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Chapter 2Retailing in

Electronic Commerce

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Learning Objectives

Define the factors that determine the business models of electronic marketing

Identify the critical success factors of direct marketing

Design the desirable relationship in a direct marketing setting

Analyze the critical success factors of electronic intermediaries

Identify the typical products that sold well in the electronic market

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Observe the reactive strategy of traditional department stores

Discuss whether electronic commerce should always target global markets

Describe the consumer’s shopping procedures on the Internet

Discuss the types of aiding-comparison-shopping devices

Describe the impact of EC on disintermediation and re-intermediation in retailing

Learning Objectives (cont.)

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Overview of Electronic Marketing Structure

Business-oriented Electronic Marketing (B2B) Needs more precise record keeping, trackability,

accountability, and formal contracts, usually with high volume of transactions and large amount payments

Consumer-oriented Electronic Marketing (B2C) Mostly online; on the Internet Growing offline too, mainly by using smart cards, although it is still

experimental

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Advantages of Electronic Marketing

Direct marketing Customization Online customer service Electronic shopping malls:

Intermediaries (e.g. Internet Mall)Stores (e.g. Amazon, J.C.Penney Online)

Electronic intermediaries Global marketing

Customers can order from cyberstores 24 hours a day, 7 days a week from any place in the world

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Forecast of the B2C Electronic Markets

Initial Forecast of B2C Electronic Market Size

Forecasting Institutions 1997 2000

IDC 1,000 117,000VSAComm 48 3,500VeriFone 350 65,000Actif Media 436 46,000Killen & Assoc. 775,000Yankee 850 144,000Jupiter 45 580E-land 450 10,000EU 228,000USA 200EITO 363 200,000AEA/AU 200 45,000Hambrecht & Quest 1,170 23,200Forrester 518 6,579

[Source: OECD, 1997]

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Kinds of items sold

Forecast of the B2C Electronic Markets (cont.)

(Unit: Millions of U.S. Dollars)

Items 1997 2000

Apparel 46 322Gifts/flowers 45 658Books 16 Not availableFood/drink 39 336Clothing 89 322Entertainment 85 1,250Subscription services 120 966Pornography 52 Not availableMusic 9 186Online games 127 1,013Consumer finance 68 Not availableConsumer insurance 30 1,110

[Source: OECD, Sept. 1997]

Initial Forecast of B2C Electronic Market Segments

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What sells on the Internet?

Forecast of the B2C Electronic Markets (cont.)

Items with high brand recognition Goods that can be transformed to digitized goods

like books, music, and video Items with security guarantee given by highly

reliable or known vendors Relatively cheap items Repetitively purchased items such as groceries Commodities with standard specification Items whose operating procedures can be more

effectively demonstrated by a video Packaged items which are well known to customers

and which cannot be opened even when customers physically visit the store

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Business Models of Electronic Marketing

Direct Marketing Manufacturers

Vs.

Indirect Marketing Manufacturers

Full Cybermarketing

Vs.

Partial Cybermarketing

Electronic Store

Vs.

Electronic Broker

Electronic Mall

Vs.

Electronic StoreActive Strategic Posture

Vs.

Reactive Strategic PostureGlobal Marketing

Vs.

Regional Marketing

Sales

Vs.

Customer Services

Generalized Mall

Vs.

Specialized Mall/Store

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Proactive Vs. reactive strategic posture toward cybermarketing Proactive strategic posture toward cybermarketing

a company’s main distribution channel is the Internet, and internal management such as inventory and operations management is focused to affect the benefit of cybermarketing

Reactive strategic posture toward cybermarketingthe traditional physical distribution channel is left as the

company’s main distribution channel even though the company has opened an online distribution channel

Global Vs. regional marketingSales Vs. customer services

Business Models of Electronic Marketing (cont.)

© Prentice Hall, 2000 10

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Active and full direct Marketing

Direct Marketing

Dell Computer Corporation Case

Founding spirit of dell: telemarketing

Astonishingly high growth and returns

Revenue via the Internet

Dell’s products on the Internet

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Dell’s Critical Success Factors

Direct Marketing (cont.)

Price competitiveness owing to mass-customization and direct marketing

Database marketing and customer intimacy Global reach and value added services at a

single contact point High reliability and reputation Delivery support Advanced web applications

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Reactive and Partial Direct Marketing

Direct Marketing (cont.)

Sell their products mainly through traditional channels like department stores, discount stores, and franchises

Ford Caseincluding dealers as partners is optimal because orders

that are received directly by the automakers may not be physically fulfilled without the cooperation of dealers

the received orders can then be assigned to the nearest dealer who owns the desired car in the inventory

the dealer’s inventory information should be shared by automakers through a common network

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Ford’s reactive direct marketing model (procedure)

Direct Marketing (cont.)

Reactive and Partial Direct Marketing

Select the brand of car or truckthat interests you

Choose the body styleyou most desire

Select the option package(s)that appeals to you

Add other individual optionsto build your most comfortable, useful customized vehicle

Pick your favorite exterior paint colorPick the interior upholstery that suits your tasteThen the Online Shopping Service System will provide

you with a “Vehicle Summary”You can change options to accommodate the budget,

and finalize the configurationDecide whether to lease or buy,

with the aid of Payment Calculator SystemSearch a dealer online bydealer name, city, or state

Send the “Vehicle Summary” to the dealerThe dealer will contact you

with a price and availability of the vehicle you configuredApply for financing

Ford supports a pre-owned showroom in the following way :

Enter your ZIP codeSearch the inventoryEnter your personal informationSecure your vehicleSelect a dealership for test-drive and deliveryChoose a Ford Extended Service PlanExplore leasing or financing optionsPrint your orderConfirm your orderConfirm you deliveryTest drive and accept delivery

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Online Customer Service

Provided in conjunction with online salesProvided to products which are sold offlineExample: service and support homepage of

Hewlett Packard (HP) By using computer telephone integration (CTI)

technology, the same screen that a customer sees can be automatically displayed to the human agent (and vice versa) who responds to the customer’s call watching the online data about the customer

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Active Electronic Intermediaries

Pure electronic mall Company’s retailing business exists only on the

Internet Electronic distributors

take full responsibility of fulfilling orders and collecting payments

Electronic brokersassist the search process of finding the appropriate

products and their vendors

Partial electronic mall Electronic mall as one of existing distribution

channels

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Generalized Electronic Intermediaries

Active Electronic Intermediaries (cont.)

Examples : Choice Mall, and iMall Provide a directory, keyword search engine, message

encryption, optional Web site hosting service and a common platform of electronic payments

Necessary factors to make shopping successfulScreening quality and reliability for assurance

• customers need a reliable screening capability of quality and reliability of brands and companies

• e-brokers should create a trusted third partyCompeting electronic channels

• several electronic channels help in finding the items needed

• e-brokers should provide some differentiated attraction

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Specialized Electronic Distributors

Active Electronic Intermediaries (cont.)

Cyber BookstoresAmazon, Barnes and Noble

Cyber CD StoresColumbia House, Music Boulevard, CD Universe,

and CDNow Digitized Products and Services Stores

Software, games, CDs, and videos Cyber Flower Stores

1-800-FLOWERS

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Reactive Electronic Department Store

The J.C. Penney Case The Internet-based revenue

amounts to only 1 to 2% of $30.5 billion total sales of 1997 (3.5% in 1999)

Catalog13%

Drug Stores32%

Insurance3%

Internet-based

1%

Department Stores51%

Updating prices and adding new items to the electronic catalogs is convenient and inexpensive

Overcoming the limitations of paper catalogs without incurring extra distribution cost

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Electronic Department Stores Worldwide

Reactive Electronic Department Store (cont.)

Marks & Spencer in the U.K., La Redoute in France, Jusco in Japan, Nordstrom in the U.S.A., and Lotte and Hyundai in Korea

Common strategy is finding significant benefits from merchandising online

Offering electronic service on the Internet is a supplementary channel of advertisement

By 2000, 3.5% of all U.S. major retailing will be done online

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Regional Shopping Service

Peapod Case

The leading Internet supermarket, providing consumers with broad product choices and local delivery services

Provide pictures of items, nutritional contents, past purchase records

Users: middle and upper class people, some of whom are single parents, and all of whom are very busy. Also sick and elderly people or those without transportation.

$4.95/month membership fee, and $6.95 service free + 5% of the purchased amount

= cost of delivery service

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Procedures for Internet Shopping :The Consumer’s Perspective

Preliminary requirement determination to meet the needs

Search for the available items that can meet the requirements

Compare the candidate items with multiple perspectives: specification, price, delivery date, and other terms andconditions

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Place an order Pay the bill Receive the delivered items and inspect;

possibly while using Contact the vendor to get service and

support, or to return if disappointed

Procedures for Internet Shopping :The Consumer’s Perspective (cont.)

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Aiding Comparison Shopping

Search hypertext files by agentsSearch in a web-based database both by

human and software agents within an e-mallComparable item retrieval and tabular

comparisonComparisons over multiple mallsComparisons as a multiple criteria decision

making

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The Impact of EC on Traditional Retailing System

Disintermediation and Re-intermediation Disintermediation — the removal of organizations or

business process layers responsible for certain intermediary steps in a given value chaineliminating the traditional intermediaries, such as

wholesalers, distributors, and retailers, to reduce the cost

Re-intermediation — the shifting or transfer of the intermediary functions, rather than the complete eliminationintermediation such as electronic shopping malls,

directory and search engine service, and comparison aids using agents creates the role of re-intermediation

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Impact on Manufacturer’s Distribution Strategy

The Impact of EC on Traditional Retailing System (cont.)

Manufacturer’s monopolistic Internet-based distribution: Levi’s does not allow any one else to sell the Levi’s product on the Internet (policy changed in 1999).

Coexistence with the dealers: This is the case in car distribution.

Regionally mixed strategy: Nike sells on the Internet, but only in the U.S.A.

Mass Customization for Make-to-Order: Manufacturers have to be adaptive to the customized orders of ultimate consumers. This means the manufacturer should be ready for mass customization.

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Managerial Issues

From a manufacturer’s point of view:

Fully committed todirect marketing,restructuring the

current manufacturingand distribution systems

Regard the electronicstore as an additional

channel of distributionOR

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From an intermediary’s point of view:

Commit to thedirectory service

Retailing aspecialized breed

of items

OR

Managerial Issues (cont.)

For existing retailer in the physical space: How to transform its business posture to get the

highest possible customer satisfaction at a minimum operating cost?