Thursday, January 31, 2008

Emerging e-Marketplaces

In its traditional sense, a 'marketplace' allows information to be disseminated and activity between buyers and suppliers to be co-ordinated. Before the slump in 2000, many firms took a huge 'leap of faith', investing large sums of money into new forms of technology and the associated business practices, without always fully realizing the implications of doing so. In the B2B electronic marketplace arena in particular, new exchanges appeared overnight, and from a peak of some 8,000 the inevitable shake-out reduced the number to about 2,000 in early 2002 (according to www.ebusiness.uk.corn, February 2002). The e-Marketplace industry is therefore only just beginning to evolve, and a wealth of confusion currently exists as to the optimal strategy for companies to adopt. Many commentators see it as the next wave of the IT/information revolution.

The division of markets by spatial competition is now evaporating because of the scalability and virtual geographical nature of the Internet. The emergence of B2B e-Marketplaces is leading to more open collaboration among buyers and suppliers, and the rise in information-based products and services on the Internet has led to the circumvention of traditional intermediary business and information brokers. As evidenced by the travel industry, traditional market structures are being transformed and are giving rise to new forms of intermediaries and business models. With the introduction of new technologies that take advantage of this e-Marketplace phenomenon, markets can perform transactions on a glob scale, and thus grow exponentially.

Internet 2010

Some of the most notable early impacts on market structure have been i the financial services industry, where online brokerage services such as E*Trad have stolen market share away from many of the established brokerage firm such as Goldman Sachs. Each user of E*Trade benefits from a larger network, since online booking enables a larger number of transactions to be made. It facilitates the exchange of 'investor tips' and the usage of discussion forums on the membership Web pages. As a result, more and more traders are willing to in the E*Trade 'community' and thus use the E*Trade platform for trading. An optimum e-Marketplace entry strategy must take into consideration a umber of factors:

  • the estimated lifespan of the market;
  • the degree of change required to existing business processes;
  • the costs of imitating the pioneer;
  • the extent of financial resources available;
  • the likely cost of customer acquisition.

At present, despite the ongoing shake-out, many marketplaces are striving each critical mass. The initial focus has been on transactions, with only a -term view taken towards collaboration. Some, particularly independent marketplaces such as Chemdex (chemicals) and Opitmark (equities), have already been forced to close down. Transactions are limited and costly at this stage, and there is little incentive for many industry participants to take advantage of what is currently available. Moreover, creating an online catalogue remains complex process, and the willingness of many companies to use marketplaces a medium of exchange has been less than enthusiastic. Some prefer to keep prices confidential and negotiate closely with their customers. In addition, most of the FTSE 100 and Fortune 500 companies are locked in to existing electronic technologies such as EDI, which represents an expensive point-to-point trading network.

Despite current low usage levels, the potential for e-Marketplaces is evidenced by many recent studies. For example in a research report conducted by Forrester Research (2001), more than 75 per cent of companies envisaged trading online by 2004, and at least 50 per cent expect to participate in four or more e- Marketplaces by 2004. According to Durlacher (2000), B2B e-Commerce is estimated to account for almost 20 per cent of GDP in the UK and approximately 12 per cent of GDP in all of Europe by 2004. Forrester Research (2001) notes that while industries are moving at different speeds in order to take advantage of B2B initiatives, the automobile industry is leading the way with a forecast spend of almost 200,000 million euros by 2005. For example, Covisint, owned by Ford Motor Co., DaimlerChrysler AG, General Motors Corp., Renault SA, Nissan Motor Co., Commerce One Inc. and Oracle, plans to reduce supply chain costs and bring efficiencies to its owners' business operations. As a result, many B2B e-Marketplaces are incorporating a variety of value-added services in their offering in order to attract participants and differentiate themselves from competitors, and thus create a sustainable revenue model that is also profitable. These services vary across different industries and products, but some of the most common features include:

  • auctioning;
  • collaborative planning, forecasting and replenishment (CPFR);
  • improved knowledge management, reporting and visibility;
  • e-Procurement;
  • supply-chain management;
  • e-Logistics services.

Competitive intelligence

Competitive intelligence is the term given to the gathering of information on business rivals through legitimate means such as via published data and interviews. The practice has its own representative body, the Society of Competitive Intelligence Professionals (SCIP), and is now taught on some courses as a key business skill. Proponents claim that competitive intelligence focuses on understanding competitive dynamics and helps in planning future change. The Internet, of course, provides a comprehensive and easily accessible source of data about competitors. So the challenge these days is less about collecting information than it is about analysis and focus. Useful information might include news about an imminent product launch or the appointment of a new chief executive. The best competitive intelligence relates to what a competitor is going to do, rather than what it actually is doing at that time. The knowledge gained then has to be disseminated throughout the organization (a process known as organizational learning) so that it is available for possible use by other people in the company at a later date.

Internet 2010

According to Curtis (2001), there are three principal factors driving increased investment in competitive intelligence:

  • the Internet;
  • globalization;
  • higher customer expectations.

From an ethical perspective, the concern is the boundary across which competitive intelligence becomes industrial espionage, or spying. In 2000, software giant Oracle admitted hiring detectives to rifle through rubbish for information on rival Microsoft in a case that became known as Garbagegate'

SCIP's ethical code means that its representatives cannot lie about who they are, but they can be as vague as possible, and usually claim to be conducting market research when contacting staff in the target company for information. Trying to obtain trade secrets (the most famous is the recipe for Coke) is against the ethical code. Competitive intelligence professionals claim that 'most' information a competitor could need is either already in the public domain or can be obtained without actually breaking the law. Whether the practice is ethical, of course, is another question entirely.

According to research by The Futures Group (www.tfgi.com), 60 per cent of companies have an organized system for collecting competitive intelligence, while 82 per cent of those with revenues of over £7 billion make comprehensive use of such a system. The researchers ranked the eight leading users as:

1 Microsoft;

2 Motorola;

3 IBM;

4 Procter and Gamble;

5 General Electric;

6 Hewlett-Packard;

7 Coca-Cola;

8 Intel.

The Futures Group recommends the following strategies for effective intelligence-gathering:

  • Debrief the sales force.
  • Attend conferences and trade shows.
  • Examine the background and private interests of newly appointed executives.
  • Keep track of patents.
  • Look for hidden messages in marketing material.
  • Ask what you would do if you were equipped with the same tools as your competitor.

There are a number of disparate information sources that can be drawn upon; for example:

Companies such as those listed above that take competitive intelligence seriously tend to give the function a strategic rather than an operational role within their organizations. This means that the person in charge of competitive intelligence will be a senior employee and report directly to the board of directors. The intelligence gathered is then used to support executive decision-making. If competitive intelligence is treated merely as a subdivision of the marketing department, then there is little to distinguish it from 'everyday' market research.

To summarize, competitive intelligence is about not making mistakes, and reducing unnecessary risks. Consider the following examples of companies that missed out:

  • Sears did not spot the potential competition from discount retailers such as Walmart
  • Levi Straus' did not appreciate the growing threat from other specialist brands such as Timberland.
  • Compaq did not anticipate that Dell would undercut prices by selling computers direct to consumers.

THE CASE OF DMITRY SKLYAROV

On 13 August 2001, www.ft.com reported on the Russian hacker Dmitry Sklyarov, who faces trial in the USA for allegedly violating new copyright legislation. He was detained by FBI agents on his way back to Moscow from a hackers' conference in Las Vegas, where he had explained how to circumvent a security system on software sold by the US company Adobe. His Moscow-based company, Elcomsoft, sold a program that broke Adobe's code which prevented users copying documents published in Adobe format. Sklyarov's detention caused outrage across the cyber community, and special Internet sites and banners proclaiming 'Free Dmitry Sklyarov' and attacking Adobe were rapidly created. Adobe was surprised by the outcry and asked the US authorities to drop the charges. However, prosecutors have resolved to pursue the case, which will be a pioneering test for the 1998 Digital Millennium Copyright Act (DMCA), which makes it illegal to evade copyright-protecting technology.

Internet 2010

Sklyarov has been released on bail, but faces a fine of up to $500,000 if found guilty. Elcomsoft argues that its program highlighted weaknesses in Adobe's security, and was not designed to allow infringement of copyright. The mainstream Russian media have followed the case extensively, and the interior ministry has said that it will not prosecute Sklyarov on his return. In the USA, libertarian groups such as the Electronic Frontier Foundation (EFF) have also argued in his defence. The case has other implications that could paradoxically lead to the potential for widespread computer damage from hackers. There is a long-standing tradition within the US technology community of 'white-hat hackers' whose hobby is finding security weaknesses within computer systems used in business applications, then publicizing them to allow computer companies to plug the security holes. Internet legal experts have expressed concern that advances in technology, together with legislation such as DMCA, is granting copyright holders too much power.

Data protection

The UK's Data Protection Act 1984 (and later amendments) focuses on the information that companies hold on customers and how individuals can access it and ensure it is correct. Although of course this act pre-dates the Internet, the principles involved are exactly the same. More detail about the implications of recent changes in the Data Protection Act is available at www.dataprotection.gov.uk. Basically, there are eight key principles of good practice enshrined in the Act which can be summarized as follows:

Data must be:

1 fairly and lawfully processed;

2 processed for limited purposes;

3 adequate, relevant and not excessive;

4 accurate;

5 not kept longer than necessary;

6 processed in accordance with the data subject's rights;

7 secure;

8 not transferred to countries that do not have adequate protection.

The Information Commissioner's Office has produced four free introductory seminars to help both individuals and organizations that hold personal information (data controllers) to understand the Data Protection Acts. Each seminar consists of a voice-over recording accompanied by a power-point presentation. The seminars can be downloaded from www.dataprotection.gov.uk/seminars. htm.

CPExchange (www.cpexchange.org) offers an independent and open standard that allows approved customer data to be shared between disparate computer systems. This means that different areas of an organization, reliant on separate data sources and even whole computer systems, are able to obtain an integrated picture of customer information that complies with data collection criteria to be used for marketing purposes.

Online Marketing Legal Developments

Although this chapter is divided into one section dealing with 'legal' and another with 'ethical' issues, it should become clear as you read through that the two areas are very much interrelated.

A comprehensive international legislation system that applies to global online trading does not exist at present and is not expected in the foreseeable future. Even within the USA, which is comparatively advanced in its use of the Internet, legal issues such as the validity of digital signatures have caused significant disagreements. While waiting for federal legislation, many states have set up their own laws, which have differed widely from state to state. Organizations such as the United Nations or bodies dealing with international trade law have been actively calling for global co-ordination of appropriate legal structures.

Copyright protection

Because the copyright legislation on the Internet is complex and vague, many Web site operators are reusing information from other sites. Comparison-shopping sites such as www.moneysupermarket.com, for example, rely heavily on aggregating information existing on other sites and presenting it in a comparative format. While this is acceptable in the USA, which allows data to be extracted and compiled in this way, there are indications that Europe may impose certain restrictions on what one site can do with another's information.

Internet 2010

Another contentious issue concerns domain name conflict. There have been a number of cases whereby individuals (known as `cybersquatters') have registered domain names that resemble established brands or generic terminology and thenattempted to sell the right to use that name to the company concerned. For example, Chen (2001) notes that the address `business.com' was sold for $7.5 million and `wine.com' for $3 million. The author goes on to describe the case of Marks and Spencer v. One in a Million Limited and Others, in which Marks and Spencer sued for infringement of its trademark after the defendant registered the domain name marksandspencer.com and demanded money in exchange for handing it over. The courts found in favour of Marks and Spencer, and One in a Million was prevented from using the name or trying to sell it to anyone else. Chen also describes the problem of character string conflicts that arise when there is more than one legitimate user of a certain combination of letters. Finally, remember the case of www.untied.com that was described in Chapter 6? This site was set up by an online 'vigilante' to publicize the customer service failings of www.ual.corn (United Airlines), and accurately mimics the logo, style and layout of the original site.

This example also illustrates that copying anything from a Web site is very easy — merely a matter of cutting and pasting the code — so that protection of any intellectual property is very difficult. A famous example concerns the ongoing dispute over the piracy of music on MP3 sites, which are file compression formats allowing songs to be freely transmitted over the Web and downloaded to an individual's computer. Peer-to-peer (P2P) sites such as www.napster.com allow

users to share the content of their computers, hard drives, and this technological innovation makes the worldwide sharing of music files even easier.

While legislation continues to lag behind technological developments, one of the few protections currently available to businesses is to patent innovative techniques that they have devised. In the case of Amazon v. Barnes and Noble in 1999, Amazon won a lawsuit against Barnes and Noble, which had tried to copy the famous 'one-click' ordering system pioneered by Amazon.

Contractual agreements

Electronic contractual agreements are part and parcel of e-Commerce. The registration procedure is part of the purchasing process and requests the buyer to scroll through a set of contract terms. The purchase sequence is completed only when the buyer has clicked his or her agreement to the terms and conditions presented. The validity of such an electronic contract has been tested already through the US courts, but it is not certain that it is globally acceptable. Consumer protection laws vary from country to country and the global operator must be aware of differing obligations that could impact on the validity of the transaction performed.

The importance of keeping track of changes in legislation that will affect e-Business cannot be underestimated. Certain legislation such as the law passed recently by the European Union regarding email marketing could have far reaching consequences. Effective from 1 March 2001, this law states that if a dispute occurs between a consumer and an online retailer in any of the fifteen countries of the EU, the consumer may file a suit in his or her own country. Small firms that have thrived from the freedom the Internet is offering may well find it harder now to maintain control over their direct email marketing campaigns in this increasingly legislative environment.

Tuesday, January 29, 2008

`Bricks' or 'Clicks'?

Around 1998, many banks hoped that online banking would allow them to cut costs dramatically by closing branches. They are now becoming increasingly aware that because customers expect a choice of channels, absolute customer numbers are not a 'able indicator of the success of an online offering; rather, the number of active online customers is a more meaningful measure. Recognizing that it will take much er to realize the anticipated cost savings, banks are adopting various strategiespush customers online:

  • using branches to educate customers in how to use online services;
  • providing reassurances over security;
  • offering lower fees and higher interest rates;
  • giving staff incentives to encourage customers to use online banking services.

The 'bricks and mortar' bank branch, therefore, is unlikely to become redundant in the near future.

Internet 2010

Generally speaking, traditional banks have not adapted products and prices or developed customized propositions for their online operations. 'Pure plays' (new sternet-only banks) have competed so far on the basis of products with aggressive pricing, innovative offerings and investments in new technologies. However, their efforts towin market share have been costly and will not be sustainable in the long term. In a very crowded marketplace, banks will increasingly try to 'poach' other online customers, which is a potentially more profitable strategy than encouraging existing customers to migrate to the Internet.

Some authors are now pointing out the irony that virtual banks are seeking to set up physical operations just as traditional banks create online ones. Gandy argues that competition is not about 'bricks' versus 'clicks': 'It's about integrating both — pulling together the best of what is available through the physical distribution with the best of the Web world' (2000: 122). Yakhlef (2001) examined four dominant banks in the Swedish banking sector to ascertain whether Internet banking was causing the Importance of bricks and mortar locations to diminish. The results indicated that banks have achieved better communications with their customers and lowered transaction costs whether they have used the Internet as a complement to or a substitute for their existing operations.

A further structural dilemma for banks is to determine whether their online operations should be integrated into the existing business or 'ring-fenced' as a separate Jivision. Gulati and Garino note that the issue of integration or separation is not a zero-sum game, and that companies should 'strike a balance between the freedom,

flexibility, and creativity that come with separation and the operating, marketing, and Information economies that come with integration' (2001: 113). In December 2001, the Bank of Ireland decided to merge its previously separate Internet bank, called F. Sharp, into its main operations after attracting just 2,000 customers. The rationale was that the online operation could not offer the high level of customer service on its awn that is necessary to support high-net-worth customers (e.business magazine, January 2002).

Internet Price Comparison

`Price' is equivalent to cost to the customer in the 4Cs. Pricing decisions generate revenue, whereas the rest of the marketing mix involves costs. Pricing decisions are particularly critical for the e-Business as there is a customer perception that prices should be lower online than otherwise. Many organizations (e.g. Eurotunnel; www.Eurotunnel.com for car crossings from England to France) apply a standard discount for online purchase.

In some cases, customers can make much bigger savings buying online. For instance, to buy tickets from a travel agent in the UK for the Calgary Stampede rodeo in Canada (www.calgarystampede.com/stampede) is likely to be expensive, as the agent will probably sell these only as part of a package. Tickets can be booked directly via the Internet at a substantial saving.

Some e-Businesses sell almost solely on the basis of price. For example, emagazineshop (www.emagazineshop.com) sells a wide range of the magazinesnormally available at newsagents'. Subscription prices are normally lower than newsagents, but emagazineshop offers lower prices still. The most popular magazines are discounted by at least 20 per cent, more specialist ones 10 per cent. This is a rare example of a pure-play dotcom, founded in 1997, that has survived the dotcom crash and is growing steadily, now employing 25 people.

Internet 2010

Despite the Internet facilitating de-layering of intermediaries, it is still not automatic that costs will be less for selling online. Someone still has to carry out functions such as breaking bulk and physical delivery — and for online sales these can be even higher than for offline (many small orders delivered to individual customers rather than fewer, larger deliveries to a store), with consequent loss of advantages of economies of scale. Hence, many suppliers selling on the basis of cheap prices, even successful ones like Amazon (www.amazon.co.uk), struggle to make a profit on their e-Operations. Again, this is an area where the success of emagazineshop is an exception.

Not all prices are lower on the Internet. As already mentioned, the cost to the customer includes not just the selling price, but all the costs of buying. To buy from a (bricks) grocery supermarket incurs transport costs, and also the notional cost of the value of a customer's travel time. Tesco (www.tesco.com) is able to make a charge for home delivery, which its many e-Customers must consider represents good value.


PRICE COMPARISON SITES

Price comparison sites provide shopping engines that allow customers quickly and simply to compare prices across a range of Internet suppliers. For example, Easy Value (www.EasyValue.com) provides price and delivery comparisons for flights, books, CDs, videos, DVDs, games and handheld computers. Director James Rothnie claims that 'people know the products and price is driving them'. Customers can be confident that they are buying brands they can trust, and all suppliers must conform to security and service standards.

Shopsmart's approach is broader (uk.shopsmart.com). Each of its sites has been rated for not only price but also ease of use, service, returns policy, order tracking and online experience quality. Chief Executive Daniel Gestetner says, `Customers do not automatically buy from the cheapest retailer; they are looking at other things. The companies that will do best are those that invest in the back-end infrastructure to deliver on all their promises.

The Internet is an ideal medium for operating a mechanistic market. For the customers, this means quick and easy access to the 'best' deals. For sellers, this should in theory mean a level playing field, where products offered at a competitive price sell, regardless of issues such as the size of the organization; hence the suitability of the Internet for electronic trading exchange (see Chapter 4). The level playing field idea, though, has hit some snags when translated to practice, and price-based services have achieved no more than modest success to date. A number of buying services are available such as Shopsmart (uk.shopsmart.com), the leading consumer price comparison site, and ComputerPrices (www. ComputerPrices.co.uk), which finds the cheapest computer kit in the UK. Priceline (www.priceline.com) is an alternative price-based service that creates a market or reverse auction. Enter the price you want to pay for a wide range of services like flights or hire cars and the system searches for suppliers willing to sell at that price — but the customer cannot choose the (say) airline for their flight. The company does, however, guarantee that it will be one of the top airlines. Most UK customers, though, prefer to have more control over what they get, rather than buying purely on price. For most e-Businesses, pricing emains as for non-electronic strategies; that is, based on the complex interaction of all elements of the marketing mix and value. Marketing pricing is still what it was, the price that customers are willing to pay, based on considerations such as the company, brand, reputation and product. The difference that e- Commerce makes is that pricing and competitor information is faster and more transparent, meaning that market forces also tend to act faster and perhaps more efficiently. There is thus a tendency for prices to converge at lower levels.

Mini case study: TIMBERWEB

TIM BE Rweb (www.timberweb.com) is the international electronic trading exchange for sustainable timber. The site is independent — not affiliated to any participant. The 600-plus 'certified sellers' across the world are carefully screened. Buyers and sellers meet to make timber contracts, and promote their businesses in a personalized, secure environment. Members benefit from immediate access to real-time timber, lumber and wood market requirements, plus the latest news, trading methods, technical and market information. Since launch in 1997, the site has had 1.5 million hits per month from 20,000 businesses.

Loyalty Programmes and Personalization

Despite the problems listed above, it does seem that relationship marketing at east has the potential to enhance customer satisfaction. Although it is easy to be cynical, a satisfied customer is more likely to be loyal than one who is not. A loyal customer base has a number of benefits to a company:

  • Higher returns will accrue, from repeat sales over time.
  • Increasing levels of competition means that service quality may be the only differentiating factor between otherwise similar companies.
  • Higher costs are associated with recruiting new customers than with managing existing ones (because of the need to conduct credit checks, take up references and other administrative tasks).
  • It provides scope for cross-selling.
  • It creates possibilities for strategic partnerships.
  • Loyal customers will recommend the company to others by word of mouth.
  • Promotional costs to acquire new business are reduced.

Loyalty programmes (also known as 'reward schemes') can be introduced to increase loyalty. For example, successful programmes have been introduced in recent years by airlines such as BA and supermarkets such as Tesco. The costs of the rewards given away can be more than offset by the additional business gained through repeat or additional purchases. For example, Tesco's Clubcard loyalty programme now covers more than 14 million customers, and special offers can be customized, based upon analysis of transactional data in order to enhance the brand image and build trust. By 1996, 200 million in-store purchases per day were being tracked by the programme, and over 5,000 distinct customer segments identified, each receiving personalized coupons. Profits have grown from £500 million in 1995 to nearly £1 billion in 2000 (www.ltol.com). When Tesco began selling goods online (admittedly after a shaky start, when the company's computer systems were not sufficiently integrated and orders had to be rekeyed manually!), the company was a 'known quantity' in comparison with the unproven Internet `pureplays' that were setting themselves up in competition. Additional Clubcard points were awarded for online purchases, and Tesco now has over 1 million online customers. In 2000 it sold half of all online groceries in the UK (www.datamonitor.com). It dominates the home delivery market to such an extent that many competitors have accepted defeat. Safeway, for example, decided in 2001 to stop selling its goods online and concentrated instead on refurbishing and upgrading its retail outlets.

Internet 2010

Another popular method of boosting loyalty is personalization. Tesco is moving in this direction with its online service, which is now becoming more sophisticated in its analytical capabilities in terms of suggesting particular products or special offers that might appeal to individual customers based upon their purchase history. Personalization software allows the name of the user to be incorporated into the Web pages, any previous transaction details to be displayed, and related areas of interest to be flagged. Personalized email messages can be distributed to highly targeted groups of customers at a very low cost. This type of marketing is also being driven by research such as that by Cyber Atlas (www.cyberatlas.com), which established that Web users who configure, person. alize or register on Web sites are more than twice as likely to buy online as those who do not. A combination of a reward scheme and personalization can therefore be a powerful tool to drive loyalty. Such mechanisms are of course ideally suited to online transactions, and this aspect will be considered in more detail in the next section.

As with relationship marketing as a whole, there has been a lot of hype recently claiming that personalization is a panacea for success. This ignores the fact that in many circumstances, customers are quite happy to receive a 'mass market' approach, and find any degree of personalization an intrusive invasion of privacy. Examine the mini case study below and make up your own mind — do you find such approaches valuable or intrusive? Why?

Internet Blogosphere