E-commerce Value Chain - Tesco - Case Study Example

E-commerce is an outcome of the advanced information technology that has brought businesses closer to their s and suppliers. Both new and oldbusinesses use internet as a platform for exchange of information. E-commerce has generated new wealth through entrepreneurial start-ups and corporate ventures (Amit and Zott 2001). It is also transforming the rules of competition for established businesses. The new digital economy is a new way of doing things which enhances speed, quality and flexibility. While the process may be smoother, it has also enhanced competition, because of the web of networks and interrelationships. Turban et al have compared the internet economy to the ecosystem in nature because the users find their own ways and means to generate profits and service the customers. They create an environment conducive to attract the customers and suppliers and make changes as the situation demands. Today the internet has scores of online businesses 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 and Zott 2000). However, the internet ecosystem has a business model that has enhanced the value chain and eliminated the dis-intermediaries. There are various business models that operate on the internet each having its own advantages and benefits for the participants. This is because the internet is an open and non-proprietary platform for collaboration and communication. It has allowed free information sharing and close connections with customers and among supply chain or business ecosystems partners’ information systems (Lee and Vonortas 2003). This results in benefits like real time pricing, flexible products and services, low cost of distribution as the intermediaries can be eliminated. The extensive reach and the richness of the information can be maintained between the ecosystem partners. The digital assets for a firm include the information about the customers whereby they are able to provide value across different markets. Information is a source of revenue for the digital economy and this enhances transparency. Business offer virtual online stores where the customers can visit stores, compare prices and take an informed decision. In the digital world keeping pace with the change that is taking place is important and firms must learn to adapt to the changing business environments. Today there are definite value drivers of e-commerce, which refers to any factor that enhances the value created by a business model (Amit and Zott 2000). A firm’s business model is a crucial source of value creation. Value chain in e-commerce stretches beyond the firm’s value described by Porter and does not pertain merely to the strategic networks between firms or identifying the core competencies. The business model drawn by Amit and Zott is based on the value chain analysis, network theory and transaction cost economies. Different sectors have their own business models which too undergoes changes on a daily basis. In the retail sector Tesco, UK´s leading grocery chain, has been exemplary in creating value both for its suppliers and the customers. It operates in the ecosystem and maintains excellent relations with all its partners. While some perceive the internet as little more than a new marketing channel (Okoli 2007), Tesco has been offering not only an online store but also acts as a portal (Rowley 2003). This suggests that there is no unifying theoretical framework that can understand the competitive environment that the internet has created. The internet has permitted any number of firms to come up which signifies that the barriers of entry are low. This could possibly also be a reason why many fail in their ventures but this has also given the firms an opportunity to operate e-commerce as well as carry on traditional business. The internet ecosystem includes electronic data exchange, interconnected enterprise systems, software agents among others. In fact the entire system takes place with the focus on company profits and value creation for customers. The internet ecosystem can create a virtual organization which is a temporary network of independent companies that are linked together by information technology to share skills, costs and have access to each other’s markets. While maintaining the reach and the richness of information is possible through the internet, there are certain drivers of e-commerce - transaction costs, lock-in, and the value chain. The customer value chains are the most important and these have been re-evaluated. Any exchange should lead to the fulfillment of the customer need. Exchange value has been enhanced as sellers are able to cross barriers and borders to reach the customers in real time and at minimal cost. The transaction costs have been reduced to the minimum as the internet brings rich information to a great number of people both simultaneously and cost-effectively (Tse 2007). Customers are educated and capable of taking faster informed decisions and such improved exchanges have helped to mitigate the adverse and opportunistic behaviours of the sellers. This implies that along with reduced transaction costs there is transparency in all dealings. This has been possible because the internet ecosystems are open platforms where anyone can interact with anyone else. The transaction uncertainties are reduced which increases consumer confidence. The internet has brought people online and has helped them to meet their physical needs and enhance their social lives (Okoli 2007). B2C companies like Tesco have taken advantage of this strong effect that internet has on consumers and build online communities. This gives a feeling to the consumers that they are real people when they shop online rather than interacting with faceless technology. This is important because as the customer expectations keep changing, and the human interaction is almost negligible in such exchanges (Amit and Zott 2000). A firm’s boundaries become blurred and the customer receives multiple offers. Tse contends that real issues are reduced to digital codes and the descriptions are very thin. Internet fails to establish identity, build trust and create rapport. Internet strips out a lot of information but these should be used to provide a balance and give the right perspective. To be meaningful the text must be accompanied by the right context otherwise internet would just be passing on data and not information, says Tse. Tesco however uses the data to extract information. It is very easy in the internet ecosystem for the customers to be distracted by competitive offers, which made the e-commerce firms to try and lock-in the customers. This helps in adding value to the operations and marketing efforts. Lock-in is considered a driver for the success of e-commerce and is a challenge in the retail industry. The e-commerce companies must find ways to motivate the customers for repeated purchase. They go in for micro-level marketing activities that enables individualized data collection and thereby in market segmentation (Burt and Sparks 2003). Tesco publishes newsletters for different segments. Tesco has partnered with iVillage, a web site owned by Tescos internet distribution division, which brings together content, community and commerce. In addition to the active involvement by the management, the active users contribute valuable guidance and advice which helps the management in the decision-making process. This has allowed the company to establish an emotional link with the consumers because Tesco has demonstrated that they are cognizant of the consumer needs. They have been able to enhance their image and create a differentiation in the competitive market place. Virtual communities like these provide some degree of stability, growth, loyalty and commitment among the ecosystem members (Flavian & Guinaliu, 2005). Visitors develop a sense of belonging which in turn increases 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 ecosystem becomes. Another step towards locking-in customers has been the introduction of Club Loyalty Cards by Tesco. This is important because a stable customer base is a core business asset (Rowley, 2006). These cards give out a lot of information about the purchase habits of the consumer and Tesco utilizes this information through data mining techniques to enhance the internet experience of the customer. According to Tse the website should be tailored to meet the needs and requirements of the individual customers. Tesco has been able extensively to cater to this need. This enhances the buyer-seller relationship and the customer is inclined to return to the website in future. Even in the internet ecosystem proper alignment is critical as in traditional business models (Delaney-Klinger, Boyer & Frohlich, 2003). Tesco balances customers’ demands with the need for profitable growth. The various functions include 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 increase the credibility and enhance the confidence level among the consumers. There should be coordination of functional level strategies as merely trying to optimize individual functions can lead to failure. E-commerce value chain would include market research, new product development, procurement and sales. E-commerce value chains ignore the laws which dictate the opening and closing hours of any store (Burt and Sparks 2003). The online shopping malls or virtual stores are open 24x7 offering service to the customers who can place orders or check the status of an order previously placed. Tesco has thus been bale to add value to its chain by extending its reach globally and it now rests on the customers reach to get online. Since there are too may players in the internet ecosystem it depends on the individual player to create value for the customers. Tesco has been able to add value for its customers through right merchandise and wide range of goods on offer. Amit and Zott contend that retailers can create new methods of producing, marketing and selling. Building a brand name is essential in e-commerce. Tesco had the advantage of its existing brand name but merely having price and cost advantages do not make any e-commerce unit sustainable. The traditional brand owners would avoid the first-mover advantage because it is first essential to build the web strategy. One such strategy is to eliminate the role of intermediaries. This is possible through internet as the supplier network can be build with effective supply chain management and procurement become easier while being cost effective. The retailers involved in e-commerce are under constant threat from the future dis-intermediators and external re-mediators who can take away their business in part or whole. In fact in the financial services sector there are forces that are shaping their strategy for inter-organizational communication and e-business (Mulligan and Gordon 2002). Because of continuing cost pressure and shrinking margins it has become imperative to implement enhanced technology for better customer service delivery. Customers demand real time data and financial transactions are now being executed to customer demands. The role of the brokerage houses and agents can be eliminated. All of these require web access and hardware processing power. Many first-movers suffered with wrong strategy and they feared that the new movers would take away their market share. For Tesco moving into e-commerce was easy because they had an established brand. 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. Tesco has also entered the medical insurance sector and provides cover on phone or across the internet. This way they have been able to eliminate the role of intermediaries. This is the benefit of the ecosystem where it is possible to service the clients directly to their satisfaction and also retain the margins which would otherwise have to be shared by intermediaries. It can thus be concluded that within the internet ecosystem virtual markets exist which are characterized by high connectivity. Virtual organization exists within the eco system which has access to rich information and a wide reach. Customer value chains have been re-evaluated within the internet ecosystem. It has been possible to eliminate the intermediaries thereby enhancing the customer service and the profits of the organization. The drivers of value chain include enhancing the customer experience, retaining the customers and reducing the costs for all members within the ecosystem. E-commerce firms in every sector have been able to take advantage of e-commerce. Information is the greatest asset in e-commerce and the importance of data collection is enhanced when this valuable information can be transformed into information through the use of sophisticated software. The value chain of course requires all participants to be transparent in their dealings and information. The success of the value chain lies in focusing on the profits of the firm and on customer satisfaction. The internet ecosystem has been able to transform the way firms operate and enhance the value chain for the customers. References Amit, R & Zott, C 2000, Value Drivers of E-Commerce Business Models. Amit, R & Zott, A 2001, Value drivers of e-commerce business models, Chapter 2, Creating Value, viewed online 15 April 2009, from http://books.google.co.in/books?hl=en&lr=&id=77dfazm7bKwC&oi=fnd&pg=PA15&dq=customer+value+chanis+e-commerce&ots=__7H27Tz1N&sig=bBJl4WrRpgusEumJLAf0Nw4eJM0#PPP1,M1 Burt, S & Sparks, L 2003, E-commerce and the retail process: a review, Journal of Retailing and Consumer Services, vol. 10, pp. 275–286 Delaney-Klinger, K Boyer, KK & Frohlich, M 2003, The return of online grocery shopping: a comparative analysis of Webvan and Tescos operational methods, The TQM Magazine, vol. 15, no. 3, pp. 187-196 Flavian, C & Guinaliu, M 2005, The influence of virtual communities on distribution strategies in the internet, International Journal of Retail & Distribution Management, vol. 33, no. 6, pp. 405-425 Lee, C & Vonortas, NS 2003, Vusiness Model Innovation in the Digital Economy, Chapter XI, Social and Economic Transformation in the Digital Era, viewed online 15 April 2009, from http://books.google.co.in/books?hl=en&lr=&id=YdICTQsmxzQC&oi=fnd&pg=PA163&dq=Turban+-+internet+ecosystem&ots=TXjFGZQa84&sig=vyNRSYMhJbPVCTcmasa8aWgdqKY#PPR4,M1 Mulligan, P & Gordon, SR 2002, The impact of information technology on customer and supplier relationships in the financial services, International Journal of Service Industry Management, vol. 13, no. 1, pp. 29-46. Okoli, C 2007, The internet competitive landscape: insights from organisational ecology, Int. J. Business Environment, vol. 1, no. 4, pp. 411-427 Rowley, JE 2003, Beds, insurance and coffee - a complete retail experience from Tesco, British Food Journal, vol. 105, no. 4/5, pp. 274-278. Rowley, J 2006, Customer relationship management through the Tesco Clubcard loyalty scheme, International Journal of Retail & Distribution Management, vol. 33, no. 3, pp. 194-206 Tse, T 2007, Reconsidering the source of value of e-business strategies, Strat. Change, vol. 16, pp. 117–126 Read More