Laudon Traver E-Commerce4E Chapter09

8/13/2019 Laudon Traver E-Commerce4E Chapter09

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-commerce. . .

Fourth Edition

Kenneth C. Laudon

Copyright 2007 Pearson Education, Inc. Slide 9-1

Chapter 9Online Retail and Services



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Understand the environment where the online retailsector operates todayExplain how to analyze the economic viability of an

Identify the challenges faced by the different types of

Describe the major features of the online servicesector

Discuss the trends taking place in the online financialservices industryDescribe the major trends in the online travelservices industry today

industry


Blue Nile Sparkles For Your Cleopatra

Why is selling (or buying) diamonds over theInternet so difficult?How has Blue Nile built its su l chain to keecosts low?

over online diamond purchases?

Would you buy a $5,000 engagement ring atBlue Nile?



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Slide 10-5

, -See also Table 9.1, Page 551.

to others in several online viral networksOnline retail increasingly profitable

,Internet users in US are now online shoppers))

Selection of goods online increases, including customized goods Specialty retail sites show most rapid growth as customized retail goodsare developedIncreased em hasis on im roved sho in ex erience e. . eas navigation, online inventory updatesIncreased use of interactive multimedia marketing, e.g., Web 2.0features like blogs, user-generated content, and video, and zoom, panRetail intermediaries strengthen in many areas, e.g., groceries,automobiles, appliance, and furniture dealersRetailers increasingly efficient at integrating multiple channels, from - - -Personalized goods, especially in apparel, become financiallysuccessful.

-


Most online shopping occurs at work, evenings at home


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The Retail Sector Most important theme in online retailing is effort tointe rate online and offline o erationsU.S. retail market accounts for over $8.7 trillion oftotal GDP (2/3rds of all economic activity)Retail industry can be divided into segments, each ofwhich offers opportunities for online retailBiggest opportunities for online retail sales: Thosesegments that sell small ticket items (specialty stores,genera merc an sers, ma -or er ca a ogs,groceries)

a or er e ep one or er sec or mossimilar to online retail sector


Composition of the U.S. Retail Industry . ,


SOURCE: Based on data from U.S. Census Bureau, 2007.


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Online Retailing: The VisionGreatly reduced search costs on the Internet wouldencourage consumers to abandon traditional

Market entry costs would be much lower than those for,

efficient than offline competitorsTraditional offline physical store merchants would beforced out of businessSome industries would become disintermediated asmanu ac urers u rec re a ons p w consumer Ultimately, few of the above assumptions proved to be

, . .not been revolutionizedThis is because consumers consider brand name, trust,


reliability, and delivery time as important as price

The Online Retail Sector Today

Online retailin se ment althou h smallestsegment of retail industry (3%), is growing atexceptionally fast rate (25% per year)Online retail revenues: 137 billion, 120 millionconsumers estimated for 2007

oug n erne user grow as ec ne , eaverage annual spending per user has

, ,Primary beneficiaries of growing consumer

online presence (e.g., Staples, Wal-Mart, OfficeDepot, Best Buy, Sears) as well as first mover


o -com rms e.g., mazon ewegg


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Online Retail and B2C E-commerce is

Figure 9.2, Page 556


SOURCES: Based on data from eMarketer, Inc. 2007a; U.S. Department o f Commerce,2007; Forrester Research, 2006; authors estimates.

Multi-Channel Integration



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na yz ng e a y o n ne rms: ra eg c Analysis

Economic viability: Ability of firms to survive as profitable businessfirms during 1-3 yearsUse two business anal sis a roaches to answer the uestion of economic viability: strategic and financial analysesStrategic analysis of economic viability of a firm focuses on bothindustr as a whole and the firm itself Key industry strategic factors:

Barriers to entry Can new entrants be barred from entering industrythrou h hi h ca ital costs?Power of suppliers Can suppliers dictate high prices to the industry orcan vendors bargain effectively for lower prices? Have firms achievedenough scale to bargain for lower prices from suppliers?

suppliers and thus challenge high prices and high margins?Existence of substitu te products Can functionality of product or servicebe obtained from alternative channels or competing products in different

Industry value chain Is chain of production and distribution in industrychanging in ways that benefit or harm the firm?Nature of intra-industry competition Is basis of competition within


n us ry ase on eren a e pro uc s an serv ces, pr ce, scope oofferings, or focus of offerings? How Is nature of competition changing?

Analyzing the Viability of Online Firms:

Strategic factors that pertain to firm include: as e rm a op e us ness

processes and methods of operation that allow it to achievethe most efficient operations in its industry?

ore compe enc es oes e rm ave un quecompetencies and skills that cant be easily duplicated byother firms?Synergies Does the firm have access to competenciesand assets of related firms either owned outright or throughstrategic partnerships and alliances?Technology Has the firm developed proprietarytechnologies that allow it to scale with demand? Has the firm

developed the operational technologies (CRM, fulfillment,SCM, inventory control) to survive?Social and legal challenges Has the firm put in place

olicies to address consumer trust issues rivac and


security of personal info)? Is the firm the subject of lawsuitschallenging its business model?


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Analyzing the Viability of Online Firms:nanc a na ys s

competitive situation of the firmFinancial analysis helps us understand how afirm is erformin Includes two main parts:

a emen o pera ons: e s us ow mucincome or loss a firm is achieving based oncurren sa es an cos sBalance sheet: Provides a financial snapshot of a


companys assets and liabilities


Factors in assessin Statements of O erationsRevenues: growing and at what rate?Cost of sales (product costs + related costs): compared torevenues; the lower the cost of sales, the higher the gross profitGross margin (gross profit divided by net sales revenues):ncreas ng or ecreas ngOperating expenses (cost of marketing, technology, admin

,amortization): What are they; increasing or decreasing?

Operating margin: Indication of companys ability to turn salesinto pre-tax profit after operating expenses are deductedNet margin (net income or loss divided by net sales or


revenue : e s us percen age o gross sa es revenue a er aexpenses are deducted: increasing or decreasing?


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Current assets cash, securities, accounts, ,

converted to cash within 1 year urren a es e s ue w n year

Long-term debt debts not due until after 1 yearor moreWorking capital (current assets currentliabilities) provides short-term financial health


-

Four main types of online retail businessmodels:

Bricks-and-clicks

a a og merc anManufacturer direct



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Single channel Web firms that generate almost allrevenues from online salesExample: Amazon, Buy.com, Newegg, Drugstore.com

Must build business and brand name from scratch

uickl in an entirel new channelConfronts many virtual merchant competitions

No costs in building and maintaining physical stores, butarge cos s n u ng an ma n a n ng a e s e, or erfulfillment infrastructure, and developing brand nameHi h customer ac uisition costs and stee learnin curveGross margins (retail price of goods cost of goods) arelow


ence, mus ac eve g y e ec ve opera ons opreserve a profit

E-commerce in Action: Amazon.comVision: Earths biggest selection, most customer-centricOffer 3 things to customers: lowest prices, best selection, and

Business Model: Amazon Retail and Amazon Services (merchant anddeveloper services)mazon e a se s goo s mazon oug an en re-se s oconsumers just like a traditional retailer Merchant services called Amazon Market lace lets individuals andsmall businesses sell their products

Another type of merchant services called Merchants@ serves

Amazon collects fixed fee, sales commission (10-20%), per-unit

activity fee, or some combination of theseDeveloper Services: offers Web services that provide developerswith direct access to Amazons technology platform, allowing them



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E-commerce in Action: Amazon.comFinancial Analysis: Greatly improved, but not yet consistentlyprofitable; still heavy long-term debt (see next figure)

Increased revenues from 600 million in 1998 to 10.7 billion in2006Revenues has grown 65% in the past two years

,costsStrategic Analysis: Competition: Online (eBay), offline, and both

-, . ., , ,competes with catalog merchants, e.g., L.L.Bean, Lands EndStrategic Analysis: Technology: Largest, most sophisticated

-

processing systems handling millions of items, status inquiries,gift-wrapping requests, multiple shipment methods) , , ,

lawsuits; ToysRUs lawsuitFuture Prospects: Long-term profitability still uncertain




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Multi-channel Merchants: Bricks andClicks

Com anies that have network of h sical stores asprimary retail channel, but also have online offeringsExamples: Wal-Mart, J.C. Penney, SearsFace high costs of physical buildings and large salesstaffs

, ,warehouses, large-scale, trained staff

Challenges: coordinating prices across channels andhandling returns of Web purchases at retail outlets,leveraging their strengths and assets to the Web,building a credible Web site, hiring new skilled staff,


systems

Established companies that have national offlinecatalog operation as largest retail channel, but also

have online capabilities , . . , ,Victorias Secret, Lillian VernonFace very high costs for printing and mailing millions ofca a ogs eac year w -secon a - e a ercustomer received themHi hest mar ins in retail sector due to ver efficient operations with centralized fulfillment and call centers,extraordinary service, excellent partnership with



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-Single or multi-channel manufacturers who sell directlyonline to consumers without intervention of retailersExample: Dell, HP, Gateway, IBM, Apple

retailers of products must compete on price andcurrency of inventory directly against the manufacturer

Advantages: established national brand name, existinglarge customer base, lower cost structure than catalogmerchants since the are manufacturer of oods and

dont pay profit to anyone else, therefore, have highermargins


Common Themes in Online

Online retail fastest growing channel, has fastest growingconsumer ase, grow ng pene ra on ra e across manycategories of goodsReasons for early difficulties in achieving profit are lowerpr ces e ow cos o goo s an opera ons, a e o eve opefficient business processes, spent too much on customeracquisition and marketing

nce , many on ne re a rms ave egun o ra sepricesDisintermediation has not occurred, and most manufacturersuse e pr mar y as an n ormat ona resource, r v ngconsumers to buy at traditional retail stores

Most significant online growth has been that of offline giantsa - art, enny, . . ean w o are ocus ng onextending brand to online channelSecond area of ra id rowth: s ecialt merchants, e. .,


BlueNile, BestBuy.com, Gap.com, OfficeDepot.com


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Insight on Technology: Using the Web to

Class Discussion

What do shopping bots and comparison sites

Why are shopping bots more successful with

What is the strategy of Shopping.com?

How can shopping bots compare luxurygoods?How will adding content to comparison sites


The Service Sector: Offline and Online

expanding part of economies of advancedn us r a na onsIn the United States, services employs about76% of labor force; accounts for $7.1 trillion



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What are Services?

Service occupations: Concerned with performing

, ,institutions

providing services to consumers, businesses,overnments, and other or anizations

Major service industry groups:FIRE (Finance, insurance, real estate)

TravelProfessional services, e.g., legal and accountingBusiness services, e.g., consulting, advertising, marketingHealth services


Categorizing Service Industries

Within service industry groups, can be further

Transaction brokers ones who act as intermediary tofacilitate a transaction e. . stockbrokers em lo mentagenciesHands-on service provider ones who interact directlyand personally with the client, e.g., lawyers, physicians,accountants

erv ces n us ry ea ures:Knowledge- and information-intense, which makes them

- Amount of personalization (legal, medical, accountingservices and customization financial services re uired


differs depending on type of service


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Online Financial Services

, ,real estate) sector example of e-commerce,

different from what had been predicted ,

insurance, and real estate ones in terms of

Multi-channel established financial servicesrms are s ow ng as es grow an

strongest prospects


Financial Service Industry TrendsFinancial services industry provides fourgeneric kinds of services:

Storage of and access to funds banking,

lendingro ec on o asse s nsuranceMeans to grow assets investment and

Movement of funds banks, credit card firms

Industry consolidation (Financial Reform Act of

1998 amended Glass-Stea all Act and allowsbanks, brokerages, and insurance firms to merge)Movement toward integrated financial services


nanc a supermar e mo e


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u yFinancial ServicesFigure 9.3, Page 624


because of desire to save time and accessn orma on ra er an save moneyMost online consumers use financial servicesfirms for mundane financial management

online financial services are fears aboutsecur y an con en a y; peop e are morecomfortable to shop online than to conduct


financial transactions online


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Bank Amount of Deposits

Checked bank accounts 65%

Moved/Withdraw bank funds 43%

Applied for a credit card 25%

Traded stock 9%

Applied for a mortgage 6%


Online Banking

WingSpanEstablished brand name national banks havetaken substantial lead in market shareOver 80 million people use online banking,

Movement toward online banking is global



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Billions)

Bank Amount of Deposits

.

Citibank Direct (online unit of traditional bank) $9.0

Emi rant Direct online unit of traditional bank 6.0

HSBC Direct (online unit of traditional bank) $4.8


The Growth of Online Banking, 20002010 . ,


SOURCE: Based on data from eMarketer, Inc., 2007b.


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,E*Trade and Ameritrade have been displaced

Charles Schwab) About 6 million U.S. households trade online,

9% of US adult Internet users traded stocksw n e pas mon s o


Multi-channel vs. Pure Online Financial

they prefer multi-channel firms with physicalpresenceMulti-channel firms have lower customeracquisition, conversion, and retention costs

,them more intensively



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Financial Portals and Account AggregatorsFinancial portals: Provide comparison shoppingservices, inde endent financial advice and financialplanning

Examples: Yahoo! Finance, Quicken.com, MSN Money,s oney an nance c anne

Do not offer financial services themselves, but act as steeringmechanisms to online roviders eneratin revenues fromadvertising, referral fees, and subscription fees

Account aggregation: Process of pulling together allof a customers financial (and even non-financial)data at a single personalized Web site

o ee, a ea ng prov er o accoun aggrega ontechnology; used by Merrill Lynch, Citigroup, Chase, othersRaises issues about rivac and control of ersonal data


security, etc.

Online Mortgage and Lending ServicesEarly entrants envisioned market in which mortgagevalue chain would be simplified and loan closingprocess spee e up, w resu ng cos sav ngs

passed on to consumer owever, many o ear y-en ry, pure on ne rms a e(e.g., Mortgage.com) due to difficulties of developing

Today, four basic types of online mortgage vendor: , ,

organizationsPure online mortgage bankersMortgage brokers



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Online Insurance ServicesOnline term life insurance: one of few product groupsin which Internet actually lowered search costs,ncrease pr ce compar son, an resu e n owerprices to consumers

owever, n o er nsurance pro uc nes, e asoffered insurance companies new opportunities for

discrimination

industry is regulated at state as opposed to federallevel; also impacted by channel conflictLeading players include InsWeb, Progressive andInsure.com


Online Real Estate ServicesEarly visions (that the historically local, complex, and

-transformed into a disintermediated marketplacewhere bu ers and sellers would transact directl hasnot been realized

Despite revolution in available information, there has



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Online Travel Services Arguably, single most successful B2C e-commercese ment; attracts sin le lar est audience, and lar estslice of B2C revenuesInternet becoming most common channel used toresearch travel and book reservations2007: $94 billion in revenue, expected to grow to

146 billion by 2010Popular because they offer consumers moreconven ence one s op; o ers con en , commerce,community, customer service) than traditional travel

For suppliers, offers a singular, focused customer




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Travel as an Ideal Internet Product/Service

Information-intensive roduct re uirin si nificantconsumer researchElectronic product in the sense that travelarrangements (planning, researching,comparison shopping, reserving and payment)

Does not require inventory (no physical assets)

excess capacity -

physical presence as required by financialservices


Online Travel Services RevenuesFigure 9.5, Page 596


SOURCE: Based on data from eMarketer, Inc., 2007f.


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Online Travel Services Components

Airline reservations the largest single component ($42.6billion in 2007; $64 billion in 2010Hotel reservations ($24.1 billion in 2002, $45.9 billion in2010)Car reservations ($3.2 billion in 2005, $5.8 billion in2010)Cruise/tour reservations: fairly slow growth since not aswell suited for online environment

Major segments:LeisureBusiness travel expected to be a major growth area ascorporations seek better control of corporate travel expenses


Projected Growth of Online Travel

Figure 9.6, Page 597

Copyright 2007 Pearson Education, Inc. Slide 9-51SOURCES: Based on data from eMarketer, Inc. 2007f, 2005c; autho rs esti mates..


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Online Travel Industry Dynamics

Competition among online providers is intense

Industry is going through a period of consolidation asstronger, offline established firms purchase weakerand relatively inexpensive online firmsSuppliers (the large national airlines, hotel chains,auto rental companies, etc.) are attempting toeliminate the intermediaries such as the globaldistribution systems and travel agencies, using Webas means


The Travel Services Value ChainFigure 9.7, Page 602



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E-commerce in Action: Expedia.com

Online travel services company that providesaccess to information about and sales oftravel arran ementsOriginally started by Microsoft, subsequently

, -into separate public company in 2005

One of top players in online travel services,eneratin revenues of $2.2 billion in 2006




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Online Career ServicesNext to travel services, one of Internets mostsuccessful online services.Dominated by CareerBuilder, Monster (owned byMonster Worldwide), and Yahoo HotJobsOnline recruiting provides more efficient and cost-effective method of linking employers and potential

, - -Enables job hunters to more easily build, update, and

prospective employers and conducting job searches -

nature of process


Why are Job Sites So Popular?

Saves time and money for both job huntersan emp oyers

For employers: Expand geographic reach ofsearch, lower cost, and result in faster hiringdecisionsFor job seekers: Make resumes more widelyavailable and rovides a variet of related

job-hunting services

establish market prices and terms (online



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Recruitment Market Segments

Three major segments

primary focus; placing wide range of individuals at all

Executive search: focuses on placing executives, ,

producing highest revenue potential

professional societies, e.g., Society of Plastics.


Online Recruitment Industr D namics

Major trends:Consolidation: CareerBuilder, Monster, and HotJobstogether dominate the market

specific occupationsLocalization: Local boards compete with local newspapers,Craigslist (source of local job listings)Job search engines (Indeed.com, SimplyJobs, JobCentral) ,recruiting services, sites of individual employers, to providefree, searchable index of job listings in one spot

oc a ne wor ng: n e n; ace oo apps are use ymembers to establish business contacts and networks while

Laudon Traver E-Commerce4E Chapter09

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