Slide 1

Direct to Customer

Types of Direct to Customer E-BusinessesDirect to Customer E-Business model schematicCase Study CDNOWLogistic Challenge & Channel ManagementINFRASTRUCTUREStrategic Objective and Value PropositionSources of RevenueCritical Success Factors Core Competencies

Whats different about E-Business?E-Business require two forms of convergence:Technical level: convergence of multiple technologies into an integrated electronic infrastructure to conduct business.The internetThe global telephone systemThe communication standard TCP/IPThe addressing system of URLsPCDatabase of product and customer informationMultimedia sound and graphicsUniversal use of browsersBusiness capabilities within and among firms:The integration of business processesWorkflowsIT infrastructuresKnowledgeData assets

E-business will drive organization to provide single point of contact to customers via electronic integration.

E-business modelA description of the roles and relationships among a firms customers, allies, and suppliers that identifies the major flows of product, information, and money, and the major benefits to participants. Strategic Objective and Value propositionTraditional retail buy, move and sellE-business direct-to-customer model sell, buy and moveFirm of interest :Higher marginsExpanded marketsGreater information about customersCustomerGreater choiceIncreased convenienceLower costsSources of RevenueDirect sales to customerSupplemental revenues Advertising Sale of customer informationProduct placement feesHigher margins may also be attained Reducing the cost to serve the customer directlyCutting steps out of the distribution chain

Dell.comIn 1994, Dell pioneered the use of the internet as a channel.Internet accounts for more than 50% of its revenues.Business and individual customers By removing dealer and distributors, Dell sells equivalent computers at higher margins than the competitors.Removing intermediaries also reduces time to market for new products.(1995 99)Average annual sales growth was 52% for Dell and 25% for Compaq. Dells margin was 5% higher than the industry average overall.Dells customers are 90% businesses and 10% individuals.Dell uses the internet effectively to deliver different value propositions to different segments within both B2C and B2B marketspaces.For transactional customers (approx. 30%) who need to be acquired Types of Direct to Customer E-Businesses

Space - based firms (dot coms) selling their own branded products such as RealNetworks.Place-based firms also operating over the Internet, selling their own branded products.Gap, Lands End, Gillette and NikePlace-based firm selling third-party products both in physical outlets and on internet, such as Barnes & Nobledot-coms selling third-party products, such as CDNOW and Amazon.comInternet increases price competition for commodity items and reduces profitability for retailers selling undifferentiated items.Only 25% of direct-to-customer Internet only businesses return a profit The higher rate of direct-to-customer firms overall that make a profit (40%) reflects the result of place-based firms launching Internet businesses

Dot comsCatalogers that have moved onlineBrick and mortarAcquisition cost$82$11$31Cost of marketing as a percentage of revenue119636Abandoned shopping carts (in percent)526676The dot coms must invest heavily to create a new brand, while catalogers and brick and mortar operators can simply migrate their brand to space 9953421471Legend for e-business Model Schematic

The organization whose business model is illustrated by the schematic

The organization or individual from which the firm of interest obtain Goods, services or information. There is generally a flow of money from firm of interest to its suppliers.

Who consumes the firm of interests goods, services, or information . There is generally a flow of money from customer to firm of interest.

An organization whose products help to enhance the demand for the firm of interests productA digital connection through which messages flow in both directions.This connection is the internet.

The firm with the greatest potential to own the customer relationship.Owning the customer relationship provides the firm with the opportunity to know the largest amount of useful knowledge aboutThe customer.Legend for e-business Model Schematic

This one direction flow indicates payment from one party to another,In exchange for goods, services or information.This one direction flow indicates transfer of goods or digital products from one party to anotherMessages flow through all electronic relationships, therefore only those flows of information that are not digital products are represented by this icon. This information is often the result of research about a product or service and usually free.Legend for e-business Model Schematic

Direct-to-customerThe firm of interest owns the customer relationship.The customer relationship enables the firm to collect data to profile the customer, who can be encouraged to become repeat customer.Owns customer data has the potential to develop powerful insight into customers needs and desires.Owns transactions receives a fee or profit margin for the item sold.Direct-to-customerChannel conflictCompaq Australia Harvey Norman Chain stopped stocking the brand.Had other resellersMargins gained from direct salesDirect-to-customer model contains risk as well as opportunityDirect-to-customer disastersBoo.com an online only retailer of fashion and sports wear.Was undone by its own technical ambitions and the unrealistic expectations created among its prospective customers.Other retailers have been undone by a misunderstanding or misapplication of the Direct-to-customer business modelFailure to adapt the model as time changesCDNOW Case StudyOne of the poster children of direct selling on the InternetArticle - CDNOW is one of the pioneers who never crashed or burned. They did it right. They offer the music, the diversity of interests, and best of all they keep it simple. Drawing on their humble beginnings in the early days of August 1994, they have built online market force. They have become a brand nameFrom its initial public offering price of $16 in early 1998 despite having lost nearly $11 million on sales of $17 millions the year before CDNOWs shares reached a high of $39.25 before falling back to $20.Higher customer acquisition ($45) to attract each customer was given as one of the reason.CDNOW Case StudyThe site offers more than 500,000 CDs and other music related products and 650,000 sound samples, as well as daily news, features, guides to music genres, and exclusive interviews and reviews by CDNOWs editorial staff.Revenue direct sales, selling advertisingsPaid Yahoo for placements on their site.CDNOW merged with competitor N2K in 1999 and in the same year it announced a merger with Columbia House , the music club jointly owned by Sony and Time Warner.The merger fell through in 2000 but agreed to commit $51 million to prop up CDNOW.Only one month later companys situation appeared direCDNOW Case StudyAccording to company auditors Company has suffered recurring losses from operations, and has a working capital deficiency and significant payment due in 2000 related to marketing agreements that raises substantial doubt about its ability to continue as growing concernWhat went wrong?CompetitionTechnical challengeAnd, an unclear , undifferentiated category 4 direct-to-customer e-business modelAmazon entered into CDs and became the largest online sellers of CDsTechnologically CDNOW was challenged by the rise of MP3Invest

Firms are building extensive networks of distribution centers and delivery mechanisms.Significant investment and management attentionAmazon200 customer service representatives put things rightOutsource Many service providers offer full service logistics supportFederal expressfedEx marketplace : one click access to several top online merchantsFast and efficient transaction processing, fulfillment, and payment Critical success factors or core competency ?Channel ManagementDoes the firm directly serve customers in both place and space (2 & 3) or in space only (1 & 4)?2 & 3 internet as another channelReduced cost or with greater customer intimacyChannel conflict could be severe enough to make a manufacturer rethink its online strategyLevi Strauss & Co. abandoned its e-commerce siteChannel conflict can be managedEstee Lauder : skincare and cosmetics company

INFRASTRUCTUREPayment transaction processing to process online customer paymentsERP to process customer transactionsWorkflow infrastructure to optimize business process performanceCommunication network services linking all points in the enterprise to each other and the outside world, often using the TCP/IP protocol

INFRASTRUCTUREThe installation and maintenance of workstations and local area networks supporting the large number of people required to operate a direct-to-customer model; Service-level agreements between business and the IT group or outsourcer to ensure, monitor, and improve the system necessary for the modelStrategic Objective and Value propositionOne of the most profitable of the models, as the firm own all of the three customer assets:RelationshipDataTransactionThe model is potentially profitable particularly for companies holding large market shares and offering a clearly differentiated value proposition Dell, Realnetworks Other categories of 1 & 2 firms Strategic Objective and Value propositionFor the firms following a less differentiated models (firms 3 & 4) profits will be hard to achieve as internet facilitatesEasy comparison on objective measures such as priceTherefore, only a small number of category 3 & 4 firms will thrive and capture large market share Sources of RevenueRealNetworkss approximate breakdown of revenue sources :Consumer media players (40%)Streaming software for business customers (30%)Content delivery (20%)Advertising (10%)Critical Success Factors Provide fast and efficient transaction processing, fulfillment, and paymentEnsure adequate security for the organization and its customersProvide interfaces that combine ease of use with richness of experience, integrating multiple channelsFull Service ProviderModel combines the strength of both the direct-to-customer and the intermediary models.A firm using the Full Service Provider model provides total coverage of customer needs in a particular domain consolidated via a single point of contact.Sourced internally or externallyDomain : financial services, health care, or industrial chemicalsFull Service ProviderPrudential Advisor, established by Prudential Securities, a subsidiary of the Prudential Insurance Company of America.Prudential Advisor is redefining the full service relationship and bringing together a wealth of resources to support educated investment decisions.Allows customer to interact in person or by telephone with a live financial adviser.A flat fee for trade, and an annual feePrudential Advisor allows Prudential Securities to own the customer relationship, the data about what the customers are doing with regards to investmentSome of the transactionsHelps Prudential to cross sellThird party does not own the customer relationship