warehouse. The traditional usage of a ‘phone’ has given way to services like WAP, GSM, GPRS etc. Devices like web-enabled cellular phones, palm pilots, PDAs etc. have become darlings of consumer from businessman to students alike (Shih an Shim, 2002). As a business, such transactions through a mobile device also involve complex processes involving a chain of operations. Marketing in totality and marketing communication in particular plays a crucial role in this entire business process. For an effective marketing strategy psychological needs of the customer(s) are to be kept in mind. These needs must be met for a person to be persuaded to purchase a product or service. E-business is no exception. Here the e-customer/ website visitor is persuaded to close the deal successfully by following a step-wise strategy. This can be done with building trust and confidence by meeting the psychological marketing needs of that visitor and potential customer while escorting that visitor through the selection and purchasing process. Such a gesture proves to be all the more important if the customer happens to be a single person family. For such households, besides being convenient, online retailing often becomes a compulsion as well. According to Euromonitor International (2008), as the youths are becoming more career conscious, the numbers of one-person households are on an increase. The report points out that worldwide the numbers of such households have reached 202.6 million in 2006, up from 153.5 million in 1996. This number is projected to increase at an average rate of 1.6% per year for the period 2008-2020, which is more than the average projected growth rate in the number of all households. This is an opportunity for online retailers and e-business companies. For a retail business the top priority is of course to remain in the good books of the customer. But there are a range of priorities for the superstore, which need to prioritized according to the business philosophy of the business. In fact, market segmentation and opportunity prioritization go hand in hand. An effective and elaborate market segmentation is supposed to achieve the following: Opportunities represented by each segment are clearly measurable and substantial Segments are accessible and identifiable for the company Meaningful differences exist between segments that will lead members to respond differently to elements of the marketing mix Segmentation is strongly linked to the business mission, goals, and identifies opportunities that fit well with resources and capabilities of the company. At times it is not possible for the superstore to cater to all segments in equal measure, therefore all such business opportunities need be prioritized for providing better service to the customers. Datamonitor (2006a) placed the global food and staples retail industry at $3,620 billion in 2006, registering an annual growth of 4%. It is estimated that by 2010, the global food and retail industry will have a value of about $4,429 billion, an increase of 22.3% since 2005. Online business and transactions require high levels of trust and confidentiality for such ventures to succeed. Increasing number of internet frauds have no doubt made general users suspicious about the credibility of internet business, but despite such hiccups, disappearance of a number of dot com ventures, the number of online business ventures and the population of online community is consistently on the rise. Web services are the driving force behind the formation of a working relation, building of trust and exchanging data of sensitive nature. Internet banking and e-business applications require ensuring a high level of security and integrity of the data for the transactions to be trustworthy. Ratnasingam (2001) has explained about a model of inter-organizational trust which illustrates that ‘trust’ generally builds in three stages. In the first stage competence trust is established through the trust and security-based mechanisms that are embedded in e-commerce technologies, to provide speed and real-time accurate information. Secondly, consistent positive behaviors from trading partners lead to credibility and reliability, which creates predictability trust. In the third stage, goodwill trust focuses on organizational reputation and brand names, accomplished by enforcing best business practices. For any company to acquire competitive advantage over its rivals, some of the strategies that can be used are; sound marketing efforts, brand building, value creation, innovation, operational efficiencies etc. But more important is to sustain the advantage. Information Technology (IT) in particular has a crucial role in value configuration, as it helps in taking care of the day’s advancements. As internet is gradually maturing and presenting a paradigm shift in its very ideation, the infrastructure has acquired a business character, a transcontinental personality and a vending framework of wide-ranging, business, educational, scientific and personal data. Now the use of internet covers real-time computer conferencing, gaming, audio broadcasting, video broadcasting, real time telephony and of course real-time business. E-business in its simplest form can be described as doing business electronically. It could be selling or purchasing of goods, offering and using the services through the online route, transacting financials commitments, marketing communication campaigns with attractive offers. Online retailing by supermarkets, net-banking, IT enabled services, business process outsourcing, online ticket purchase etc. are some of the examples of e-business. Of all the changes in distribution during the last century, those taking place in retailing have been the most dramatic. Competition is quite tough with the presence of a large number of MNCs, as in such a business proposition the customer is always in control because the customer buys whatever he wants. This gives a feeling of being more threatened and less empowered in terms of the company’s dealings with its customer base. Today, totally new institutions have appeared in an industry that a hundred years ago consisted mostly of small general and specialty stores. The principle retailing innovation in the 1930’s was the supermarket, which introduced a number of principles of mass merchandising that cut costs and increased volume at a time when family incomes were strained. The original supermarkets, in fact were not very attractive, but times have now changed. With innovative techniques of attracting the customers, supermarket chains have established themselves in a big way. With the introduction of the principles like self-service, wherein the customer is supposed to do the leg work, which resulted in reduction of the personnel cost of the supermarket, the retailing chains have been able to cut costs. But with the onset of e-business, such companies are also feeling the heat. Some of them like Tesco, Wal-Mart etc. have also started their online ventures in right earnest. In this study we will be analysing the retailing industry in general and some of the companies like Amazon.com, Office Depot etc. for their successful online ventures in selling books, office equipment etc. online. During the study an effort would also be made to see how these companies have been able to successfully take on the traditional companies and businesses and made enough space for themselves online. Amazon.Com Amazon.com aspires to be3 ‘earth's most customer centric company; to build a place where people can come to find and discover anything they might want to buy online. Today, Amazon is a well known brand in online retailing. The reach of internet knows no boundaries, therefore amazon.com diversified in a range of products, which further helped in strengthening its image internationally. A strong brand image helps in taking on the competition and also provides competitive edge to the company in the online retail industry and helps in attracting more dedicated as well as curious customer traffic. Amazon’s ranking amongst the top 100 global brands ranking has consistently improved over the years from 68 in 2005 to 61 in the year 2008. Company registered similar improvements in its brand value from $4,248 million in 2005 to $5,411 million in 2007 and with a quantum jump to $11,511 million in 2008. Amazon has put in lot off efforts towards personalization of online shopping experience. The online search-find-obtain experience is one such innovation from Amazon.com. To further strengthen the brand value, the company has started exploring overseas markets as well. It has good localized presence in Canada, France, Germany, China, Japan, and the UK. In order to make use of the economies of scale, today the multichannel companies are entering into strategic tie-ups with companies in related fields. Well, with the rates of success setting an example, dot com companies too have started emulating the example. Amazon has also entered into partnership agreements with other reputed brands like Cannon, Nikon, Sony, Panasonic, Blackberry, Casio, Fuji, HP, Olympus etc. which not only makes it a reliable online marketplace but establishes it as a company offering quality at reasonable prices. What is unique to this dot com company is its business proposition. The online retailer operates on a unique business model which enables buyers and sellers to interact over safe technology platforms. Such an interaction helps in saving transaction costs as no intermediaries are present. Such an arrangement works quite perfectly for products which are otherwise very difficult to find in the marketplace e.g. vintage products, end-of-life products etc. Innovation and quality services are the hallmarks of today’s business environment. While the customer is always in search for the best quality at affordable prices, the multichannel distribution companies are also always on the lookout for ways and means to cut costs while trying to offer quality products at lowest margins to the customer. The retailing business being a very competitive one requires being more innovative in approach and offers. Amazon too has a dedicated team of professionals, and a good amount of its funds are earmarked for research and development activities. During 2006, the company invested about $662 million in R&D with consistent increase in the amount over the years (Datamonitor, 2007). This helps the company in maintaining its leadership position in the market. With growing competition and shrinking margins, Amazon.com too has started feeling the pressure as the profit margins of the company have seen a declining trend over the last couple of years. Realising the potential of Chinese consumer market the company also entered the Chinese market by acquiring Joyo.com in 2004, but the competition became more prominent from another domestic player dangdang.com in China. China, having a huge customer base, is stated to be a market full of promises, and China Internet Network Information Center (CNNIC) also states that, online shopping in the country is expected to grow by 190% in the coming year. But, Joyo.com has a weak market share of 12% against 18% of dangdang.com (Datamonitor, 2007). But it should be an encouraging signal for the company that it finds itself fully prepared for accepting the challenges in order to plan its strategies for catering to about 1.3 billion people worldwide. Since Amazon.com has already established itself as a reputed brand in the Chinese market, therefore, it stands to gain from the experience of these 3-4 years and create a niche for itself in the market. With an all around curiosity and emphasis on e-commerce around the globe, this augurs well for the company, as its core competency is in the field of e-business and online retailing only. Company’s new venture providing free MP3s and range of other music formats, promises to bring in a revolution in the market. This will help Amazon.com in offering millions of songs, free of copy protection technology, which allows them to be played on any personal device. The company has obtained the license to the digital catalog of EMI, a music company. Until now, the Digital Rights Management (DRM) prevents buyers from making multiple copies of the music. Therefore, company’s sales are bound to increase when it provides DRM free music to the patrons. Office Depot Inc Pat Sher, Jack Kopkin and Stephen Dougherty established a company called Office Depot in 1986 in Fort Lauderdale, Florida. The company went public in 1988 and was subsequently listed on the NASDAQ. It expanded its operations in North America with the acquisition of The Great Canadian Office Supplies Warehouse Chain in 1992. Company is selling its products mainly under the brand names like Office Depot, Viking Office Products and Viking Direct. Headquartered in Delray Beach, Florida, having its footprints in 23 countries, company’s main operative area is US. Company has been making good use of almost all distribution channels like retail stores, direct mail, contract delivery, Internet and business-to-business e-commerce. Office Depot is the second largest office products company in the US selling a wide range of office supplies, business machines, computers office furniture and related products through traditional superstores in major regions like North America, Europe and Japan. Of late the company is quite active on the internet as well. Though a relatively newer company, but Office Depot has been able to establish a strong brand image. In the US, Office Depot has become synonymous with office products. Adopting the tagline "Taking Care of Business" into its logo has further given it a unique identity. The company has successfully finalized a multi-year alliance with NASCAR under which it became NASCAR’s official office products partner. This has helped in boosting the brand visibility of Office Depot products. While entering newer markets, like the Asian subcontinent, a strong brand image helps in an easy and formidable entry. Product mix of Office Depot includes branded office products and own brands with general office supplies, computer supplies, business machines and related supplies, and office furniture under various labels, including Office Depot, Office Depot Value, Viking Office Products, Niceday, ForayM, AtivaM and Christopher Lowell. In order to optimize the retailing capacity to a customer online, the company also sells products of some other reputed brands. Such a balanced product and brand mix allows the company to serve multiple customer segments and markets. While on the one hand branded products enable the company to address the label-conscious customers, own brands are targeted at more cost-conscious customers. Customer base of Office Depot is equally diverse. It clientele includes a diverse range of businesses, ranging from big corporate houses to small office home office (SOHO) customers. Geographically also, the company is spread across many continents, which helps in isolating the region specific problems of one region from spreading to other regions, thus reducing the business risks while systematic plans can be prepared for specific regions. Internet, e-commerce and m-commerce hold the best future prospect for a business entity. The online spending habits are on the rise on account of its ease of use, for both the seller as well as the buyer, and an improvement in security features for such transactions. Office Depot has a strong web presence and operates a number of websites including www.officedepot.com, www.viking.com and www.techdepot.com. An increase in online sales would certainly boost the company’s direct to business customer revenues. Tesco It was in the year 1919 that Jack Cohen founded Tesco, when he began to sell surplus groceries from a stall in the East End of London. In those days his first day’s profit was £1 and total sales of £4. The name comes from the initials of TE Stockwell, who was a partner in the firm of tea suppliers, and CO from Jack’s surname. In 1929 Jack Cohen opened his first Tesco store in Burnt Oak, Edgware, North London. And the journey continues, there’s no looking back since then. This super market chain, with about 90 years of experience, has been in constant touch with its customer base. The customer’s reaction to the product/ services is largely based on the customer’s feelings, which are subjective in nature. Relationship management, the very basis of running a retail store, asks for earning the loyalty of customer. Grabbing customer attention is not a big deal but retaining customer loyalty requires sound thinking at the top. A satisfied customer often takes pride in becoming a goodwill ambassador for the company. Beckett-Camarata et al. (1998) present a conceptual overview of relationship management in a rapidly changing global environment: “In a global economy, all system members are interdependent and are customers. Companies are restructuring (i.e. downsizing) to fund only those core competencies that are key to their profitability and long-term survival. Managing relationships with their customers - especially with employees, channel partners, and strategic alliance partners - is critical to the firm’s long-term success” (p71) Tesco has expressed its mission and objectives (Tesco, 2008) basically in the two key values: i. No-one tries harder for customers ii. Treat people as we like to be treated Retail Business requires managing a broad range of retail skills in the areas of customer sales and service, promotion & advertising, store layout, visual merchandising, economics & accounting, marketing, buying from suppliers, inventory control, and human resource management. The mission and objective statement must encompass all such fields and activities. Holding a number one position in the retailing business in UK for quite a while a now, TESCO has started feeling the heat of growing competition from the likes of ASDA and Sainsbury the number two and three respectively. As of June 2006, Tesco has 31.1% of the UK grocery market while ASDA's share is 16.4%, followed by Sainsbury’s 14.7% (Datamonitor, 2006). While the operating profits of TESCO for the year 2004 was £m 1526 (an increase of £m229 over 203), this margin was £m1694 i.e. an increase of £m168 over 2004. These are the alarm bells for TESCO with Wal-Mart making all out efforts to push ASDA using innovative penetrating marketing strategy. It is now widely accepted that the most influential members of marketing channels for FMCGs are now the retail supermarkets (Stem and El-Ansary, 1992). This provides an impetus to the retail industry. Having analysed some of the companies in the retail industry it is quite apparent that prospects of e-business ventures are here to stay for long time to come. Despite initial hiccups in the formative stages, concerns of safety and security on the net etc. the technological advancements have indeed turned this phenomenon somewhere near to calling it a craze amongst the young generation in particular. It can be said for sure that we are bound to see a lot more in the coming years. References: 1. Amazon.com (2008). Available online at http://www.amazon.com/ (July 4, 3008). 2. Beckett-Camarata, E. J., Camarata, R. C. and Barker, R. T. (1998), “Integrating Internal and External Customer Relationships through Relationship Management: A Strategic Response to a Changing Global Environment”, Journal of Business Research, 41, pp. 71-81. 3. CBI & Google (2006). A CBI / Google Survey of Internet Trends for Business and Consumers. conducted by GfK NOP November 2006. 4. Datamonitor (2006). 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A study of Consumer Value-added Services in Mobile Commerce-Focussing on Domestic Cellular Phone Companies in Taiwan, China. ICEC-05, August 15-17, 2005, Xi’an China. 18. Tesco (2008). Every Little Helps-Tesco. Available online at http://www.tescocorporate.com/insidetesco.htm (July 6, 2008) 19. UDHR (1948). Universal Declaration of Human Right. Available online at http://www.un.org/Overview/rights.html (July 3, 2008) Read More