Management Information Systems - Customer Relationship Management Systems in Retail Sector - Research Paper Example

The effects Relationship Management systems in retail sector. The proliferation of the Internet and online growth has facilitated novel business opportunities through the piecemeal evolution of electronic commerce, thereby creating a new business model accommodating the challenges of digital trading. However, the rapid pace of online business activity has led to ad hoc responsive retail strategy measures in an attempt to balance the interests and protection of consumers whilst simultaneously facilitating market growth. Traditional business models cite “location, location, location” as the critical factor for commercial success, however the hallmark of e-commerce is that issues of location in the physical sense are not relevant (Lloyd, 2004). As such, the concept of “location” has created an internal paradox within this new business model, resulting from the evolution of novel legal issues, where “location returns very much to the forefront” (Lloyd, 2004). Furthermore, it has been argued that the central issues raised by e-commerce are where the contract is made, the governing law, appropriate tax regime and consumer protection (Lloyds, 2004). This in itself highlights the competing interests for retail management strategy operating at the heart of e-commerce; namely, the growth of business opportunities due to relative reduction in operating costs vis-à-vis the consumer rights against the shield of anonymity and bargaining power afforded by online business transactions. Moreover, it is submitted that directly correlated to the proliferation of the internet business model is the effects of customer relationship management systems (CRM), which is the focus of this paper. It has distinctly altered the way that companies view strategy, with a distinct shift from product focused strategy to customer relationship management, which is “underpinned by information systems convergence and the development of supporting software, which in turn promises to significantly improve the implementation of Relationship Marketing principles” (Ryals & Knox, 2001). CRM essentially stems from relationship marketing and early works of Berry (1983) and Reichheld (1996), which indicated that a 5% growth in customer retention rates culminated in a mean customer lifetime value figure ranging between 35% to 95%, with knock on effects on profit margins (Ryals & Knox, 2001). There are many definitions of CRM but in broad terms, CRM is defined as an all embracing approach which integrates sales, customer service, marketing, field support and other functions that touch customers (Christopher et al, 1991). Moreover, Galbreath posits that effective with effective CRM activities “an enterprise performs to identify, select, acquire, develop, and retain increasingly loyal and profitable customers”(Galbreath, 1998 at p.14). For example, this is further evidenced by Tesco’s customer orientated marketing strategy, spearheaded by the famous tag line “every little helps”. Additionally, they were one of the first big companies to begin a low priced own label range of goods and loyalty card system under different categories in an attempt to retain its customer base. CRM therefore embodies the simultaneous operation of distribution channel members, including online and offline customers and “is a combination of business process and technology that seeks to understand a company’s customers from the perspective of who they are, what they do, and what they’re like” (Couldwell, 1998). Moreover, Kutner and Cripps posit that effective CRM is rooted in four central relationship based principles: 1) Customers should be viewed as assets; 2) Customer profitability will inherently be variable with some more desirable than others; 3) Customers vary in their requirements, preferences, purchasing behaviour and price sensitivity; and 4) Understanding customer drivers and profitability enables company to tailor their services and distribution channels to maximise the efficacy of the customer base needs (Kutner & Crips, 1997). As such, the e-commerce business model highlighted a fundamental shift in customer and business relationship with an intense focus on CRM. Moreover, the main objective of CRM is to identify, qualify, acquire, develop and retain increasingly loyal and profitable customers by delivering the right product and service to the right customer, through the right channel, which has become particularly pertinent in the multi-channel challenge reshaping retail strategy. Additionally, the factors highlighted by Kutner & Crips (1997) highlight the importance of understanding consumer behaviour, which is vital to effective CRM. Several studies report that although consumers regularly utilise e-commerce websites for browsing and searching, they often do not conclude this process with online purchasing and the percentages of consumers engaging in online purchasing varies from 24% (Ahuja et al., 2003) to 32% (Lee, 2002). Based on these statistics it is suggested that consumers move between online and offline channels during the course of the consumption process, and that they effectively decide at which stage of this process they want to conduct through which channel (Forsythe & Shi, 2003). Black et al further investigated why consumers use particular channels and the results demonstrate four categories of factors influencing consumer choice of channel: 1) Consumer characteristics; 2) Product characteristics; 3) Channel characteristics; and 4) Organisational factors (Black et al, 2002) Other researchers such as Gupta et al (2003) further developed this and found that after making purchases through one channel whether online or offline, loyalty will be dependent on how risk averse the consumer is (Gupta et al, 2003). In a study on the influence of product characteristics on consumer patronage frequency, Chaing et al (2004) have found that the most influential attributes vary across product categories and Schoenbachler and Gordon’s study (2002) on organisational factors that influence consumer channel choice demonstrated that businesses with a multi-channel strategy are better suited to cater to consumer channel preferences than businesses focusing on a single channel, which is reflected further in Argos’ multi-retail strategy. Moreover, a literature review regarding consumer channel the multifarious reasons as to why consumers may decide to use or avoid specific channels in specific in certain circumstances, however there is a lack of consensus as to why consumers combine the use of several channels for different purposes during the consumption process (Schoenbachler & Gordon, 2002). The literature on contemporary consumption behaviour offers potential explanations For example, Laing et al argues that contemporary consumption behaviour is shaped by characteristics of the post-industrial society and that the internet business model has fuelled availability and access to information and the ability of consumers to utilise this information (Laing, et al, 2003). As a result consumers have potentially become empowered in their interactions with business, shaped by numerous parallel consumer interactions and consumer types (Laing et al, 2003). For example, Laing et al’s study gives the example of parallel channels in the tourist industry, for example one consumer type will call a travel agent for deals, search on the internet and then order online or through a travel agent (Laing et al, 2002). Alternatively, the Laing et al refer to a second consumer type which demonstrates a different holiday planning process undertaken by another consumer, who enjoys going to the travel agent and using other channels such as catalogues. Laing et al further argue that the central to this is the efficacy of information delivery across the various channels (Laing et al. 2003) and accordingly, by analogy Argos’ multi-channel retail strategy has to account for variances in consumer demand (Laing et al, 2003). To this end, it is posited that effective CRM integrates sales, marketing, service and enterprise resource planning and core supply chain management functions simultaneously, whilst working on customer relationship marketing (Ryals & Knox, 2001). In terms of practical applicability of CRM to retail strategy, it is submitted that retail businesses (particularly in the multi-channel marketplace) are more successful if they focus on obtaining and retaining shares in the customer marketplace rather than a share of the actual product base, particularly in light of the numerous outlets. Indeed, Ryals and Knox argue that the following are key characteristics of CRM in optimum retail strategy: 1) Customer relationship focus; 2) Data gathering and data retention on customer preferences; 3) Use of dedicated support software to analyse gathered data; 4) Micro-segmentation of markets according to customer requirements; 5) Customer value delivery through detailed and integrated customer profiles; and 6) A change in approach from product centred portfolios to customer focused portfolios (Ryals & Knox, 2001). To this end, it is submitted that effective CRM is vital to retail strategy in gaining new customers through online and offline marketing communication activities, promotion and direct email incentives (Trapp, 2007). Indeed, an investigation into CRM by the Independent in 2007 highlighted the efficacy of CRM in retail by analogy with the corner shop “if you’re a corner shop, say, it’s much more straightforward to serve your local customers than if you’re a supermarket chain. You know what the customers want because you seem them on an almost daily basis….. it’s this knowledge and understanding of customers that big companies were trying to replicate when they started to invest in CRM a few years ago” (Trapp, 2007). Moreover, in the CRM focus, Trapp highlights the importance of CRM in developing an insight into customer preferences and comments that “”Insights” is the word in of the moment in consulting circles. Everybody seems to want that extra little bit of information that gives them an advantage over its rivals. Much has been made in recent years, of how, for example, Tesco seems able to anticipate warm weekends and get the right amounts of beer and barbecue supplies into its stores while its rivals sell out. It’s largely down to analysis” (Trapp, 2007). If we further consider this in terms of effective customer relationship management “at the core, CRM is an integration of technologies and business processes used to satisfy the needs of a customer during any given interaction. More specifically, CRM involves acquisition, analysis and use of knowledge about customers in order to sell more goods or services and to do it more efficiently (Bose, 2002). Moreover, the “customer” includes a wide definition including vendors, channel partners, or virtually any group requiring information. This is further evidenced by Tesco’s CRM strategy and implementation via partnership with Accenture in Korea (www.accenture.com/global/services/By_Industry/Retail/Client_Successes) Accenture provided the CRM support technology for the retail joint venture between Samsung and Tesco to break into Korea’s competitive retail market, by creating a Homeplus discount store chain, which has now proliferated to 30 locations across the capital of Seoul (www.accenture.com/global/services/By_Industry/Retail/Client_Successes) Accenture highlight that there were significant existing players and barriers in the Korean market place with intense competition across all sectors. Other barriers facing the partners were a limited number of potential store locations and a high cost of site acquisition(www.accenture.com/global/services/By_Industry/Retail/Client_Successes). Korean retailers also face the difficulties of high cost supply chains and high store maintenance costs, and therefore Tesco had to implement a retail concept which would fill a niche marketplace and deliver to the Samsung joint venture the growth it needed to achieve goals geared towards the Korean market place. To this end, it engaged Accenture for its CRM best practice and capability in Korean and global retail markets, which has proven successful in the growth of the Homeplus stores in Korea (www.accenture.com/global/services/By_Industry/Retail/Client_Successes) . Accenture highlight key factors in the success of the Korean venture being linked to effective CRM. Firstly, the CRM strategy operated in four distinct phases, firstly by undertaking extensive research to gain customer insight (www.accenture.com/global/services/By_Industry/Retail/Client_Successes). Secondly, after confirming Samsung and Tesco’s strategy and objectives in the marketplace, Accenture profiled potential customer segments to define the right market. In Phase 2, Accenture undertook a customer segmentation exercise by assessing the value of various segments based on their size, spending patterns and growth potential. (www.accenture.com/global/services/By_Industry/Retail/Client_Successes) Accenture then identified the most attractive of these target segments and developed the value proposition based on this profile, delivering to their preferred products, pricing, brands and service levels (www.accenture.com/global/services/By_Industry/Retail/Client_Successes) Additionally, effective CRM may in fact require radical changes the corporate structure and culture. If an enterprise is not already customer orientated, it requires customer relationship leadership, which centres on CRM in retail strategy. Moreover, Chung-Hoon Park and Young-Gul Kim argue that “according to the content and interaction types, customer information can be classified into three types: 1) information of the customer ; 2) information for the customer; and 3) information by the customer (Chung Hoon Park and Young-Gul Kim, 2003). Additionally, they can utilise data mining technology to analyse target customers and separate profitable customers need, understand customer value, identify the perceived value of the product and deliver customer value effectively to sell more products to them and increase profitability of organisations (Chung Hoon Park and Young-Gul Kim, 2003). Alternatively, the evolution of the internet business model has further impacted the way business operations are run in many ways (Chaffey, 2006). Moreover in terms of Customer relations, Robins argues that two business consequences from this phenomenon; namely the “extensive exploration of the content of the new e-marketing mix” and “the internet is fostering closely integrated, holistic, customer focused and innovative marketing” (Robins, 2000 p.23). Moreover, Chaffey posits that companies marketing on the Internet are utilising technology as a vital source of competitive advantage than size. Additionally, through the internet model, businesses are focusing their strategy on CRM software to co-ordinate customer communication can be tailored to the internet (Chaffey, 2006). Moreover, they can utilise such technology to supervise individual customer demand and respond with bespoke products, which is vital to multi-channel retail strategy (Chaffey, 2006). Indeed, the internet business model has clearly segmented the retail marketplace and as such, “no enterprise can any longer succeed in distinguishing itself through operational excellence, customer intimacy, or product innovation without understanding the needs and desires of its customers” (Jeremy Galbreath and Tom Rogers, 1999). Peppers and Rogers further argued that “Organisations will be more successful if they concentrate on obtaining and maintaining a share of each customer rather than a share of the entire market” (Peppers and Rogers, 1995). Therefore, CRM has become vital as part of corporate management strategy, particularly in the retail sector, further fuelled by the multi-channel e-commerce driven marketplace. Indeed, leading industry body for global e-retailing IMRG estimates that currently a quarter of all UK shopping is undertaken online via the internet or other mobile devices within a market estimated at approximately £80billion according (www.imrg.org). Signals of this prolific growth have been evident since 2003, which has resulted in a constant drive by retailers to introduce new delivery mechanisms to broaden customer reach (Diamond & Pinter, 2004). As such, this has seen a shifting approach in multi-channel retail strategy from bricks and mortar to multi level formats including home shopping and mobile commerce (Levy & Weitz, 2008). Initially, it was difficult for traditional retailers to envisage how this new channel would work in unison with the pre-existing infrastructure therefore the first mode of multi-channel retailing involved integration of two platforms with an effective cloned copy in the form of home shopping (Diamond & Pinter, 2004). However, this led to segmentation and viewing of the two models as separate entities in competition. The difficulty of retailers to initially shift their outlook was compounded by the growth of unmanageable proportions of the Internet, interactive digital television, mobile commerce and console technologies, threatening the customer base and fragmentation (Levy & Weitz, 2008). Moreover, some commentators argued that the more channels approach to multi-channel retailing ignored the critical part, the customer (Laing, Hogg & Newholm, 2003). Indeed, the multi-channel retailing paradigm has shifted control to customers that are more tech savvy with increased expectations including consistent pricing and best value offers, loyalty points being consistent through all channels and the ability to check the status of any order placed online(Schoenbachler & Gordon, 2002): Therefore it is submitted that it is important to understand consumer behaviour in any approach to multi channel strategy in the current market (Levy & Weitz, 2008). Whereas previously customers would enter the store and decide on the make and model of product desired and then go home with their purchase, in the current multi channel marketplace, customers often research on the web prior to visiting the store, therefore effective interaction between the online presence and the bricks and mortar model is vital (Van Dijk et al, 2002). This point in turn further adds gravitas to Ryals and Knox’ arguments regarding the importance of CRM particularly in the retail sector. This is further evidenced if we consider UK based company Home Retail Group, which operates through Argos, which is estimated to sell more than 18,000 general merchandising home products (Home Retail Group –Financial and Strategic Analysis Review, 2008 www.researchandmarkets.com./reports/690777). The delivery-to-home operation of the Argos brand culminated in sales of approximately £4.2 billion in 2008 with the Argos website being the second most visited retail website in the UK (www.homeretailgroup.com). Moreover, Argos operates three central warehouses in the UK and the first two warehouses ran on order management; however the contemporary model has impacted the supply chain model with the existing in house warehouse management system being unable to cope with the volume demand from online orders (www.homeretailgroup.com). Moreover, it is arguable that the proliferation of the multi-channel model could in fact have signalled a new tide against the recent trend of losses and closures within the industry, particularly within the emerging online market as evidenced by the rapid growth of “virtual” online media outlets (Home Retail Group –Financial and Strategic Analysis Review, 2008: www.researchandmarkets.com./reports/690777). As such, Argos Direct has introduced systems from third party vendors to address demand in the third warehouse, with the implementation of a new warehouse management system as part of its CRM strategy (www.homeretailgroup.com). In the 2008 Home Retail Group Annual Report it was reported that the new supply chain model has been a success with a reduction in clerical work and ensuring maximum customer service. This highlights the importance of operations management and an effective supply chain network as part of the multi-channel retail strategy going forward. For example, the manufacturing and service industries are characterised by short product life cycles and large budget requirements for research and development, fuelled by changing consumer habits and requirements (Smith, R.D. 2006). This is further evidenced by the demand from online custom at Argos direct and it has been submitted that a central element of this success is logistics management and understanding of the global supply chain (www.homeretailgroup.com). Moreover, it is precisely the simultaneous management of CRM technology and distribution, which has contributed to the sustenance and growth of Argos in the multi-channel retail market. A prime example of this is Argos’ engagement of Manhattan Associates for the delivery of a new in house CRM based warehouse management system to address significant business volume increases. The efficacy of this partnership as part of Argos’ multi-chain retail strategy is further described by Manhattan Associates in their 2008 report in Figure 1 below: Source: Manhattan-Argos Case Study: www.manh.com/library/MANH-Argos-CaseStudy.pdf In the Home Retail Group’s Annual report 2008 it states that “our multi-channel offer gives consumers choice and flexibility. Argos and Homebase customers can shop in-store from home or a combination of both (www.homeretailgroup.com) Therefore as it is now the consumer that seeks out the channel providers to fulfil their desired needs, the integrated multi-channel is arguably as much about internal operations and suppliers as it is about customer facing services. Van Dijk posits that a successful multi-channel retail strategy is as much, if not more about internal operations and suppliers as it is about customer-facing services and that a successful multi strategy channel should focus on the following: 1) Clarity within the organisation 2) Customer base, 3) Improving marketing and customer understanding 4) Providing customers with a seamless service experience 5) Improving demand planning and distribution 6) Adding channels selectively according to their strengths and consumer preferences Moreover, research indicates that consumers move between online and offline channels and therefore there are numerous factors influencing multi channel uses, which are complex and dynamic (Laing, Lewis, Foxall & Hogg, 2002). To this end Argos’ multi-channel strategy has focused on achieving successful interaction between the online and offline channels to reflect changes in consumer behaviour as evidenced by the supply chain strategy, which has become crucial to Argos’ success and continued relevance as a brand in the marketplace. Therefore, it is submitted that not only is effective CRM vital to retail strategy within the contemporary multi-channel marketplace, it is further imperative for the retail sector to ensure successful implementation of CRM through “effective management of functional interdependencies through process teams” (Ryals & Knox, 2001). This in turn requires a change in corporate culture to ensure that the retail sector remains customer centric to maximise profitability within a changing business model. Bibliography Achrol, R (1991). Evolution of the marketing organisation – new forms of turbulent environments. Journal of Marketing, pp. 77-93. Ahuja, M., Gupta, B. and Raman, P. (2003). 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