The e-commerce environment

All organizations operate within an environment that influences the way in which they con­duct business. Strategy development should be strongly influenced by considering the environment the business operates in, as illustrated in Figure 2.1. To inform e-commerce strategy, the most significant influences are those of the immediate marketplace of the micro-environment that is shaped by the needs of customers and how services are provided to them through competitors and intermediaries and via upstream suppliers. Wider influ­ences are provided by local and international economic conditions and legislation together with whatever business practices are acceptable to society. Finally, technological innovations are vital in providing opportunities to provide superior services to competitors or through changing the shape of the marketplace.

1. Strategic agility

The capacity to respond to these environmental opportunities and threats is commonly referred to as strategic agility. Strategic agility is a concept strongly associated with knowl­edge management theory and is based on developing a sound process for reviewing marketplace opportunities and threats and then selecting the appropriate strategy options. See Mini Case Study 2.1 for an excellent video introduction to the principles of strategic agility.

2. Online marketplace analysis

Analysis of the online marketplace or ‘marketspace’ is a key part of developing a long-term e-business plan or creating a shorter-term digital marketing campaign. Completing a mar­ketplace analysis helps to define the main types of online presence that are part of a ‘click ecosystem’ which describes the consumer behaviour (Chapter 9) or flow of online visitors between search engines, media sites and other intermediaries to an organization and its competitors. Prospects and customers in an online marketplace will naturally turn to search engines to find products, services, brands and entertainment. Search engines act as a distri­bution system which connects searchers to different intermediary sites for different phrases, so the flow of visits between sites must be understood by the marketer in their sector.

To help understand and summarize the online linkages between online businesses and traffic flows it is worthwhile to produce an online marketplace map as shown in Figure 2.3. This shows the relative importance of different online intermediaries in the marketplace and the flow of clicks between your different customer segments, your company site(s) and dif­ferent competitors via the intermediaries.

The main elements of the online marketplace map presented in Figure 2.3 are:

1. Customer segments. The marketplace analysis should identify and summarize different target segments for an online business in order to then understand their online media consumption, buyer behaviour and the type of content and experiences they will be looking for from inter­mediaries and your web site.
2. Search intermediaries. These are the main search engines in each country. Typically they are Google, Yahoo!, Microsoft Live Search and Ask, but others are important in some markets such as China (Baidu), Russia (Yandex) and South Korea (Naver). You can use audience panel data from different providers indicated in Box 2.1 to find out their relative importance in different countries. The Google Trends tool (Figure 2.4) is a free tool for assessing site popularity and the searches used to find sites and how they vary seasonally, which is useful for student assignments.

Companies need to know which sites are effective in harnessing search traffic and either partner with them or try to obtain a share of the search traffic using the search engine marketing and affiliate marketing techniques explained in Chapter 9. Well-known, trusted brands which have developed customer loyalty are in a good position to succeed online since a common consumer behaviour is to go straight to the site through entering a URL or from a bookmark or e-mail. Alternatively they may search for the brand or URL. Hitwise provides this type of insight, as shown in Table 2.1. Through evaluating the type and volume of phrases used to search for products in a given market it is possible to calcu­late the total potential opportunity and the current share of search terms for a company. ‘Share of search’ can be determined from web analytics reports from the company site which indicate the precise key phrases used by visitors to actually reach a site from different search engines.

3. Intermediaries and media sites.

Media sites and other intermediaries such as aggregators and affiliates are often successful in attracting visitors via search or direct since they are mainstream brands. Companies need to assess potential online media and distribution partners in the categories shown in Figure 2.2 such as:

1. Mainstream news media sites or portals. Include traditional, e.g. FT.com or Times or Pureplay, e.g. Google news, an aggregator.
2. Niche or vertical media sites, e.g. E-consultancy, ClickZ.com in B2B.
3. Price comparison sites (also known as aggregators), g. Moneysupermarket, Kelkoo, Shopping.com, uSwitch.
4. Superaffiliates. Affiliates gain revenue from a merchant they refer traffic to using a commission-based arrangement based on the proportion of sale or a fixed amount. They are important in e-retail markets, accounting for tens of percent of sales.
5. Niche affiliates or bloggers. These are often individuals, but they may be important, for example, in the UK, Martin Lewis of Moneysavingexpert.com receives millions of visits every month. Smaller affiliates and bloggers can be important collectively.

Again, the relative importance of these site types can be assessed using the services summarized in Box 2.1.

4. Destination sites

These are the sites that the marketer is trying to generate visitors to, whether these are trans­actional sites, like retailers, financial services or travel companies or manufacturers or brands. Figure 2.3 refers to OVP or online value proposition which is a summary of the unique features of the site which are described in more detail in Chapters 4 and 8. The OVP is a key aspect to consider within planning – marketers should evaluate their OVPs against competi­tors’ and think about how they can refine them to develop a unique online experience.

Marketplace channel structures describe the way a manufacturer or selling organization delivers products and services to its customers. Typical channel structures between business and consumer organizations are shown in Figure 2.5.

A distribution channel will consist of one or more intermediaries such as wholesalers and retailers. For example, a music company is unlikely to distribute its CDs directly to retailers, but will use wholesalers who have a large warehouse of titles which are then distributed to individual branches according to demand. Of course, today they can distribute digital tracks straight to online retailers such as iTunes and Napster, a major change to their channel strat­egy. Bands can even bypass retailers and sell direct; for example, in 2008 Radiohead released their In Rainbows album direct from their site, allowing purchasers to name their own price!

The relationship between a company and its channel partners shown in Figure 2.5 can be dramatically altered by the opportunities afforded by the Internet. This occurs because the Internet offers a means of bypassing some of the channel partners. This process is known as disintermediation or ‘cutting out the middleman’.

Figure 2.6 illustrates disintermediation in a graphical form for a simplified retail channel. Further intermediaries such as additional distributors may occur in a business-to-business market. Figure 2.6(a) shows the former position where a company marketed and sold its prod­ucts by ‘pushing’ them through a sales channel. Figures 2.6(b) and (c) show two different types of disintermediation in which the wholesaler (b) or the wholesaler and retailer (c) are bypassed, allowing the producer to sell and promote direct to the consumer. The benefits of disintermediation to the producer are clear – it is able to remove the sales and infrastructure cost of selling through the channel. Benjamin and Weigand (1995) calculate that, using the sale of quality shirts as an example, it is possible to make cost savings of 28 per cent in the case of (b) and 62 per cent for case (c). Some of these cost savings can be passed on to the customer in the form of cost reductions.

Vauxhall (www.vauxhall.co.uk), the UK part of General Motors, provides a good example of the response to the opportunities provided by new electronic channels. The initial aims for this web site were not limited to online sales generation. Indeed, a wholesale replacement of dealerships was not envisaged. Additional aims included raising the profile and branding awareness of Vauxhall and lead generation for dealerships (such as brochure and test drive requests). To achieve these aims online approaches used include differential pricing (‘Vaux­hall Internet Price’), an online sales support tool (‘Vauxhall Advisor’) and an e-mail newsletter. CIO (Chief Information Officer) (2002) reported that in November 2001, eGM – a group created in 1999 to manage e-business projects and processes throughout General Motors – was dismantled and rolled back into GM’s traditional business units. While scep­tics may point to this as evidence of disappointing results from e-business, the article reports that GM executives, including CEO Rick Wagoner and CIO’s Ralph Szygenda, say the changes at eGM are not indicative of a wholesale retreat from e-business:

The intent from the beginning was to create a separate function for two to three years to drive [e-business capabilities] across GM. The dismantling of the eGM group is seen as a sign of success, with e-business now an integral part of the company’s fabric.

GM managers also point to the role of the Internet in generating leads for dealer sales. In September 2001, the GM BuyPower US web site has delivered an average of more than 2,000 leads to dealers per day with 20 per cent of dealer leads generated through BuyPower con- verting into sales. This pattern of the incorporation of e-business back into traditional structures is commonplace amongst the advanced adopters of e-business who have success­fully integrated e-business into their organizations.

Although disintermediation has occurred, reintermediation is perhaps a more significant phenomenon resulting from Internet-based communications. Figure 2.7 illustrates this con­cept. Let us take the example of car insurance in the UK market. In Figure 2.7(a) we commence with the traditional situation in which many sales were through brokers such as the Automobile Association (www.theaa.co.uk). With disintermediation (Figure 2.7(b)) there was the opportunity to sell direct, initially via call centres as with Direct Line (www.directline.co.uk) and then more recently by their transactional web site. Purchasers of products still needed assistance in the selection of products and this led to the creation of new intermediaries, the process referred to as reintermediation (Figure 2.7(c)).

In the UK Screentrade (www.screentrade.com) and Confused (www.confused.com) are examples of a new entrant broker providing a service for people to find online insurance at a competitive price. Esurance.com and Insurance.com are US examples. Reintermediation removes this inefficiency by placing an intermediary between purchaser and seller. This intermediary performs the price evaluation stage of fulfilment since its database has links updated from prices contained within the databases of different suppliers. Screentrade was purchased by Lloyds TSB, a tra­ditional financial services provider, but is still positioned as independent from its parent.

What are the implications of reintermediation for the e-commerce manager? First, it is necessary to make sure that your company, as a sup­plier, is represented with the new intermediaries operating within your chosen market sector. This implies the need to integrate, using the Internet, databases contain­ing price information with those of different intermediaries. Forming partnerships or setting up sponsorship with some intermediaries can give better online visibility compared to com­petitors. Second, it is important to monitor the prices of other suppliers within this sector (possibly by using the intermediary web site for this purpose). Third, it may be appropriate to create your own intermediary, for example DIY chain B&Q has set up its own intermediary to help budding DIYers, but it is positioned separately from its owners. Such tactics to counter or take advantage of reintermediation are sometimes known as countermediation. Screentrade is another example of countermediation, except that here the strategy of Lloyds TSB was to use the lower-risk approach of purchasing an existing online intermediary rather than creating its own intermediary. A further example is Opodo (www.opodo.com) which has been set up by nine European airlines including Air France, BA, KLM and Lufthansa. Such collaboration would have been inconceivable just a short time ago.

Source: Dave Chaffey (2010), E-Business and E-Commerce Management: Strategy, Implementation and Practice, Prentice Hall (4th Edition).