Internet Strategies

Chapter 3

Internet Marketing and Operations Advantages

Better products and services
Interactive games and software; interactive maps

More intelligent products and services

Link past purchases with new products and alert potentially interested customers

Lower Prices
Presumed lower cost structure Ease of comparison shopping Unlimited retail space
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Differential Cost Drivers of Internet and Traditional Firms

Bricks: The cost of maintaining physical stores is lower for internet firms Taxes: Internet sales are exempt from sales taxes Inventory and Personnel: Internet sales have a significant advantage Logistics: Internet firms are at a disadvantage

Chapter 3 - Internet Strategies

Inventory
Required stocking levels are related to the service level desired and the variance in demand for a given product
For individual stores to have sufficient safety stock:

kN

For a central location to have sufficient safety stock:

k N

Chapter 3 - Internet Strategies

Inventory Stocking Example

Assume the following about sales of Make Millions at Home at SuperBooks:
500 stores Mean sales of 20 copies per day Standard deviation of 5. Service levels of 95%
Number of books sold: 500*20 = 10,000 Safety stock required: 1.645*5*500=4113

With a single warehouse linked to a website

Safety stock required:

1.645 * 5 * 500 184

4

Chapter 3 - Internet Strategies

Personnel
The effect on personnel is similar to that of inventory stocking
Fewer people are required in a centralized system like a website or telephone bank than in decentralized systems
The math will be covered in Chapter 11

Utilization efficiencies lower the number of people required in a centralized environment

Chapter 3 - Internet Strategies

Logistics
Distribution offers traditional retailers a cost advantage
Shipping costs on a per unit basis are much higher for an internet firm that ships individual orders directly to consumers
Traditional Systems
Central Warehouses Distribution Centers Retail Outlets Customers Chapter 3 - Internet Strategies
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Internet Systems

Logistics
Reverse logistics is a far larger problem in an internet environment
Return rates can approach 30% for internet retailers Retailers have a product perception advantage as consumers are able to view and touch merchandise prior to the sale Items returned in an internet environment cannot easily be put back on the shelves, rather they are shipped back to the merchant and restocked in a vast warehouse
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Strategies for Mixed Traditional & Internet Retailers

Integrating the back-office of traditional and retail businesses is challenging
Warehouse format: pallets/forklifts/wide aisles vs. pick-and-pack, narrow aisles Shipping: bulk vs. individual orders
Inventory and Shipping Strategies for Combined Internet/Traditional Retailers Bulk Integrated Segregated Chapter 3 - Internet Strategies Cost Minimizer Transportation sharing Single Item

Professional Shopper
Dedicated Systems
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Assessment of Strategies
Dedicated Systems
Warehouse systems are separate for catalog/internet vs. retail side (examples include JCPenny) May include outsourcing Internet orders to a third party firm (examples include Wal-Mart, Macys and Bloomingdales)
Disadvantages of both strategies include excess inventory and excess distribution costs

Chapter 3 - Internet Strategies

Assessment of Strategies
Professional Shopper
A store employee walks the retail outlet to pick the order Disadvantages
Prices must be retail + shipping and handling Phantom stock-outs High cost of order fulfillment

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Assessment of Strategies
Cost Minimizers
Orders are picked individually, but goods are combined and sent on dedicated trucks Transportation may be shared with other retailers Advantages
Cost effective

Disadvantages
Time consuming for customer who may have to wait for order

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Assessment of Strategies
Transportation Sharing
Internet orders are shipped to retail outlets with the retailers regular suppliers; customers pick them up in the retail outlet
Example: JCPenney and 7-Eleven of Japan

Advantages
Eliminates problems of the last mile

Disadvantages
Inconvenient for the customer

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Level of integration in order picking and delivery

Inventory Segregation: Where Internet Order Picking Occurs High
Bulk distribution center Break-bulk distribution center Flagship retail store Retail stores Contiguous distribution center

Low
Dedicated distribution center

Options for Delivering Internet Orders Bulk Shipments

Customer pickup at retail store/Retail store order pick Customer pickup at retail store/Delivery from distribution center Chapter 3 - Internet Strategies

Individual Shipments
Shipping direct to customer home

Bulk from distribution center to general area/individual delivery to home

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Customer Service and the Internet

In the last 5 years customer satisfaction has declined
Companies have implemented cost-saving automated technologies without considering customer satisfaction

Internet customer service is terrible

37% never receive a response to e-mails 90% of consumers would prefer live support, 1% of retailers have live support 67% of all shoppers abandon shopping carts
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Cost of Service Transactions

Process
Traditional Means Letter Telephone Web Billing query-fully automated (occasional operator intervention) Billing query through customer on line account Query that requires agent response back to customer Operational update available through on line access Operational query that can have automated response (occasional operator intervention)

Unit Cost
$12.45 $ 2.76

% of Telephone Cost
451% 100%

$0.27 $0.14 $1.38 $0.14

10% 5% 50% 5%

$0.27

10%

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Internet Service Design

Product characteristics
Customization level, complexity, customer knowledge, capacity

Process characteristics
Technology and task

Touch points
Interaction between customers, employees and systems

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Service Design Model

Product Process Touch point Outcome

Technology Product Task

Customer Performance

Employees

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Product
The product dictates what type of activity will happen on the internet
E-commerce vs. e-service Customization
Is contact with a real person required? Can the internet facilitate service inquiries? Is loyalty the goal?

Product complexity and product knowledge

Example: technical support for novices vs. experienced users

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Processes
Back-Office Processes
Transaction Systems Billing Shipping Receiving Distribution & Fulfillment Systems Inventory Distribution Tracking Knowledge Systems Capture Organization Access Use (Selling & Monitoring)

Information Systems Data Supporting Hardware Supporting Software

Front Office Processes

Interaction Systems Status Checking FAQ, FUP, Scripting, Keyword Search Wizards Bulletin Boards Monitored Discussion Forums Call-back Buttons Real-time chat VOIP Language Translation Voice Recognition 19

Chapter 3 - Internet Strategies

Touch Points
Match customer tasks with appropriate touch points.
Complaints: phone Sales: internet, live chats Balance inquiries: internet, automated phone system

Give customers options based on their preferences for contacting the company Customer Contact Centers (CCCs)
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Outcomes
Measures of performance include the following:
Employee satisfaction Customer satisfaction Response times Form (greeting, language, offering additional help) Employee knowledge Customer regard Intention for repeat encounter
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