- Chapter 2 Creating an Integrated E-commerce Strategy
- The Bonds of an E-commerce Strategy
- Four Positional E-strategic Directions
In creating an e-commerce strategy, it is clearly necessary to align and integrate the four main areas of positional strategic focus: technology, brand, service, and market (see Figure 2.3). This is a challenging task that must be deeply considered at the outset of strategy formulation since both the dollar and opportunity costs of dramatic strategic change after execution can be high. This is not to say that change is not occurring; change in this arena is inevitable and continuous, with victory coming to those who can adapt fastest and be nimble in the face of change. The remainder of this chapter will introduce the basic strategic issues in each of these leadership propositions and consider some of the key interactions between them.
We can find e-commerce strategies that are focused on leadership through technology in all industry sectors. Technology leadership involves the early adoption of an emerging technology to achieve a preemptive position. Many of the companies studied for this book followed this strategy or viewed technology leadership as an integral part of their overall leadership strategy, including UPS, Nortel, SUN Microsystems, Motorola, and Dow Jones.
At the World Economic Forum in Davos, Switzerland, Nortel Networks issued the statement on page 43 illustrating the technical and strategic challenges facing the company in an evolving Internet- and communications-driven marketplace.
B2G & B2B Technology Leadership
An example of B2G-mandated technology change is that originating from the regulatory conditions decreed by the U.S. Department of Energy, which, under the auspice of the Federal Energy Regulatory Commission and the Open Access Same Time Information System (OASIS), mandated that the Internet be used to buy and sell natural gas, as well as to make nominations for gas and pipeline capacity.
The utilities, which through other deregulation have been forced to relinquish monopoly power and become competitive, have been quick to recognize the potential that a technology leadership position offers in the B2B and B2C markets. With their ability to rapidly pass through the learning and experience curves, internalize their learning, and create new infrastructures, utilities such as Florida Power & Light (FPL) have rapidly moved to the front of the technology leadership arena. Utilities such as FPL aim through the use of technology to increase the strength of their customer relationship by offering more informational services and decreasing power costs, thus locking in market share for both residential (B2C) and corporate (B2B) consumers.
While their mandate is to reduce their customers' power consumption, they balance this with a strategy of increasing their market share. Through the deployment of Internet technologies they can achieve this at a lower cost than would have been possible even 5 years ago. The technology leverages the ability of the power utilities to monitor their customers' usage and offer them suggestions on how to be more power efficient. This is a win-win strategy for both the utility and the customer, but it simultaneously changes the nature of competition within the industry. No longer is it based on the lowest-cost solution per kW-hour; it is based on a technology added value strategy that allows the utilities to get closer to the customer and create wider market coverage. The issues surrounding technology leadership strategies are discussed further in chapter 4.
January 30, 2000
Internet, eBusiness to Fuel Trillion Dollar Economic Growth, Nortel Networks Research Says Explosive Growth of Internet Economy Driving Demand for High-Performance Internet
Construction of the high-performance Internet is essential to support the massive increase in eBusiness and other investment fueling the growth of the Inter-net Economy, according to Nortel Networks' research unveiled at the Annual Meeting of the World Economic Forum.
Produced in conjunction with IDC, a leading global consulting firm, the research projects the Internet infrastructure segment of the Internet Economy is expected to more than quadruple to reach $1.5 trillion, larger even than spending on e-Business in 2003. This massive investment will be required to create a high-performance Internet with the reliability, quality, speed and economics that business and consumer demand.
The global Internet Economy is forecast to reach $2.8 trillion to become the world's third largest economy by 2003, larger than the gross domestic product of Germany, France or the United Kingdom.
The study also found that eBusiness is expected to grow by 86 percent annually to reach US$1.3 trillion. Europe will be the fastest-growing region for eBusi-ness over the period with annual growth of 118 percent. eBusiness growth will be driven by the decisions of thousands of businesses to shift billions of dollars of commerce from traditional methods such as EDI (electronic data interchange) to Web-based alternatives.
This is further evidence of what Nortel Networks has been saying for years," said Ian Craig, executive vice-president and chief marketing officer, Nortel Networks. "The explosion in demand for bandwidth and the growing reliance of business and industry on the Web requires building a new, high-performance Internet as a matter of urgency. This is the task on which Nortel Networks is focused. We are leading the way with the Optical Internet, but the opportunity remains huge." "Far from any bandwidth glut, there is a shortage of available bandwidth in both the US and the European market," Craig said. "Nortel Networks has been doubling the bandwidth and halving the cost of fiber optic networks every nine months as we improve the performance of the Optical Internet. The challenge facing us is to deliver an Internet with the reliability, quality, speed and economics that users need and demand." Other key findings of the research include:
The emergence of the Internet as a dynamic branding mechanism has done much to fuel the debate over how to most effectively utilize this benefit within the development of the organization's overall brand strategy. Potentially the most important of these debates focuses on the Internet's ability to influence, change, or reinforce corporate branding. The Internet is unique in modern times as it is a truly new conduit to the customer, and as such it has extensive ability to create a new corporate branding position, to reinforce the existing brand, or to enable the existing brand to be repositioned.
Louis Gerstner, Chairman & CEO: IBM
Branding-it is a very important issue and it will dominate business thinking I suspect for a decade or more.
Source: IBM Executive Conference on Information Systems, Latin America, Miami, FL, September 1, 1998.
The development of an e-commerce branding strategy will clearly mean something different to a new entity than it will to an established organization. The born-on-the-net category is epitomized by Amazon.com, a company that only just commenced selling books on the Web in July 1995 but that had by 2000 sales of $1.64 billion (net sales for fiscal year 1999, as reported in its SEC filing)-a staggering growth rate of 169% over the net sales of $610 million for 1998. Amazon is not only the Internet's dominant bookseller; it is potentially the Internet's most dominant brand. To most North American Internet users, Amazon is a reflection of the Internet's e-commerce potential; to most executives, it is the specter on the horizon, and they do not want to be caught cold like the "café latte" high street booksellers. To the book-buying public, the added value is financially clear-everyday low-cost pricing. However, cost alone is not the only added value factor; convenience and service are the key. The customer feels connected to the company rather than disconnected by the technology. The secret of the branding at Amazon.com is also more than its efficient, quality customer service. It is based on the added value of mass customization. The customer is dealt with the way customers wish to be dealt with-as a valued and familiar client with whom a store worker has built up a long-term relationship. Thus, value comes from recognizing the customer's patterns of purchasing and through making subtle suggestions to the customer rather than using overt direct marketing techniques. The key to mass customization is getting close to the customer and providing the product on demand at a low cost while maintaining sufficient margins for the supplier.
Brand reinforcement comes through reflecting the values of the physical product through the medium of the Internet. A brand reinforcement strategy does not necessarily imply the Internet is used to transact, merely to interact.
The goal of being a leader and developer of Internet sales may not be the goal of every organization. Many established organizations do not actually wish to develop a new sales channel at the current time and hence have determined that a brand reinforcement strategy is a suitable complement to their existing corporate strategy. The goal of this channel is to reinforce the organization in the eyes of the customer. In order to do this the organization has to utilize the added value of "information provision" to its viewers, providing information and building a quality relationship with the customer on a continuing basis through that information content. This is not a static information interchange relationship but a dynamic one in which the customer will expect change and continual value from the relationship or the linkage will be severed, potentially for a significant amount of time. An example of a leading brand reinforcement strategy can be found in the automotive area where BMW is continually stimulating its customers through subtle incremental changes to its site. BMW utilizes the technology to increase the involvement level of potential, current, and past customers. In the past the site has allowed customers to build their own dream car or, at the launch of the M series Z3 roadster, to listen to its engine. However, unlike Amazon, BMW would prefer the potential new owner to visit a traditional dealer subsequent to visiting the site. This is not because BMW is not capable of creating the technology to sell a vehicle via the Inter-net, but because the company feels that the interrelationship between customer and organization is best served by human reinforcement and bonding.
Even though this channel is not directly generating revenue, the brand equity (discussed in chapter 10) is developing tangible benefits to those that understand and execute effectively in this marketspace. An automobile manufacturer confirmed during the research for this book that there is a tangible return through retail feedback and retail connectivity and that the insights gained through the online channel are superior to those of traditional marketing channels. The issues surrounding branding are considered more fully in chapter 7.
The Service Payoff
An obsessive focus on all information surrounding the customer at all contact points is the most effective way to establish service leadership via the Internet. Service should not always be expected to translate immediately into purchases by customers because its value often consists simply of building relationships with, and gathering information about, potential customers and maintaining relationships with existing ones.
The value-adding effects of building virtual communities have been well documented by management consultants John Hagel and Arthur Armstrong in their 1997 book Net Gain.8 Their communities are developing in parallel to the e-consortia relationship within the B2C and B2B environments. Over time, e-consortia will attract more and more customers (and potential new sellers to add to the consortia) through their service strength. This derives from the specialized nature of the individual organization's information being available under the umbrella of the consortia to service the needs of the customer from a data and information provision perspective.
Healtheon.com: an E-consortium
A fundamental feature of e-consortia is that the value increases exponentially even as they grow incrementally. Over time, the companies that nurture e-consortia can look forward to more customer transactions and greater revenue. One growth area in which communities and consortia will proliferate is healthcare. Currently there are many stand-alone Websites-e.g., WebMD and Dr.Koop.com. However e-consortia, of which Healtheon is a variant, look at becoming a dominant force in this arena. Healtheon's mission statement is "to leverage advanced Internet technology to connect all participants in healthcare, and enable them to communicate, exchange information and perform transactions which cut across the healthcare maze. This will simplify healthcare, reduce costs, enhance service and result in higher quality, and more accessible healthcare."9 Healtheon is forming alliances with the necessary groups within a healthcare framework to ensure its consortium is effective, including preferred provider organizations (PPOs) and other partners in ancillary fields. The value here is in providing 24 × 7 access to information, prescription drugs, and so on, thus creating services that are not possible in the modern health management organization (HMO)-run physicians' surgeries where interaction is the most valuable service item but the provision of which has become too expensive and too rarefied.
UPS.com-A B2C, B2B, and B2G Enterprise
Other companies have taken less radical-but nevertheless profitable-approaches to service over the Internet. Consider UPS, the world's largest package distribution company, which transports more than 3 billion items a year. Through adoption of the Internet and Net technologies UPS has repositioned itself as a deliverer not just of packages but of information. UPS's Document Exchange service enables businesses to transmit documents cheaply and securely over the Internet, with the same benefits-such as package tracking and delivery confirmation-UPS offers with physical packages. The Inter-net also makes it easier for UPS to customize logistics for its customers-for example, by ensuring that parts from different countries arrive where needed at the same time.
The Internet allows organizations to offer innovative types of service variations to more and more customers. There are examples in all industries: utilities such as Entergy, serving the Louisiana, Texas, and Mississippi areas, and Flor-ida Power & Light analyze their customers' bills and power usage; biotechnol-ogy companies such as Genentech support community activities; American Express provides tools for customers to carry out their own financial portfolio management; and companies across the board provide investor information to shareholders.
Furthermore, the Internet makes it possible for international companies to offer a level of service to all markets that was previously restricted to their home countries and major markets, a realization of a long-held dream. The development of service leadership strategies is discussed further in chapter 6.
In Search of Market Growth
Nimble, creative, and agile corporations have achieved disproportionate market growth via the Internet through responding to changing market conditions with product offerings as well as through their approach to understanding the market within which they operate. One successful approach has been to combine marketing, service, and information systems groups to focus on issues as a cross-functional team. Some examples of organizations innovatively using the Internet to spur market growth follow.
Royal Caribbean International, one of the world's largest cruise lines, evolved from a Technology leadership focus in 1997, through a process of brand enhancement, to a more recent Market focus, achieving significant market growth through online sales.
By contrast, American Express first focused on brand reinforcement. As one marketing executive stated:
The Internet is where the home run is-when you leverage what you are good at already and you use online systems in a way that cannot be duplicated. It reinforces what your products and services are, makes them better, and reinforces your brand and what it means.10
Building upon its early Internet learning experiences, American Express has subsequently moved into a market growth mode. Some examples include helping customers to trade stocks online; providing consulting services and expertise to customers; and assisting business to identify and implementat direct and indirect cost savings. In addition to its more traditional business areas, American Express is offering real-time air, hotel, and car reservations, as well as last-minute travel bargains.
Office Depot, the U.S.-based office supply company, receives over 300,000 orders a day for its products through its straightforward, user-friendly Internet site. The company aims to retain customers by providing a convenient and efficient service. It's building market share by creating free services for office managers and small businesses and by providing real-time inventory checking, along with its traditional customer call centers.
Car rental company Alamo is aggressively pursuing a strategy of being the first to facilitate wider market coverage and closer relationships with customers. Naturally, this has influenced the speed at which it is developing its Internet activities. The company reports that the Internet is not only more profitable than traditional channels, but that it tends to receive a fairly constant amount of use. In Japan, Alamo's Internet revenue has grown significantly compared to revenue growth through traditional channels.
Companies with this level of success clearly see the new business model made possible by the Internet and are willing to commit to the hilt the financial, technical, and management resources needed. As an executive at the American Bankers Insurance Group remarked: "It's a bit like ATMs [automated teller machines]. Everybody was getting them and if you didn't you lost customers. But the Internet also reinforces organizations, adding new channels. It is a real transition in business, one of those points where huge differences can be shown and made."
The issues surrounding the development of market leadership strategies are discussed in more detail in chapter 5.
Royal Caribbean Cruises is the world's largest cruise-based leisure company, with revenues of $2.64 billion for 1998. It carries over 4.5 million passengers a year to Alaska, the Bahamas, Bermuda, Canada, the Caribbean, Europe, Hawaii, Mexico, New England, the Panama Canal, and Scandinavia.
Leadership and Organizational Learning
Since its inception in 1970, Royal Caribbean has tried to be an innovator in ship design and construction techniques, logistics, and reservation systems. Building upon this reputation, the company created its first Website in February 1996. The site was redesigned in 1997 to incorporate a stronger brand message and sales and marketing initiatives. The amount of information provided for-and obtained from-visitors was increased.
The relationship between technology and the strategy of the organization is acknowledged at the highest levels. According to Jack Williams, president of Royal Caribbean International: "Royal Caribbean recognised long ago the potential that the automation held for us as a company.... The past decade has been spent identifying how this new tool could be incorporated into every aspect of our business to bring more information about our brand into the homes and offices of our customers and our travel partners worldwide." This vision of technology at the executive level is critical: it drives all sections of the organization toward a common goal through the medium of technology.
Some elements of the system are done out-of-house, however. As with other advertising media, the company employs an interactive agency to be creative on its behalf. According to the director of Royal Caribbean's Marketing Automation Group, this is so that the company can gain access to "the latest and greatest ideas" on the creative side while focusing its own energies on other areas of marketing. The organization uses a partnering model: it gains external expertise where necessary and carefully manages the relationship with its in-house information systems department.
Companies such as AOL, Amazon.com, and eBay that have mastered the technology of e-commerce ahead of their competitors have been able to create and dominate new markets. Established companies also see a technology focus as crucial to successful competitive positioning.
Royal Caribbean uses a variety of information systems to manage its shore-and ship-based operations-in other words, its business-to-business customers such as travel agents and its liners. With the former, the existing technology of its traditional booking channels-Sabre's Cruise Director, Galileo's Leisure Shopper, Worldspan's CruiseLine Source, and Amadeus Cruises-accounts for 30% of its bookings (the highest degree of automation in its industry). Royal Caribbean is aiming to increase this percentage by introducing CruiseMatch 2000 Online, a Web-based reservation system, through which agents can access its logos, interior and exterior ship photography, information on reduced rates, and downloadable advertisements. It is also planning to enable long-standing customers to book directly online.
The Internet has two attributes that guarantee its success: Websites can be accessed by a global audience 24 hours a day, 365 days a year, and those sites can be made to appear personalized for individual users. Marketers can finally realize their dream of mass-customized, one-to-one marketing when they structure Websites effectively.
Royal Caribbean Cruises operates two cruise brands: Royal Caribbean International and Celebrity Cruises. By 2002 the combined fleet will consist of 16 vessels with a capacity of 21,700 berths. In addition to the many different countries the ships visit, the company offers a wide range of trip durations, from three-day cruises to epic voyages that take in several continents. This complexity of offerings necessitates a complex pricing structure.
Sales are traditionally made through travel agents. If Royal Caribbean were to bypass these agents by selling directly to customers online, it might provoke a hostile and perhaps even damaging reaction from the agents.
The company, however, sees an opportunity to colonize an underdeveloped marketplace. Research has shown that 93% of the public has not been on a cruise, and that only 31% of travelers use a travel agent; the company's internal studies show a high correlation between its existing customers and the fastest-growing segments of Internet users.
Its strategy is thus to exploit the power of information systems to inform this set of customers of its complex array of products and services. Customers can book directly through Royal Caribbean's telephone call center or use the online reservation request form to check availability. Internet-based online booking is the next step.
As with the ability to create a perception of individualized marketing through the Internet, organizations can also service the needs of their customers on a global, 24-hour-a-day basis.
Success in the premium sector of the leisure industry depends heavily upon quality of service. So like many companies in this sector, Royal Caribbean aims to deliver a branded, high level of service whenever a customer comes into contact with the organization. This especially includes the customer's interaction with the Website; after all, the site is a direct channel to the retail customer.
Royal Caribbean's strategy consists in gently shepherding the customer toward the greater resources of professional travel agents (where this does not conflict with the segmentation strategy outlined above) while attempting to provide total customer support and satisfaction. E-commerce should be about total customer service as well as transactions. A Website is not simply a low-cost sales channel but a means of giving customers greater choice and detailed, relevant information.
Branding is a process that creates within a consumer's consciousness a heightened awareness and recognition of a trademark or product, creating a brand-image. The term "brand-image" was coined in the 1950s by David Ogilvy of the Ogilvy, Benson & Mather advertising agency. Ogilvy conceived of marketing strategy as the reinforcement of a product's brand to the point where the product is elevated above products of equal quality but of unknown brands.
The positioning of the Royal Caribbean brand as a "quality" brand is of vital importance to the organization. Jack Williams has said that the company's brand identity "needs to illustrate the quality product that we offer and needs to signify the international scope with which we operate our ships and sell our vacations." Through its Website, the company aims to communicate this at all stages of its relationship with a customer: for the first-time cruiser, there is the visual "electronic experience" of the ship and cruise; for prior customers, there is a loyalty program; and for stockholders, there is an online investor relations channel. The Website brings together many normally disparate points of contact. Thus a key task for Royal Caribbean-as for other companies that rely heavily on their brand associations-is to ensure that these are presented in a coherent way.
Developing a Winning E-strategy
Several keys to the successful development of an e-commerce strategy have been highlighted:
· Ensure the project is backed by a senior executive.
· Develop a strategy before developing a Web presence.
· Develop a strategy by focusing on technology, branding, marketing, and service.
· Develop an IT infrastructure capable of matching the strategic objectives.
· Identify and use knowledge in the organization.
· The strategy must add value for customers, and it must change as the requirements of those customers change.
It is possible for companies that were not "born on the Web" to create similar Internet-based channels to those that the newer competition has so far exploited. By focusing on the factors outlined above they stand a good chance of success; by monitoring their performance and responding to changes in their markets, they can sustain that success. The established fixed-asset company of today can be the nimble Internet company of tomorrow.
8. John Hagel and Arthur G. Armstrong, Net Gain: Expanding Markets Through Virtual Communities, Harvard Business School Press, Cambridge, MA, 1997.
10. Personal interview, September 1998.
11. Based on personal interviews, conducted May 1999.