e-Business Research Center RESEARCH REPORTS 5 2003

THE ROLE OF E-BUSINESS FOR COMPETITIVE ADVANTAGE IN THE TRANSFORMING EUROPEAN FOOD AND NON-FOOD RETAIL BUSINESS

Richard Windischhofer

Distribution e-Business Research Center Published by Tampere University of Technology and University of Tampere Printed edition ISSN ISBN 1459-0158 952-15-0950-3 951-44-5548-7 Electronic edition in http://www.ebrc.info ISSN ISBN 1459-0166 952-15-0951-1 951-44-5549-5

Cover design by Mainoscraft Oy Printed by Cityoffset Oy, Tampere 2003

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Preface This study is part of the eTampere project, a joint project of the University of Tampere and the Tampere University of Technology. Within this project, the eBusiness Research Center (eBRC) represents the home of this study on The role of eBusiness for competitive advantage in the transforming European food and non-food retailing business. The project has been supervised by Kari Neilimo, Professor of Management Accounting at the University of Tampere. The report has been conducted and written by Richard Windischhofer, student of Social Economics at the University of Linz while studying as visiting student at the University of Tampere. The study was conducted during the period of August 2001 and June 2002. The results were disseminated in June 2002 as Richards Masters Thesis, and appear under the same title, but with slight modifications as this publication. The study represents a literature review on retailing transformation, its effects on strategy and competitive advantage and the role of electronic business in that context. It is directed to anyone who aims to gain a basic insight on these issues or seeks to engage in deeper research in a specific area of retailing and e-Business. The writer hopes that especially students will profit from this study as an introduction to strategy, retailing and e-Business. Because of the wide field to cover, this report represents an overview rather than going into very specific details. Richard Windischhofer

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Acknowledgements First, I would like to thank Prof. Kari Neilimo for his supervision during my studies at the eTampere project, of which this report is the result. I am grateful that Prof. Neilimo has shared with me his thoughts on strategy, retailing and e-Business and that our working relations have been characterized by openness and support. By appointing me as his researching assistant, I was able to stay for a longer period in Finland than I had hoped for, which made my roots grow deeper and deeper into this great culture. Further, I would like to thank Prof. Anne-Mari Jrvelin for her support and ideas on the content of this report. I would also like to thank the following business professionals for their time and expertise: Jouko Nieminen, Managing Director of Intrade Partners, Arttu Laine, Managing Director of SOK Estonia, Visa Palonen, Vice-President of the e-Business Division at SOK, Maria Santavuo and Henrik Lares from Accenture, Helsinki Office and Marika Alhonen from SOK Customer Owner Services. Finally, I would like to thank the e-Business Research Center that contributed financially to this study. R.W.

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Executive Summary The evolution in retailing is driven by market saturation, proliferation of customer needs and progress in information technology (IT). The three biggest European markets (Germany, United Kingdom and France), that have been subject to the environmental analysis of European Food and Nonfood Retailing, share these characteristics more or less. However, the strategies to cope with this situation differ slightly, whereby the UK retailers represent the most sophisticated ones in customer centric strategy. In general, retailers have become bigger, more diverse in their operations and have moved into foreign markets to pursue above average growth. Retailers are seeking for efficiency through streamlining supply chain processes because competitive pressures force them to cut costs. The power has shifted from suppliers to the retailers because retailers gained size and therefore purchasing power and sophistication in their business operations. Retailers are launching an increasing amount of private label products, which adds a significant amount of profit to their business. These private labels have been constantly moved to the up-segment where they start to compete with manufacturer brands. E-Commerce in the form of e-Marketplaces gives retailers a chance to leverage their private labels through conducting reverse auctions. Retailers are able to use their position as owners of the customer interface to gain customer knowledge, which helps them to build customer centric concepts. Many retailers are emphasizing value for money and increase customer loyalty instead of competing only on low prices. As a result of market saturation, retailers are looking for additional revenue drivers such as new services (diversification) or new distribution channels (e.g. online shopping). Retailers need to have a clear perception of their business. Either, the focus is on cost leadership - a no frills strategy such as discounters do - or on a customer centric strategy, which is a hybrid form of generic strategy because it focuses on efficiency as well as on differentiation. This report does not evaluate which strategy is better both strategies create value for their customers in different ways. However, they have in common that cost efficiency pursuer and customer centric retailer create customer value through passing on cost savings that have been achieved through supply chain enhancement. Here, the cost efficient strategy enjoys competitive advantage from process standardization, economies of scale and focusing on a few key tasks. But customer centric retailing also means to enhance the relationship between the retailer and the customer, which means to enter a learning and long-term relation with the customer. Here, the concepts most often used are relationship marketing, one-toone marketing and customer relationship management (CRM). Enhancing relations with customers and increasing share-of-customer can be achieved by creating valueadded services, though retailers seem to find it difficult to add services the customer truly values, without having to diversify.
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Customer centric retailers are moving therefore from offering core services (e.g. shopping in physical stores) to providing an array of services where the customer can choose. This is mainly about creating a multi-channel retailer that enjoys more loyal customers through continuous service delivery. Customer loyalty programs are most frequently used to transform customer relations into membership relations where the retailer knows its customers. The aim is to analyze purchasing data to derive customer insight on buying behavior in order to manipulate that behavior. But these technologies are deployed for more practical measures as well, such as the success of marketing campaigns. Looking at service creation from a transaction-cost oriented perspective, the potential benefit for these retailers to transform transactions into services is higher on the B2B side than on the B2C side. Creating new services should provide the retailer with competitive advantage through enhancing customer loyalty and customer spending. In order to create this competitive advantage, the firm needs besides a clear perception of its core-business to have a portfolio of strategies. These strategies represent big and small bets about the future, which is becoming increasingly uncertain due to the Internet as disruptive technology. In order not to become laggards, retailers need to bet on different e-Commerce strategies by managing these project step by step and continuously evaluating their projects future prospects, as for example online shopping, mobile commerce, or emarketplaces. Three key success factors have been discussed, that derive from characteristics typical for the industry and which are business strategy, organization strategy and information strategy. The business strategy manages the core business while exploring the future with new projects. These activities translate into organization strategy and information strategy, which both are needed to build the flexible and innovative organization that can execute the business strategies. Firms need to build competitive advantage through managing these key success factors. This study argues that for mastering competition, the retailer needs to manage three competencies that are the basis for the firms strategy and implementation. Competencies are a set of skills that enable the firm to cope with uncertainty and to build its core competencies. Two of these competencies are former key success factors - organization strategy and information strategy, while the third competency is networking competence a crucial skill for a customer centric retailer that aims to enhance the value of a network that consists of customers, manufacturers, wholesalers and other partners. Competencies that are the basis for executing e-Business solutions have been harder to develop than expected, for example in analyzing customer-purchasing information through data mining. Also Mobile Commerce solutions for retailing have not takenoff yet, which is hardly the retailers fault due to the immaturity of nearly all characteristics of this technology. However, small m-Commerce projects have been initiated for example in mobile marketing and advertising.

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E-Marketplaces are definitely here to stay though still immature, but most industry players are participating in these platforms more or less. Online shopping had been rather troublesome in its initial phase but recently especially French and UK retailers enjoy some success in that area. Usually it was firms that started early with these projects and approached the topics in small steps that could enjoy success. It can be concluded that e-Business is offering potential benefits of different significance, whereby the outcome of many technologies the industry is currently investing in, is still uncertain. For example, enhanced personalization and customization of services and advertising might have an effect on retailing with a potential benefit that is hard to predict yet. However, this report evaluates the potential of e-Business for creating competitive advantage to be greater within the B2B supply chain than within the B2C relations. However, to stay in the game, retailers therefore must keep investing in new technologies (whether B2B or B2C), manage their core business at the same time, and enhance their skills in organization, information and networking competence. Most industry leaders, such as Wal-Mart and Tesco have been building their competencies decades ago, which shows that it is a difficult process that takes its time and resources. Keywords: e-Business, e-Commerce, Customer Relationship Management, Retailing, Corporate Strategy, Supply Chain, Competitive Advantage, Customer Value, eMarketplaces, m-Commerce, Online Shopping.

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Contents 1 Introduction ........................................................................................................ 1 1.1 Background of the study ..................................................................................1 1.2 Objective ............................................................................................................2 1.3 Methodology and Structure .............................................................................2 Major Trends in the European Retail Industry .............................................. 5 2.1 The Evolution of Retailing Store Formats and Markets...............................6 2.2 From Supply-Oriented Model to Customer Centric Concept ....................10 2.2.1Changing Customer Needs .........................................................................10 2.2.2Private Labels .............................................................................................12 2.2.3Diversification ............................................................................................14 2.3 The European Retailing Market....................................................................15 2.3.1Germany .....................................................................................................17 2.3.2United Kingdom .........................................................................................18 2.3.3France .........................................................................................................19 Definition of Concepts ...................................................................................... 21 3.1 Corporate Strategy .........................................................................................21 3.2 The Impact of e-Business on Strategy...........................................................23 3.3 Definition of Electronic Business...................................................................27 3.4 Definition of Electronic Commerce...............................................................28 3.5 Definition of Customer Relationship Management (CRM) ........................29 3.6 Customer Value...............................................................................................30 3.7 Relationship Retailing ....................................................................................31 3.8 One to One Marketing and Relationship Marketing.............................32 3.9 A Definition of Consumer Goods...................................................................33 3.10 A Definition of Services in Retailing .......................................................33 3.10.1 Distinguishing between Services ...........................................................34 3.11 Changing Relationship Characteristics in Retailing .............................35 Retail Strategy .................................................................................................. 39 4.1 The Value Chain Analysis ..............................................................................40 4.2 Generic Strategy and Competitive Advantage.............................................44 4.3 Sources of Cost Efficiency ..............................................................................51 4.3.1Economies of scale .....................................................................................52 4.3.2Experience ..................................................................................................52 4.3.3Product and Process Design .......................................................................53 4.3.3.1 Cost Efficiency in Store formats ........................................................53 4.3.3.2 Supply chain process automation.......................................................54 4.3.3.3 Supply chain techniques.....................................................................55 4.3.3.4 Vertical integration into wholesale ....................................................57 4.3.4Supply costs................................................................................................59 4.4 Transaction Costs............................................................................................61 4.5 Customer Value Equation and Supply Side within the Retail Value Chain . ...........................................................................................................................63 4.5.1Relationship Management and Preferred Supplier Relations.....................65 4.6 Key Success Factors........................................................................................67 4.6.1Business Strategy .......................................................................................68 4.6.2Organization Strategy.................................................................................68 4.6.3Information strategy ...................................................................................69 4.7 Competitive Advantage and Core Competence ...........................................70
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4.7.1Core Competencies of a retailing firm .......................................................72 5 E-Business techniques and tools in Retailing ................................................. 75 5.1 Individual Customer Information (ICI) .......................................................77 5.2 Customer Segmentation .................................................................................77 5.3 Loyalty Card Schemes....................................................................................79 5.4 Data Warehousing ..........................................................................................83 5.5 Data Mining.....................................................................................................84 5.6 B2B e-Commerce Procurement Platforms ................................................88 5.6.1Public independent trading exchanges .......................................................89 5.6.2Industry sponsored e-Marketplaces............................................................90 5.6.3Private Exchanges ......................................................................................92 5.7 Business-to-Consumer e-Commerce Channels ............................................97 5.7.1Electronic Grocery Shopping (EGS) ........................................................101 5.7.2Mobile Commerce ....................................................................................105 5.7.2.1 Technological Issues ........................................................................106 5.7.2.2 Applications for m-Commerce.........................................................107 5.7.2.3 Projects in m-Commerce..................................................................109 5.8 Internet Portals .............................................................................................111 Suggestions for further research ................................................................... 114 Appendix ......................................................................................................... 117 7.1 Store Formats ................................................................................................117 7.1.1Convenience Stores ..................................................................................118 7.1.2Department Stores ....................................................................................118 7.1.3Supermarkets ............................................................................................119 7.1.4Hard Discounters ......................................................................................119 7.1.5Hypermarkets ...........................................................................................120 7.1.6Category Killers .......................................................................................120 7.2 The S Group ..................................................................................................122 References ....................................................................................................... 125

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List of Tables TABLE 2-1 COMPARISON OF EUROPEAN SALES OF TOP FMCG MANUFACTURERS AND RETAILERS, 1993-1994 .................................................................................... 7 TABLE 2-2 PRIVATE LABEL PENETRATION BY RETAILER, 1995 ............................ 12 TABLE 2-3 PENETRATION OF PRIVATE LABELS IN EUROPE ................................... 13 TABLE 2-4 COMMON CHARACTERISTICS IN EUROPEAN FOOD RETAILING ............. 16 TABLE 2-5 UK GROCERY MARKET SHARES, 1992 2000 ................................... 19 TABLE 2-6 NUMBER OF HYPERMARKETS IN EUROPE IN 2000 ................................ 20 TABLE 5-1 TIME LINE OF THE CUSTOMER OWNER SYSTEM .................................... 82 TABLE 5-2 E-MARKETPLACES AND EUROPEAN PURCHASING ALLIANCES IN 200093 TABLE 5-3 COMPARISON OF GROCERY DISTRIBUTION MODELS.......................... 104 TABLE 7-1 MARKET SHARE IN FOOD RETAILING BY STORE FORMAT, 1996 ....... 118 TABLE 7-2 S GROUP IN FIGURES......................................................................... 123 TABLE 7-3 SOK CORPORATION IN FIGURES ........................................................ 123

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List of Figures FIGURE 2-1 PRODUCT-LIFE-CYCLE FOR STORE FORMATS AND CHANNELS ............. 9 FIGURE 2-2 FROM THE SUPPLY-LED MODEL TO THE CUSTOMER CENTRIC MODEL .............................................................................................................................. 11 FIGURE 2-3 EUROPEAN RETAIL MARKET, 1999 .................................................... 17 FIGURE 3-1 THE EFFECT OF E-BUSINESS ON THE COMPONENTS OF THE RETAILING MIXES ................................................................................................................... 22 FIGURE 3-2 THE DIFFERENCE BETWEEN EDI AND ELECTRONIC COMMERCE ........ 25 FIGURE 3-3 FIVE WAYS OF IT ENABLED BUSINESS TRANSFORMATION ................. 27 FIGURE 3-4 DISTINGUISHING BETWEEN E-BUSINESS AND E-COMMERCE ............... 28 FIGURE 3-5 THE CUSTOMERS VALUE PERCEPTION ................................................ 30 FIGURE 3-6 RELATIONSHIPS WITH CUSTOMERS ..................................................... 35 FIGURE 4-1 PORTERS VALUE CHAIN .................................................................... 41 FIGURE 4-2 SCHEMATIC DIAGRAM OF A RETAILING VALUE SYSTEM .................... 43 FIGURE 4-3 PORTERS GENERIC STRATEGIES ........................................................ 44 FIGURE 4-4 THE STRATEGY CLOCK: BOWMANS COMPETITIVE STRATEGY OPTIONS .............................................................................................................................. 46 FIGURE 4-5 COMPARISON IN COST EFFICIENCY AND VALUE ADDED .................... 49 FIGURE 4-6 SOURCES OF COST EFFICIENCY .......................................................... 51 FIGURE 4-7 THE VALUE STRUCTURE OF A FIRMS OFFERING ................................. 61 FIGURE 4-8 THE RETAIL VALUE CHAIN ................................................................. 64 FIGURE 4-9 KEY SUCCESS FACTORS IN RETAILING ............................................... 67 FIGURE 4-10 A PROCESS ORIENTED FRAMEWORK OF A RETAILERS CORE COMPETENCE ......................................................................................................... 74 FIGURE 5-1 DEVELOPMENT OF SEGMENTATION .................................................... 78 FIGURE 5-2 USE OF INDIVIDUAL CUSTOMER INFORMATION (ICI) ......................... 87 FIGURE 5-3 E-MARKETPLACES IN FOOD AND NON-FOOD RETAILING ................... 91 FIGURE 5-4 SOK INTERNET PORTAL AS STAKEHOLDER PORTAL ........................ 113 FIGURE 7-1 DIFFERENT STORE FORMATS IN RETAILING ..................................... 117 FIGURE 7-2 ORGANIZATIONAL STRUCTURE OF S GROUP .................................... 122

List of Illustrations Illustration 1: S Group and Lidl as Hybrid versus No Thrills....48 Illustration 2: S Groups Supply Chain Process58 Illustration 3: S Groups Customer Loyalty Program....81 Illustration 4: S Groups Strategy for e-Purchasing Platforms..94 Illustration 5: S Groups Web Portal112

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1 1.1

Introduction Background of the study

The European retailing market has been undergoing a period of market saturation for the past two decades, which has resulted in continuing market consolidation. According to a market forecast from M+M Eurodata, the five largest European grocery retailers might rise their combined market share from 25,4% in 1998 to 40% in 2005 (as cited in: Laine, 2000). Ensuring revenue growth becomes increasingly difficult, which motivates retailers to pursue growth through entering new markets, acquiring competitors and developing existing markets. Retailers are developing their markets by diversifying retail operations, creating new distribution channels and value added services. Further, improving supply chain efficiency to decrease operating costs is of every retailers concern. The two main strategies, which have emerged, are the so-called cost-efficiencystrategy and the customer-centric-concept. The cost efficient strategy seeks to derive its competitive advantage from pure cost leadership, specialization and efficient supply chain processes. The customer centric approach combines efficient supply chain processes with diversification (multi-channel retailing) and seeks to build a relationship to the customer by not just emphasizing price but also value for money. E-Business supports both - gaining efficiency of the supply chain process and creating new distribution channels and services. Especially virtual purchasing platforms, such as e-marketplaces have been argued to increase the retailers ability for sourcing, ordering and logistics. On the business-to-consumer side, online shopping and customer relationship management has been argued as promising sources of future revenue. The customer centric retailers, such as Tesco (UK) or S Group (Fin) have engaged in transforming their business activities in order to use the benefits of eBusiness. Their aim is to create a bond to their customers and try to develop partnerships through offering value-adding services, which should keep competitors out and customers in. However, the shakeout of e-Business in spring 2000 forced the economy to look at eBusiness and its possibilities from a more realistic perspective. In retailing industry, most on-line grocery start-ups have failed, such as Web Van, which finally went bankrupt in 2001 (Gartner, 2001). CRM has had major difficulties to deliver the expected customer insight, with several retailers quitting their customer loyalty programs, such as Safeway did in May 2000 (Laine, 2000:16). In supply chain management, purchasing platforms havent had the predicted success either (Accenture, 2001a). Despite the setbacks in e-Business, there were also successes that show us e-Business is here to stay. Market leaders such as Tesco (UK) or Wal-Mart (US) are on the forefront of using e-Business to grow revenues, save costs and add value to their customers. Tesco has been succeeding for example in the on-line grocery business and is making profit already (Financial Times, 2001a).

Wal-Mart has successfully implemented a private e-procurement platform which integrates suppliers, wholesale, retail and the consumer (Accenture, 2000b). Industry sponsored exchanges have decided to co-operate in establishing common standards to speed up their integration process (GNX, 2001c). 1.2 Objectives

The main objective has been to study evolution, competition and strategies in retailing business and how e-Business solutions affect the process efficiency and the creation of customer value in food and non-food retailing. The aim was to provide an overview of the entire retailing value chain, with investigating the value chain from the supplier via the wholesaler to the retailer and finally, the end-consumer. The main focus has been on the food and non-food retailing industry in Germany, the United Kingdom and France, which are the three largest markets of the European Union in terms of inhabitants and GDP. All three markets have developed their own characteristics, whereby Germany has a special tradition of hard discount markets. The United Kingdom is the most advanced market in customer centric respect, and France is the most restricted market, which for example has driven all major French retailers into on-line grocery recently (Business Week, 2001). These diversities provide an opportunity for comparing competencies of retailers from different countries with each other to identify issues which can contribute to building competitive advantage for other retailers, such as S Group, which represents the Finnish retailing scene in this report. 1.3 Methodology and Structure

The methodology of this study has been mostly an inductive analysis of literature on strategy and electronic business. To support the results and provide a view from business practice, a short qualitative study has been conducted by interviewing four managers of the retailing and e-Business field. Throughout the report, empirical results collected from literature are giving examples of retailing and e-Business, while at the end of this report a brief empirical case study is enclosed. Chapter two provides an overview of retailing evolution and outlines the major trends in the European retailing industry. The chapter briefly explains retail evolution in respect to competition and market pressures, as well as the role of important issues such as technology, diversification and private labels. The chapter should provide the reader with a brief industry analysis, which is the further basis for the theoretic chapters three and four. The material used in chapter two mainly stems from market research data, academic articles, and retail strategy books and reports from consulting firms.

Chapter three defines the theoretical concepts of the strategic concepts used for this study. It contains definitions of strategic management, e-Business, e-Commerce, and CRM. It further explains consumer goods and services. It also provides definitions for the concepts of customer value, relationship retailing, relationship marketing. Finally those concepts are linked when it is explained how retailers aim to transform their relations with their customers and deploy e-Business for that reason. The chapter is based on academic literature and explains the concepts of strategic management in retailing, electronic business, electronic commerce and customer relationship management. Chapter four explains concepts of business strategies such as choosing a generic strategy and achieving competitive advantage. It also explains value addition through achieving cost efficiency, and transforming costs into services. Further, the concepts of key success factors and core competence are explained. After each strategic concept, the connection to e-Business and retailing is explained. The information used in this chapter is mainly based on academic literature and practical examples from business journals. Chapter five about the role of e-Business in retail strategies and business processes shall give an overview of e-Business concepts such as e-Commerce and CRM. The benefits of the processes and tools within these concepts, such as e-Marketplaces or on-line shopping are throughout connected to the former chapters. The information, which had been used for chapter five, is a mixture from consulting reports, business journals, personal interviews, research reports, and academic literature. Due to the emergent nature of mobile commerce, not many results had been produced until the end of 2001, which had been the deadline for all other information that can be found in this report. Therefore, the paragraph about mobile commerce projects contains information, which has been collected in the first half of year 2002. Chapter six contains suggestions for further research. Chapter seven represents the appendix. It contains information about the characteristics of store formats, such as hypermarkets, supermarkets, department stores and discount stores. Further, the appendix contains a brief introduction to S Group (the second leading Finnish retail firm) and provides information about its business areas, organizational structure and some key numbers from their annual reports. It should provide the reader with background information to the illustrations, which are throughout the report giving practical examples of S Groups strategies and activities. The reason for including this brief case study was to investigate a practical example of the retailing industry and to connect theoretical with practical information. Since it is only a short case study, it has been decided to provide this practical information right at the spot where more theoretic aspects are explained. Therefore, the information about S Group is provided in 5 illustrations within the text of chapters four and five. The information in this case mainly derives from three interviews with managers at S Group and further, the annual report, brochures and information from the Internet.
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Major Trends in the European Retail Industry Objectives

The main objective of chapter three is to show practical aspects of the retailing market in Europe in order to get a better picture of the pressures which have been driving the retailing industry in past decades and which caused the transformation of the retailing industry. To read more about store formats, please refer to the appendix. The chapter deals with the evolution of retailing strategy and pursues the topic from a management perspective rather than the customers perspective. It should provide the reader with a basic analysis of the European food and non-food retailing industry and argues the following points: The evolution in retailing is driven by market saturation, changing customer needs and progress in information technology (IT). Store network density is increasing while store productivity (sales/m) is in some cases slightly decreasing, stagnating or enjoying only moderate growth which shows that Europe is a mature retail market. Retailers have become bigger, more diverse in their operations and have moved into foreign markets. Retailers are seeking for efficiency through streamlining supply chain processes because competitive pressures force them to cut costs. The power has shifted from suppliers to the retailers because retailers gained size and therefore purchasing power and sophistication in their business operations. Retailers are launching an increasing amount of private label products, which adds more profit to their business. These private labels have been constantly moved to the up-segment where they start to compete with manufacturer brands. Retailers are able to use their position as owners of the customer interface to gain customer knowledge, which helps them to build customer centric concepts. Many retailers are emphasizing value for money to increase customer loyalty instead of competing only on low prices. As a result of market saturation, retailers are looking for additional revenue drivers such as new services (diversification) or new distribution channels (e.g. online shopping). All European main markets show more or less the same signs of market saturation though certain differences remain concerning profit margins, predominant store formats and private label penetration.

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The Evolution of Retailing Store Formats1 and Markets

While during the economical boom of the post-war centuries markets benefited from over-demand, markets started to saturate in the 1970s, and new models and concepts had to be found in order to increase turnover and profits. For food retailers and nonfood retailers in most European countries, the 1970s were the beginning of launching large, new store formats such as supermarkets and hypermarkets2 (Knee and Walters, 1985). During the 1980s, the retailing industry expanded through organic growth, but mergers and acquisitions became increasingly important to gain critical mass in their home-markets and internationally, which resulted in the emergence of large-scale market players with improved purchasing and distribution power. At the same time, the reach of stores has been improving due to higher consumer mobility while increasing outlet density improved store access. Product range and product quality was improving as well, which is described by Walters and Hanrahan (2000). They name the example of Tesco, (the leading UK grocery retailer in 2000) which changed its strategy in the 1980s as one of the first industry players from an operations-led (or supply-side-led) approach to a customerled approach, in order to adapt to shifting customer needs. Tesco started to reflect customer expectations for merchandising range, quality and convenience at competitive prices. This approach also meant more emphasis on marketing and to link it with purchasing, because retail outlets had to be designed and planned to handle merchandise and customers more efficiently and to serve clearly defined customer segments. One of the main reasons why retailers could engage in this customer-led approach was their investment in information technology in the 1970s and 1980s. In the late 1970s, the Uniform Product Code (UPC) and the scanning technology were introduced which brought changes to consumers on the checkout line and improved the retailers ability to collect sales data from products and customers. In the 1980s, electronic data interchange (EDI) had been introduced which connects retailers with suppliers. Further, database management was introduced (see paragraph 5.4 about data warehousing). In the 1990s, data warehousing and several supply chain techniques, such as category management and ECR3 (efficient consumer response) have been implemented (Keh and Park, 1997).
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Several theories of institutional change in the retailing population have been argued during the past decades, such as by McNair (1958) who was the first proponent of the wheel theory or wheel of retailing. The wheel theory argues that a new institution such as a low-cost retailer, which started as a low-cost, low margin and low-status business, attracts over time competitors and starts to feel pressure to differentiate. Subsequently, the retailer starts to improve its products and services, such as merchandise range and quality which finally erodes the former competitive advantage because the business has become rather multi-service, high price and high-status. McNair named department stores as the classical example, which has emerged at the end of the 19th century as competitors to small Specialty stores. Department stores have in turn become vulnerable to new, large, specialized and multi-operational stores, which have arisen from the beginning of the 1950s such as supermarkets and hypermarkets. Hollander (1960) has questioned whether low cost is the necessary beginning of a new retail format, since shopping malls and convenience stores are new retail formats with higher prices rather than lower prices. 2 For example, due to the rapid increase of hypermarkets in Europe, in the beginning of the 1980s their total selling space exceeded that of department stores already (Knee and Walters, 1985:43). 3 Supply chain techniques such as ECR and Category Management are explained in chapter four, paragraph six Value Chain and Customer Value Equation in Context.

Especially this progress in information technologies set off a range of new possibilities for retailers to derive better insights about their customers and to improve efficiency in their product chains, as it is described in chapters four and five. In the early 1990s, numerous mergers and acquisitions in the retailing sector lead to an increasingly concentrated market. Table 2.1 shows the increasing consolidation in European retailing industry, pointing out the European food and non-food retailers enormous size compared to FMCG (fast moving consumer goods) manufacturers European market shares. In the 1990s the increasing size of store formats and the emergence of new store concepts such as category killers started to draw more purchasing power from the town centers to the suburban areas. Most retailers have engaged in fragmented business concepts, holding portfolios of different store formats, such as supermarkets, hypermarkets and discounters in order to serve different customers with different stores while other retailers concentrate on just one or two different formats.

Table 2-1 Comparison of European sales of top FMCG4 manufacturers and retailers, 1993-19945 Manufacturers Company Sales (bn ecu) Unilever 18,44 Nestle 17,65 Philip Morris 14,14 BSN (Danone) 10,00 Procter and Gamble 6,91 Mars 4,63 Allied Domecq 4,48 Guiness 3,14 Grand Metropolitan 4,14 Heineken 3,06 Total 86,59 Retailers Company Metro Rewe Tengelmann Promods Edeka Leclerc Intermarch Aldi Carrefour Sainsburys

Sales (bn ecu) 43,40 24,41 20,94 20,90 20,61 18,50 19,85 16,60 16,32 12,02 213,55

Source: Fiddis, (1997),6 as cited in: Fernie and Staines, Towards an understanding of European grocery supply chains, Journal of Retailing and Consumer Services 8 (2001) pp. 29-36.

4 FMCG = Fast Moving Consumer Goods. The FMCG sector consists mainly of sub-segments such as personal care, oral care and household products. This can be further sub-divided into oral care, soaps and detergents, health and hygiene products, beauty cosmetics, hair care products, food and dairy-based products, cigarettes, and tea and beverages. 5 This graph rather shows a trend than the present situation because the actual figures for the retailers and manufacturers size have changed during the past years quite significantly. The 2001 figures for the worlds retailers in billion (M+M Eurodata, 2001): Wall-Mart (US) 199; Carrefour (Fra) 65; Ahold (NL) 52; Kroger (US) 51; Metro (GER) 48; Albertsons (US) 39; Kmart (US) 38; Tesco (UK) 34; Safeway (US) 34; Safeway (UK) 13; Rewe (GER) 33; Aldi (GER) 31. 6 Fiddis, C., (1997), Manufacturer-retailer relationships in the food and drink industry: strategies and tactics in the battle for power, FT Management Report, Pearson, London

Fierce price competition was the main characteristic of retailing competitive strategies. Gaining economies of scale and increasing branch size as well as outlet amount was seen as the answer to competitive pressure and market saturation. Because of increasing selling space but constant sales figures, in the early and mid 1990s productivity figures even started in some cases to decline as in the example of Germany (EHI, 2001). Internationalization increased, and retailing firms began to open businesses in other European countries (some firms started to pursue a global strategy, such as Tesco, UK) in order to escape their saturated home markets. Few market players were focusing already on customer experience in order to retain their customers and create loyalty effects. The mid-1990s showed that diversification of the retailing business resulted in developing new product lines and increasing the share of retailing brands or so-called private labels. New distribution channels emerged, such as online shopping in the later half of the 1990s for example with Tesco being the first British grocery retailer, which engaged in online grocery shopping in 1996. An increasing amount of retailers has started to diversify and explore new industries such as car sale and financial services in order to combine new services and products with their existing retailing product matrix. The increasing adaptation of the customer centric concept has enabled retailers to a certain extent to escape the downward spiral of low margins by emphasizing value for money in favor of lowest prices. Year 2000 and after The so-called new era of retailing is argued to be driven by information technology and tries to get a full picture of the customers needs by using advanced data analysis methods7 (Laine, 2000). The use of information technology also fosters process integration, such as vertical integration in the supply chain of retailers (Walters and Hanrahan, 2000). Further, the increasing use of technology enabled retailers to make more efficient use of their workforce for example through sales force automation and therefore increase sales/employee figures8 (Verdi, 2001). Especially retailing brands are being increasingly developed to strengthen the retailers position concerning customer loyalty and brand awareness, while we see retailers even starting to compete with their private labels on quality, which creates increasing competition for brand producers (e.g. Wileman and Jary, 1997). Retailing companies are pursuing in their mid-term strategies to become multichannel operators and to be able to identify their customers across all channels (e.g. interview with Palonen, 2001). Retailers also aim to serve the market in assistance of the Internet and web based technologies according to the 24x365 formula, which means to keep certain services via the virtual store open all times (24 hours, 365 days a year).
7 Please see chapter five for more information about data analysis methods and deriving information about customers. 8 According to Verdi, the largest German Employees Union, German retailing sales per employee have increased from 1993 to 2001 by roughly 12% while net increase of retail sales was only 3.5% (Verdi, 2001).

Figure 2.1 shows a life-cycle model or retail store formats9. Department stores were the earliest large-scale store format, followed by the emergence of supermarkets. Hard discounters and category killers represent rather specialized stores and show significant growth potential. Electronic retailing or on-line shopping is still in its early phase with rather high potential for the future. For a brief explanation of the different store formats, please refer to the appendix.

Revenue

Development

Introduction

Growth

Maturity

Decline

Traditional Supermarkets Department Stores Hypermarkets Hard Discounters

Category Killers Electronic Retailing (on-line shopping) Time Sales Profitability Competition Low/Growth negative none
Fast acceleration High/slow-down
strong progression

decline decrease intensive

strong/decline extensive

weak

Figure 2-1 Product-Life-Cycle for Store Formats and Channels Source: Based on Accenture 2001, Overview of the French Retailing Scene, p.44, Internal Report, see also Davidson et al. (1976), The Retail Life Cycle, Harvard Business Review (Nov-Dec.), pp. 89-96 Turning to market internationalization, diversification and gaining economies of scale, the number of retail mega-players is increasing, partly generated through mergers and acquisitions or by building own competencies in industries, such as travel and financial business. New created business activities are combined with existing retailing distribution channels for example through offering a wider range of services via the retailers internet portal to its customers. Industry mega-players such as Tesco (UK), Wal-Mart (US) and Carrefour (France) are pursuing global strategies and establish international chain networks and supplier relations on different continents (e.g. Wileman and Jary, 1997; PriceWaterhouseCoopers 1998). Expanding to other European countries (e.g. within the EU or Central European Applicant Countries) can be seen as a trend, which is also pursued by mid-sized European retailers, such as the S Group in Finland, which has expanded to Estonia (S Group, 2000).
9 As mentioned earlier in context of the wheel of retailing, store formats do not make each other obsolete as long as the management adjusts its strategy to the dynamic competitive environment and changing customer needs.

2.2

From Supply-Oriented Model to Customer Centric Concept

The European retailing market has moved from a period of over demand during the 1950s and 1960s to a rather saturated market in the 1990s. Because retailers engaged in more sophisticated business activities due to their increasing size and therefore increasing resources, the power shifted from suppliers to retailers (Wileman and Jary, 1997). The main focus has changed its direction and moved from a supplier driven (or operations-oriented) model to the customer centric concept, where especially with the support of information technology since the mid 1990s more emphasis has been put on delivering value for money rather than fiercely competing on price. In this context, the use of electronic cash registers which started in the mid 1980s made it possible to collect data from merchandise and customer purchases and to improve retail offers to customers due to better customer knowledge. 2.2.1 Changing Customer Needs

The ccustomer needs have changed while two main groups were arising, the so-called convenience-oriented and the price conscious customers, though the latter group is increasingly appreciating quality for affordable price, influenced through improved product and service quality by todays retailers (ILO, 1999). Price-sensitive consumers emerged for example due to increasing part-time jobs and therefore lower income. Further the increasing gap between high and low incomes contributed to this development. Price-conscious customers have been served by the retailing industry through concepts that highlight low prices, such as EDLP10 (every-day-low-prices), or building private labels, which is explained in later sections of this chapter. The convenience-oriented customers, who have been increasing because of changes in work participation (for example increasing share of female workforce and single households) tend to appreciate more take-away-food, one-stop-shopping and homedelivery (ILO, 1999). In addition, increasing mobility and internationalization and global media contributed to the change in customer needs. Customers also have been demanding more variety and competitive prices on merchandising partly influenced by the Internet. Especially during the late 1990s the Internet increased the visibility of how prices accumulate and enabled the customer to compare prices easier (e.g. Laine, 2000). In figure 2.2, the arrows within the supply chains have changed their direction 180 degrees and are showing the information flow starting at the customer side. Information, which is needed for marketing, forecasting demand and procurement, should be based on the information that is collected from the customer interface.

10 For an explanation of EDLP please see chapter four, paragraph three Generic Strategy and Competitive Advantage.

10

As mentioned before, information technology has been one of the main drivers for the emergence of the customer centric concept and the power of retailers. Industry-shared standards such as the Uniform Product Code (UPC) and the electronic transmission of data through EDI-lines (electronic data interchange) enabled retailers and other vendors (such as wholesalers) to derive more accurate data on product movement. This made it possible to schedule production and manage inventories more efficiently, and to provide raw data for more sophisticated analyses of consumer preferences and buying patterns (ILO, 1999).

National Supplier Industry

Wholesaler

Retail Shop

Customer Group

National & International Supplier

Purchasing company and Logistics Company

Chain Retailer

Individual Customer

Figure 2-2 From the Supply-led Model to the Customer Centric Model Source: Laine, A., (2000), Information from the Masses. Oxford Institute of Retail Management (OXIRM), University of Oxford, UK.

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2.2.2

Private Labels

There are two reasons for including private labels in this report. First, private labels represent a crucial part of a retailers profit structure and brand strategy. Second, especially the new technologies, such as electronic purchasing platforms (emarketplaces) provide the retailer with new tools and techniques (e.g. reverse auctions) for leveraging private label products, which is explained in chapter five. Private labels can be classified in four categories. Store brands carry the retailers name, but no additional sub-brand (e.g. Tesco). Store sub-brands carry the retailers name and an additional sub-brand (e.g. Tescos Finest). Generic brands have a brand name independent from the store. A specific retailer does not issue them and they can be marketed across different stores and chains. Last, individual product brands have an individual name but are marketed by the retailer. The retailers name might be visible on the back of the product (e.g. Pirkka from Kesko) (KPMG, 2000). With the increasing sophistication in marketing and increasing pressure on margins, the number of private labels is rapidly increasing because they bare significant advantages for retailers. According to a study by AC Nielsen (1998), private labels are at least 20% to 40% cheaper compared to manufacturer branded product lines (as cited in: KPMG, 2000). UK retailers have launched their private labels already in the 1960s. In 1975, the share of private-label sales of packaged grocery in the UK had reached already 20.5%, which increased to 28% in 1985 (Knee and Walters, 1989) and reached 39% in 2000 (EHI, 2001).

Table 2-2 Private Label Penetration by Retailer, 1995 Retailer Aldi Sainsburys Waitrose Tesco Safeway Asda Casino % 83 % 67 % 65 % 56 % 46 % 43 % 37 % Origin Germany UK UK UK UK UK France

Source: adapted from Fiddis, C. (1997), as cited in: Fernie, J. and Staines, H. (2001), Towards an Understanding of European Grocery Supply Chains. Journal of Retailing and Consumer Services, 8

12

Table 2.2 shows among the top seven retailers according to private label penetration, one can find five UK retailers11. Considering the overall market in the UK, Germany and France, the UK leads with a penetration of private labels in groceries retailing by 39% of the market share in 1994, followed by Germany (22%) and France (20%) (Wileman and Jary, 1997). In addition, the German and French market are more competitive on price than the UK, where value for money and product quality belong to the main characteristics of the market (e.g. Fernie and Harris, 2001). These market conditions are reflected by the retailers private label strategies, where we see that UK retailers have been starting to compete with brand producers on quality, compared to German and French and Spanish retailers which still pursue a no thrills strategy (table 2.3). The UK is therefore the most sophisticated private label market while France is showing signs of catching up; and private labels in Spain are representing the purest kind of a no thrills strategy.

Table 2-3 Penetration of Private Labels in Europe United Kingdom France Spain % Share Product Category 42 % Honey 41 % Mashed Potato 40 % Canned Pineapple 35 % Canned vegetables 25 % Juice 25 % Jams 25 % Cocoa spreads 21 % Sardines 21 % 21 % Rice Instant Coffee % Share 27 % 26 % 24 % 21 % 21 % 20 % 19 % 19 % 18 % 18 %

Product Category % Share Product Category Wine 75 % Biscuits Cheese 65 % Frozen Fruit Prepared poultry 63 % Canned Fruit meals Fruit Juice 60 % Bakery Dessert Frozen Fruit Pasta Canned Vegetables Bakery Fish (frozen or other) 56 % 56 % 51 % 50 % 46 % 46 % Pizza Wine Preserves Dessert & Yogurt Cheese Oil & Margarine

Source: Adweek Western Edition, (1994), Vol. 44 Issue 7, pp. 38-41, Based on data from Frost & Sullivan, AC Nielsen and McKinsey

The fact that Aldi is at the top of this list must be seen in context of Aldi being the German hard discounter with the highest share of private labels. Hard discounters traditionally have a high share of private labels, but Aldi remains exceptional even for the German hard discount-retailing scene.

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2.2.3

Diversification

Besides private labels, also diversification into new products and services should provide the retailer with new revenues. Knee and Walters (1985:145) describe diversification as the movement into an area or an activity in which the firm, or division, has not previously been engaged (or has not been seen by its customers to be engaged). Several kinds of diversification exist, such as diversifying into different distribution channels or adding product groups and services to the merchandise range. Knee and Walters have argued that when existing formulas no longer give the expected return and ensure customer loyalty, when competition from inside and outside the retailing sector becomes more severe, when consumers tastes and habits show signs of radical change, retail firms tend to seek solutions in diversification (Knee and Walters, 1985:145). However, besides the pressures which are motivating firms to diversify, the emergence of the Internet on its own has been providing a strong incentive for retailers to diversify their services and leverage their customer base, especially in the cases where large amounts of loyalty card holders exist. In addition, the retailers existing infrastructure (e.g. using existing store networks or on-line channels) can be used to sell these new services, which can create additional savings. Further, brand building has been crucial for retailers when they diversify, meaning they leverage their brand name and their customer base when moving for example into banking, as Tesco has shown it. Eagle (et al. 2000) argues that customer acquisition costs for retailers (e.g. groceries, consumer electrics) are rather low compared to telecommunications providers, mortgage lenders and credit card providers. Therefore, the retailer can use its existing infrastructure, its customer base (of frequent customers) and cross sell products of other categories. For example, according to a survey conducted by McKinsey (as cited in Eagle et al. 2000), customers were asked if they believe that Tesco (the UK retailer) could be as good in providing financial services, telecom services and automobile sales as existing market players. The result was that more than half of the people interviewed gave a positive answer. Concerning financial services, even 72% believed Tesco could be at least as good as existing providers. In order to offer the right products to the right customers, a database has to be created which connects the entire customer and purchase information of the diversified corporation and its different distribution channels. The creation of such a database has been described by one of our interview partners, Visa Palonen, Vice President of SOK e-Business division12 (2001) as the biggest data project ever, in awareness of the possibilities but also the complexity of such a project. He further gave some examples, which are clearly connected to the idea of creating a value network, which has been mentioned earlier.

12

SOK is owned by S Group, Finlands second leading retailer.

14

For example, the retailer could offer through analyzing the purchasing information of the customer who buys dog food also dog insurance. Another case would be to order a jacket form the retailers web site, and return it (for example because it had been damaged in the shipping process) at the retailers store next corner. 2.3 The European Retailing Market

Europe, as the worlds biggest trading block partner with a share in global trade of 19% on global exports and 18% on imports is a rather diverse market of 15 different nations and a population of 375 million (European Commission, 2000). Within the EU, especially the southern regions (Spain, Portugal, and Greece) are developing on a different pace than the remaining member states. GDP (gross domestic product) and consumer spending are significantly lower in the south than in the rest of the European Union. However, the European enlargement process will create a third region in terms of social and economic development. The ten central European applicant countries, of which Slovenia and the Czech Republic are the economically most advanced ones, will bring another 105 million of customers to the European Community. This enlargement process is creating new possibilities for retailers to move into developing, immature markets, which provide growth. However, according to Gurdjian (et al. 2000), international expansion and acquisition has been harder than domestic one because of Europes diverse retailing markets13. Fernie and Staines (2001) have classified the European retail market in three broad categories, according to market structure, physical and socio-economical structure, and predominant trading formats. According to this classification (table 2.4) Germany has been grouped together with Belgium and Denmark whereby the main difference to France and the UK is the high share of discount markets. Both clusters (table 2.4) have a relatively low density of retail outlets, a rather high share of own labels compared to the south of Europe, which shares a high outlet density, low standard of living and low penetration of private labels. Hypermarket density is in Germany, France and the UK rather high, while in Spain and Portugal quite low. However, the reason to show this figure is to provide a simple picture of a rather complex reality of European retailing.

For example, the Spanish and French groceries product range overlap to only 20%, and therefore add in case of an acquisition a significant amount of new products to manage to the parent company. Synergy effects of mergers have been rather modest, though increasing assortment overlap has been argued to deliver savings of 3% to 4% of sales while savings in administration and purchasing might only account for 1% to 2%. Gurdjian et al. (2000) further mentioned reputation, experience, know-how transfer and the understanding of foreign markets as crucial to succeed in trans-national merger and acquisitions. However, despite the cultural complexity, it has been argued (e.g. PriceWaterhouseCoopers 1998) that the experience European Retailers are gaining in trading in the diverse European market is providing them with future competitive advantages compared to US retailers international expansion efforts.

13

15

Table 2-4 Common characteristics in European Food Retailing Characteristics Cluster Market Structure Trading Formats Structure Belgium, low food outlet density, high hypermarket Germany, high private label share, density, high Denmark high share of multiples in discounters' share of food market, high share food retailing of co-ops Spain, high Food outlet density, low hypermarket Portugal low private label share, density low road density, low standard of living France, low food outlet density, high hypermarket UK high private label share, density high multiples share of the food market

Source: Based on Fernie and Staines, (2001), Towards an understanding of European grocery supply chains. Journal of Retailing and Consumer Services 8, pp. 29-36. For the purpose of this paper the focus lies on the three largest markets in terms of inhabitants and GDP of the EU-15, which are Germany, France and the United Kingdom, which altogether account for more than half of the ECs population (European Commission, 2000). Though these markets have been argued to belong more or less together in a European context, their differences are rather significant as well. For example, the average pretax profit in European food retailing industry is 5% for the UK, 3,5% in France compared to the low German figure of 1,2% (EHI, 2001). The significant higher profit figures in the UK result mainly from the long tradition of private labels and competing on value for money rather than on the lowest price (The Economist, 1995). Market saturation and price competition is a common characteristic among the European retailing industry. According to Gurdjian et al. (2000), the industry has consolidated rather fast in the nineties. The volume of corporate takeovers has increased from $2.9 billion in 1994 to $12.4 billion in 1998. In 1998, the five largest European grocery retailers owned a cumulated market share of 26% which is significantly lower than in the US, where the top five account for 35% of the market.

16

Number of Outlets (in thousands)

700 600 500 400 300 200 100 0

G er m an y Fr an ce Ita ly U K Sp ai n

Sales Outlets

Figure 2-3 European Retail Market, 1999 Source: Accenture, 2001, Overview of the French Retailing Scene, Internal Report, Accenture Helsinki. Figure 2.3 shows the biggest European retailing markets and compares the number of outlets with the sales figures, which points out that Germany and the UK have a rather low amount of small shops. France has with 380,000 outlets less than Germany, and has a higher variety of small and large store formats (Accenture, 2001). Figure 2.3 also shows that Italy and Spain have a significantly higher share of small store formats than Germany, the UK or France, which is indicated through the low sales figure compared to the high amount of stores.14 In this context, it must also be referred to table 8.1 in the appendix, which shows the market shares of store formats in food retailing. Spain and Italy have by far the highest share of traditional, small size individual stores (Spain 27%, Italy 32%), while France has 8%, Germany 1% and the UK 0% (Castrillo et. al. 1998). 2.3.1 Germany

Germany is the largest retailing market in Europe, with a population of 82.1 million (EC, 2000) and retailing sales of 325 billion (estimate) in 1999 (Accenture, 2000d). Retailing in Germany is facing typical characteristics of market saturation, which is one major reason why retailing sales in Germany (without cars and petrol) have increased from 1991 to 2000 only by 7%. At the same time, the share of retailers turnover of Germanys total private consumption has declined in 1991 - 1998 from 41% to 33% (EHI, 2001).

14

The accurate sales amounts were only available in the case of France ( 267 billion). For the other countries, the figures are estimates according to the exhibit of the report they were taken from. Accenture, (2001), Overview of the French Retail Scene, Internal Report, p31 Source of Data: Retail Intelligence

17

In 2000, market concentration for the top five food retailers was 62.4% whereby the top ten owned a share of roughly 84% (EHI, 2001; M+M Eurodata, 2001a). In 2001, Germanys largest food and non-food retailer was Metro with sales of 48 billion, followed by Rewe (33 billion); Aldi (31 billion); Edeka (25 billion) and Tengelmann with 24 billion (M+M Eurodata, 2001). Hypermarkets, supermarkets and discounters represent the most common store formats in Germany, with a trend of increasing number of hypermarkets and hard discounters whereby the number of supermarkets is slightly declining (EHI, 2001). Consumer spending on transportation/communication, education/entertainment, and body care and rent/household costs has increased, whereas spending on groceries and clothing has decreased constantly over the last forty years with the trend to continue in the future as well (EHI, 2001). This is a general trend in the European markets (Eagle et al. 2000). According to the EHI, the average pre-tax profit in Food Retail Industry in Germany has declined to 1.2% over the past ten years and is among the lowest ones in Europe. The reasons for the low profit margin are for example increasing selling space (19911997 plus 12.1%) while productivity (sales/m) has declined in the same period (1991-1997 minus 5%). In addition, the fierce price competition caused by hard retailers such as Aldi and Lidl or new market entrants such as Wal-Mart is pressing down on margins. Further, the average selling area per 1000 inhabitants is highest in Germany, with 293m, France 162m, and UK 154m (EHI, 2001). Finally, private label penetration, which is seen as a major source of income for retailers, accounts in Germany for just 23% compared to the UK with 30% (Adweek Western Edition, 1994). 2.3.2 United Kingdom

The UK retailing market is the second largest in terms of population (59 million in 1998) and in terms of retailing with 310 billion estimated sales in 1999 (Accenture, 2001). According to M+M Eurodata, the five largest food retailers accounted for 63.7% of the food market in 2001 (M+M Eurodata, 2001b)15. As table 3.6 shows, the market shares of the five largest food retailers did change during the last decade insofar, that Tesco increased from 10.1% in 1992 to 15.8% in 2000. Table 3.6 shows that Sainsburys has almost stagnated between 1992 when it owned 11.9%, and fell back to that share in 2000, after a short increase during the mid-1990s. ASDA was able to boost its market share and moved up from 6.3% in 1992 to 9.3% in 2000. Safeway has stagnated by staying at roughly 7.5% during the entire period between 1992 and 2000. Therefore, Tesco and ASDA were gaining market share on the expense of Sainsburys and Safeway, which has been also connected to the fact that Tesco and ASDA had lowered their prices to a greater extent than Safeway and Sainsburys did.

15

According to the EHI (2001) in 1998, market concentration of the 10 largest UK retailers in food retailing accounted for 79.5%.

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Table 2-5 UK Grocery Market Shares, 1992 2000

Retailer Tesco Sainsburys ASDA Safeway 1992 1993 1994 1995 10.1% 10.4% 11.4% 13.4% 11.9% 12.1% 12.3% 12.2% 6.3% 6.5% 6.7% 7.2% 7.3% 7.5% 7.6% 7.3% 1996 14.2% 12.2% 7.8% 7.6% 1997 14.8% 12.4% 8.3% 7.6% 1998 15.2% 12.2% 8.4% 7.6% 1999 15.6% 11.8% 8.6% 7.4% 2000 15.8% 11.7% 9.3% 7.5%

Source: Merrill Lynch Industry Report: UK Supermarkets/Food Retailers, June 6, 2001, p.7 In: Tesco Delivers, Stanford University, Case Number: EC-32, Sept. 2001 UK retailers can be considered as most advanced in customer centeredness, investments in private labels and diversification of retailing channels and businesses, which resulted in rather high margins for the retailing industry, which attracted companies from abroad. European and US retailers have been moving into the UK market, such as the German hard discounter ALDI (Discount Merchandiser, 1993). However, in 1998, sales of supermarkets and superstores have continued to outperform food retail trade as a whole, which points to a rather strong and competitive position of these formats, especially because UK retailers still emphasized value for money. In 1999, Wal-Mart Stores Incorporated, the world's largest retailer acquired ASDA. Since the takeover, the supermarket price wars have escalated, with all of the major supermarket groups introducing major price initiatives (EHI, 2001).

2.3.3

France

The French food retail market is of roughly the same size as the British in population with 58.7 million in 1998 (EC, 2000) and third biggest in sales, with 327 billion in 1998 (Accenture, 2001d). As in most European markets, household consumption of Food and Textile is decreasing also in France. Non-specialist retailers, such as traditional grocers (small-scale non-specialists), supermarkets and hypermarkets dominate the mature retail market. Small specialist retailers account for less than 20% in France but have been growing with 4.1% on average from 1994 to 1999, while supermarkets were also growing in 1999 4.1% on average. The number of hypermarkets increased only by 2.3%. The expansion of hypermarkets is highly restricted (as well as for other large-scale store formats), and in 1998 only 26 new supermarkets were opened and no hypermarkets (Accenture, 2001d). In fact, France is the most concentrated food retailing market of the big three, with a big-five-concentration of 80.7% compared to the UK with 63.7% and Germany with 62.4% (M+M Eurodata, 2001b). The biggest chains are New Carrefour Group (created through the merger of Carrefour and Promod in 1999), ITM Intermarch, Leclerc and Auchan.

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As shown in table 3.7, France has the densest hypermarket coverage in Europe, which caused the government to freeze the number of hypermarkets and supermarkets. Table 2-6 Number of Hypermarkets in Europe in 2000 Hypermarkets France Germany Italy Spain 1 105 635 305 209 Households / Hypermarkets 20 373 59 106 64 046 56 780

Source: Accenture, (2001), Overview of the French retailing scene, Internal Report, Accenture Helsinki As a result of restriction, high outlet density and market saturation, retailers are merging in order to gain critical mass, purchasing power and to decrease operating costs. Another result of the store number restriction is the retailers diversification into other businesses in order to keep revenue and profits growing (e.g. Accenture, 2000d; Knee and Walters, 1985:146). French retailers have concentrated on retaining loyal customers and opening new distribution channels (e.g. online shopping and online grocery shopping), which should provide growth in the saturated market. In fact, all French major retailers are engaged in online shopping or online grocery shopping nowadays, which is further explained in chapter five. In addition, French retailers have expanded with their hypermarkets to foreign markets, especially to Spain and Italy (Discount Merchandiser, 1993). Another difference between French retailers and German or UK retailers is their ownership structure, since most French retail groups are privately-held businesses (Accenture, 2001d). The Economist (1995) has argued, based on a study by INSEAD that this ownership structure has motivated French retailers to understate their profit figures, while UK retailers are rather motivated to put their figures into a positive light, since they are public limited companies. This argument had therefore been used to partly explain the difference of profit figures, which are 3.5% for French retailers and 5% for UK retailers (EHI, 2001).

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3 3.1

Definition of Concepts Corporate Strategy

Strategic management represents the overall context of this study because electronic business is a strategic issue (figure 3.1.). This view is supported for example by Kalakota (2001) who argues that e-Business is destined to shape the entire organization rather than isolated business processes (Kalakota, 2001). In order to define corporate strategy, the following definition of Quinn (1996) is used. [Strategy is] the pattern or plan that integrates an organizations major goals, policies, and action sequences into a cohesive whole. A wellformulated strategy helps to marshal and allocate an organizations resources into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment, and contingent moves by intelligent opponents (Quinn, 1996:3).16 Johnson and Scholes provide a definition of strategic management17, containing three main stages, which are analysis, choice and implementation. Strategic management includes strategic analysis, in which the strategist seeks to understand the strategic position of the organization, strategic choice, which is to do with the formulation of possible courses of action, their evaluation and the choice between them, and strategy implementation18, which is concerned with both planning how the choice of strategy can be put into effect, and managing the changes required. (Johnson and Scholes, 1999:17) Porter (1980) argues that the essence of formulating competitive strategy is relating a company to its environment. In retailing, corporate strategy also means to achieve a positive balance between the stores image and the customers self-image (differential congruence) while coping with and overcoming competition (Samli, 1990). In the context of this study, the differential congruence of store and customer image is understood as creating congruence between the customers value perception and the firms value offering, which must be understood and appreciated by the market and its customers.

As cited in Mintzberg and Quinn (1996): The Strategy Process. Excerpted from Quinn, James Brian,(1980) Strategies for Change: Logical Incrementalism, Homewood III.: Richard D. Irwin 17 Johnson and Scholes (1999) distinguish strategic management from operational management through its need for making decisions, which arise, from ambiguity. They further argue that strategic management is about solving complex situations in consideration of the organization-wide impact these decisions can have. The perspective for these decisions affect the organization fundamentally and in long-term. On the contrary, main characteristics of operational management are rather routinised activities based on specific problems, which arise in short-term context. 18 It is difficult for organizations to implement strategy successfully within the entire organization. This concerns especially e-Business, which is the reason why Johnson and Scholes definition has been used, which includes explicitly implementation into the meaning of corporate strategy.

16

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In order to create value that is understood and appreciated, the firm must be distinguishable from its competitors and have a clear perception of its strategy, which is part of choosing a generic strategy. But to survive competition in a retailing market that has obviously been affected by internationalization, market saturation, changing customer needs, and finally the Internet as disruptive technology19, the firm needs to develop a portfolio of strategies based on the business the firm knows (Beinhocker, 1999). Therefore, choosing a generic strategy is only one part of a firms strategy to cope with competition and uncertainty.

Goods and Service Mix

Merchandise Store Formats and Choice of Distribution Channels Variety and Assortment Guarantees and Exchanges Customer Services Pricing Credit Alterations and Adjustments Parking Delivery

Communications Mix
Advertising Catalogues Store Layout Public Relations Internal Displays Personal Selling Window Displays Telephone Sales Customer Loyalty Programs

Physical Distribution Mix

Store Location Distribution Centres Warehousing Transportation Handling Goods and Packaging

E-Business as a cross-boundary-technique that affects all mixes

Goods and Services Mix: Online Shopping; Value-Added services; Automated Payment at Point of Sale (POS) through mobile Commerce; Internet Portals; Customer Loyalty card as Service Card in a value Network; Basing pricing decisions on facts from (real-time) evaluation of campaigns; Reducing Mark Down through more accurate demand forecast and storage Communication Mix: Online Marketing; Mobile Marketing; Online Catalogues and Display of Products and Services; Deploying CRM for Customer Purchasing Data and Customer Loyalty Program; Directing sales traffic from Stores to Internet and vice versa; creating a multi-channel view of Customer; Developing Customers Physical Distribution Mix: Improving Product Quality and supply costs through better product sourcing in e-Procurement platforms; increased inventory turnover through improved supply chain techniques; supply chain management increases sales through decreasing out-of-stock; increased sales force productivity through sales force automation through mobile commerce (e.g. use of PDAs)

Figure 3-1 The Effect of e-Business on the Components of the Retailing Mixes Source: Adapted from Samli, C., (1990), Retail Marketing Strategy Planning, Implementation and Control, p. 5, Quorum Books, Westport

19

Christensen and Tedlow, (2000).

22

Before analyzing its competitive environment, resources and its market, the firm will determine its rate of engagement. For example, on what scale it will operate in a certain market to become the market leader or just a niche player. In the retailing business, the choice of strategy affects the firms resource requirements for the components of the retail mixes, as shown in figure 3.1, which represents a view of a retailing firm from the marketing and customer interface perspective. Figure 3.1 shows that in the modern retailing firm strategic positioning and implementation contain not just the three traditional retail mixes (goods and services, communication and physical distribution mix) but also e-Business. E-Business affects all three mixes and is regarded in this study as a cross-boundary discipline. EBusiness needs commitment from the strategic level because it requires significant resources and is rather difficult to implement since its technology is still immature and it affects different areas across the organization. Besides the retailing mix (figure 3.1), the effect of e-Business on the firms activities can also be seen from the traditional planning areas such as operations planning, marketing planning, management control and administration control (Walters and Hanrahan, 2000). E-Business needs to link together these business operations and connect them with the outside of the firm (for example as integrative platform) in order to improve the information infrastructure (e.g. Kalakota, 2001). 3.2 The Impact of e-Business on Strategy

Drivers for e-Business Industries are facing increasing competitive pressures due to market saturation, internationalization, the proliferation of customer needs (e.g. Mller and Halinen, 1999; E. Anderson et al., 1997), and the disruptive effects of information technology (e.g. Christensen, 2000). As a consequence, corporations are redesigning their business relations (Short and Venkatraman, 1992) and building stronger links with their business partners to gain competitive advantage, especially by deploying information technology (e.g. Malone et al., 1987; Gurbaxani and Whang, 1991; Mller and Halinen, 1999). Because a firms service or product offering consists of aggregated value-adding tasks, the scope of those tasks usually lies outside a single firms capabilities. Traditionally, these activities have been aggregated within rather linear process flows of traditional value chains and value systems (Porter, 1985). However, competitive advantage is increasingly created by firms that look outside their dyadic relationships and recognize the environment they are operating in as a setting of various stakeholder relationships (J.C. Anderson et al., 1994) that need to be managed effectively (e.g. Mller and Halinen, 1999). Information technology is significantly changing the way firms are managing their relationships within their markets and the firms internal and external processes, described by Malone et al. as hierarchical relationships (Malone et al., 1987). ICT reduces internal and external coordination costs, allowing firms to engage in more dynamic and complex relationship settings (Gurbaxani and Whang, 1991).
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Therefore, the firm can operate within a set of dynamic exchange relationships with other business partners, creating a business network20 (Wilson and Kothandraman, 2001). In a more practical manner, Kalakota and Robinson argue six major trends for driving e-Business. First, customers demand faster service and self-service, more product choices and integrated solutions for conducting transactions. Second, firms engage in electronic supported service (e-Service) to integrate sales and service and to create seamless support. Further, flexible fulfillment, convenient service delivery and improved process delivery belong to the benefits of e-Service. As organizational drivers, outsourcing, contract manufacturing and virtual distribution are regarded as drivers for e-Business. Kalakota and Robinson also argue that the need to recruit and retain talented employees is driving e-Business. Fifth, the need for integrated enterprise applications for example for data mining and supply chain efficiency as well as the need to integrate distribution channels is causing corporations to invest in e-Business enterprise technology. Last, Kalakota and Robinson argue general trends for wireless web applications, mobile commerce and the creation of services by application service providers as drivers for e-Business (Kalakota and Robinson, 2001:38). These developments have called for an improvement of information infrastructure not only within the firm but also within its entire supply chain. Kalakota and Robinson bring it straight to the point when they state about integrating the firms architecture that [] these managers transform their companies from isolated fiefdoms to process-centered organizations; every aspect of the organization is being transformed by integration of disparate processes. This thinking, first applied to manufacturing and order fulfillment, is now found in sales, employee self-service, and customer service. An integrated-process view infuses support areas, such as finance and human resources, with a strong customer orientation (Kalakota and Robinson, 2001:163). Managing these processes and transforming them into frictionless transactions can provide a firm with competitive advantage through adding value to its partners and customers and save costs through more efficient processes (e.g. Accenture, 2001d; Karjalainen, 1998).

20

This report does not tackle business networks any further than this - though it regards the increasingly dynamic relations within the supply chain as business networks, but keeps calling them supply chains. I would like to refer to Windischhofer & Ruola, 2003 where we emphasized the network perspective more and approached in an e-Channel research project the retailer and its business relationships from the network perspective. Windischhofer, R. and Ruola, J. (2003), Customer Value Enhancement Through e-Channels in the Groceries Retail Network, pp. 517-536 in: Frontiers of e-Business Research 2002, University of Tampere and Tampere University of Technology, Tampere. Electronic edition in http://www.ebrc.info

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From EDI to Electronic Commerce EDI (electronic data interchange) offers transmission of information in standardized electronic form between two points which have established a bilateral data connection. EDI represents through its need for establishing a fixed line communication a rather large investment (software and hardware) and creates therefore high switching costs (e.g. Kalakota and Whinston, 1996).
Supplier A Supplier B Supplier C Supplier n Supplier A Supplier B Supplier C Supplier n

EDI Interface

e-Commerce Interface

The Firm

The Firm

Figure 3-2 The Difference between EDI and Electronic Commerce Source: Karjalainen, N., (1998), The effect of Electronic Commerce on Businesses, Masters Thesis, Lappeenranta University of Technology, p.26 Figure 3.2 compares the closed technology of the EDI with the open character of the Internet-based electronic commerce21 interface. Electronic commerce allows parties to connect through the Internet as a hub, whereby the costs to establish these links are lower because of the common browser technology. Therefore, the switching costs are lower, which creates more flexibility for all parties to connect and disconnect their linkage. Because of the high implementation costs of EDI, many supply chain partners such as manufacturers have to be convinced in a rather coercive way by the buyers purchasing power to join the data network. The e-Commerce interface allows a more collaborative approach to the decision of establishing a connection, because it means a smaller investment for the parties (Goldman Sachs, 1999). The open technology of e-Commerce is especially important for the emergence of electronic marketplaces, which is explained in chapter five.

21 The reason for using here rather the term e-Commerce than e-Business is because the Internet is mediating transactions between one party and a number of other parties. E-Business comprises more than the transactions between the firm and any third party. Please look at the paragraphs below for the definitions of e-Business and eCommerce to gain a clear insight on how these terms are used in this report.

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However, it has been clearly stated by numerous authors and business professionals22 that though the internet-based connection is easier to establish than EDI the web (World Wide Web) based connection is just a small part of the integration process. The underlying information processes and business processes have to be integrated as well (e.g. Kalakota and Robinson, 2001). Business Transformation Venkatraman (1994) argues the implementation of information technology (IT) causes a revolutionary transformation of the firm and its business environment. Also Christensen (2000) argued the Internet to be a disruptive technology for retailing because it changes the way firms, customers and the whole industry would do business. Evans and Wurster (1997) have described the Internet as bringing the end to supply chains and hierarchies. They argue a revolution in the transmission of information through resolving the trade - off between reach (number of people reached by the information) and richness (amount of information, deepness of content and possibility of interaction). For example, the Internet provides Amazon.com with the possibility to reach its customers on any place of the world with Internet access. Amazon provides a richness of a merchandise range of 2.5 million books, which can be searched through within seconds, where even contents or sample pages can be checked. The books get delivered within days or weeks, or can be even downloaded immediately as e-Books in some cases (e.g. Evans and Wurster, 1997). Figure 3.3 shows Venkatramans model of five stages of IT enabled business transformation. The first stage still concentrates on the exploitation of benefits that derive from the local implementation and use of IT, for example a retailers inventory management system. The second stage already shows the internal integration of all business processes, which is usually run by integrative information systems such as SAP (Hax and Wilde, 2001). The revolutionary levels in figure 3.3 start where the firm redesigns its organization and business processes, which has also been intensely discussed by Kalakota (2001) in the context of designing e-Business architectures and implementing integrated enterprise application frameworks. Business network redesign comes right after because of the impact linkages between firms and customers have on the way transactions are conducted, which might lead to what Evans and Wurster (1997) described as the end of channels and hierarchies.

22 For example, Mr. Nieminen, Managing Director of Intrade Partners has emphasized in an interview for this study that the importance of underlying information and business processes for systems integration.

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High

Degree of Business Transformation

Business Scope Redefinition Business Network Redesign Business Process Redesign Revolutionary Levels

Internal Integration Low Localized Exploitation

Evolutionary Levels

Low

Range of potential benefits

High

Figure 3-3 Five Ways of IT enabled Business Transformation Venkatraman, N. (1994), IT enabled Business Transformation: From Automation to Business Scope Redefinition, Sloan Management Review, Winter, pp. 73 87. Finally, the new way the value system or value chain is conducting transactions opens new possibilities for growth and ways to do business, which causes the firm to redefine its business scope and which usually has an impact on other partners of the value chain as well. For example, if retailers and suppliers establish an electronic purchasing platform, the wholesaler as the middleman will have to redefine its business scopes to survive. The virtual many-to-many purchasing environment enables retailers to source directly for products at the manufacturer, which could reduce the need for the wholesalers expertise to an amount which the retailer can also manage with in-house competencies and therefore only has to outsource the logistics operations. 3.3 Definition of Electronic Business

Electronic Business (e-Business) is the broadest concept of all e-terms used in this report. For the purpose of this study the concept of e-Business defined by Chaffey (2002) is adopted: [E-Business comprises] all electronically mediated information exchanges, both within an organization and with external stakeholders supporting the range of business processes. E-Business is a concept that contains tools of strategic importance for the firm. It is considered as a strategic issue for companies because of its widespread impact on companys products, processes and markets.

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For the purpose of this study the goals of e-Business are to develop competitive advantage for the firm in the area of cost efficiency, interactive customer centric strategy, and value addition of services (Karjalainen, 1998). 3.4 Definition of Electronic Commerce

Though some authors (e.g. Turban et al., 2002) give a similar meaning for e-Business and e-Commerce, they have been defined in this study separately. In this research eCommerce is narrowed down to all electronically mediated transactions between an organisation and any third party it deals with (Chaffey, 2002). Those transactions and interactions are usually of commerce related nature, and concern buying, selling and exchanging products, services or information. Therefore, this study refers to a definition of e-Commerce modified from the definition of Turban et al. (2002, 4): Electronic Commerce is all electronically mediated transactions and interactions - specifically the buying, selling, or exchanging products, services, and information via ICT (Information and Communication Technology -, between an organisation and any third party it deals with.

e-Business

Supplier, Wholesale, Logistics

Retailer

Customer

(B-2-B) e-Commerce

(B-2-C) e-Commerce

Figure 3-4 Distinguishing between e-Business and e-Commerce

Figure 3.4 shows that e-Business is the widest term, and contains all electronically mediated information exchanges, whether within the firm or with its external stakeholders. E-Commerce on the other hand, happens only between the firm (in this case the retailer) and other third parties the company is dealing with.

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Those third parties are in general businesses and therefore the transactions with those parties are called business to business e-Commerce. These transactions or interactions usually concern activities in the supply chain, such as transferring data collected at the point-of-sale to the wholesaler or even directly to the supplier. Between the retailing firm and the consumer, these electronically mediated transactions are called business to consumer e-Commerce. These transactions include for example the purchase of groceries or other consumer goods through a retailers web site, where customer, credit and billing information is transmitted. 3.5 Definition of Customer Relationship Management (CRM)

Most definitions for CRM found in the Internet contain Browns definition that CRM is a business strategy that aims to understand, anticipate and manage the needs of an organizations current and potential customers (Brown, 2000). Iconium, a software developing company has added on its web site to Browns definition that the essence of CRM is a customer-centric business philosophy involving the seamless integration of marketing, sales, service and support processes (Iconium, 2001). For the purpose of this study, both definitions are used but it is added that CRM deploys information and communication technology (ICT) to derive customer insight. CRM is using technology concepts such as data warehousing and data mining to analyze data and to base management decision on facts. CRM is not a strategy but it is a concept, which helps the firm building the methods for managing and developing customers and to create the desired customer relationships. CRM is deployed by firms with a certain strategy, in this context it is the customer centric retailing firm. A firm, which does not have a customer centric strategy, is unlikely to fully deploy the concept of CRM. CRM is a concept that aims to understand, anticipate and manage the needs of an organizations current and potential customers. The essence of CRM is a customer-centric business philosophy involving the seamless integration of marketing, sales, service and support processes. CRM deploys technology to derive customer insight from data analysis. In fact, this report is focusing on the technical side of CRM, rather than investigating the philosophical aspects of understanding, anticipating and managing the firms current and potential customers. However, it has to be mentioned that one of the major non-technical objectives of CRM is to build long-term relations with customers. To achieve these relations, technical concepts and tools are deployed. Collecting, analyzing and understanding all relevant data in order to derive customer insight is one of the main tasks of CRM, to get what Laine (2000) calls individual customer information (ICI). He defines ICI as information where actual customer purchase data is linked to individual customer data in order to understand customer behavior (Laine, 2000:13).

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This report aims to describe what retailers are doing with the ICI they derive, and what the major obstacles for the technical side of CRM have been so far. Those issues will be explained in chapter four. The philosophical side of CRM as a business concept is seen as a part of the retailers customer centric strategy and is tackled in the paragraphs below about customer value and retail strategy. 3.6 Customer Value

First of all, it is to say that this report is using a rather simple, transaction cost oriented model of customer value, as it is used for example in Walters and Hanrahans book of retail strategy23 (Walters and Hanrahan, 2000). In this model, customer value is the result of benefits minus costs of purchase (see figure 3.5). Brown (2000) argues that the costs of a retail format are the equivalent to the consumers costs. Therefore, the consumer accepts a higher price when the service level is higher as well. For example, a department store creates higher costs for the retailer due to higher service, merchandise range or image, which results in higher prices.

Customer Value = Benefit Cost of Purchase

Benefits = Attributes desirable to the customer (in customers eyes) Cost of Purchase = Total costs of product or service to customer (as perceived by customer) Customer value = Customer beliefs buying/using the product or service gives a net value (the perceived value is in savings of non-monetary costs such as time, effort or psychological costs)

Figure 3-5 The customers value perception Source: Based on Walters and Hanrahan (2000), Retail strategy Planning and Control, Macmillan Business Press, London.

However, there are several other customer value theories, as for example Zeithamls theory of customer perceived value (customer value = perceived benefits minus perceived sacrifices) or customer life time value (the value of the customer to the firm). For a more detailed discussion about different theories of customer value, please see e.g. Payne and Holt (2001).

23

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The consumer tends to accept the higher price because he/she perceives transaction costs in monetary forms (the price of the item purchased) and non-monetary forms (time, effort and psychological costs). Therefore, the consumer perceives as value not just the price which is higher in the department store than for example in a hypermarket or discount outlet but also receives value from service, time savings or from psychological benefits such as image or a more pleasant shopping experience (Brown, 2000). Figure 3.5 shows that the customers value perception is based on the remaining benefits after the cost of purchase has been subtracted (Best, 1997). The Benefits for the customer can be for example image of the product, additional product features, ease of accessibility or good service. The cost of purchase for the customer includes for example product sourcing, transportation and time. Customer value is created when the customer perceives buying this certain product or service gives a net value after subtracting the cost of purchase from the benefits. 3.7 Relationship Retailing

Berry and Gresham (1986) argue the concept of relationship retailing as to turn customers into clients through personalizing the business relations. Relationship retailing considers attracting customers as only an intermediate step in the marketing process, which is continued through retaining relations and enhancing them. The appropriateness for relationship retailing depends on the product and service offering, which is distinguished into four categories. 1. 2. 3. 4. The consumer periodically re-buys in the product category sold by the retailer (for example, buying fashion apparel rather than a cemetery plot); The consumer has alternatives from which to choose (for example, buying housewares rather than electricity); The consumer is ego-involved (for example, buying home furnishings rather than frozen foods); The consumer requires personal service and/or selling (for example, buying an automobile rather than a light bulb). (Berry and Gresham, 1986)

The first two categories apply to all retailing formats, which are discussed in this report (including discounters, supermarkets, and hypermarkets). However, the department store is also selling products that belong to the last two categories and therefore it is the only store format that has been born for relationship retailing. All formats are trying to add value to their customers. Berry and Gresham argue two different ways to add value to the product or service. The first way is relationship customization, which means learning the preferences of individual clients, capturing this information so that it can be readily accessed and then using it to best advantage in merchandizing and serving client requirements (Berry and Gresham, 1986:44). Relationship customization nowadays is a part of CRM. The other way to add value is called offer augmentation, which involves building extras into the retail offer to differentiate it from other competitive offerings.
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For meaningful augmentation to occur, these extras must be genuine extras, which are not readily available from competitors and are valued by clients (Berry and Gresham, 1986:45). Offer augmentation nowadays is a part of creating customer value-added to gain competitive advantage. Augmentation can be in form of tangibles such as free parking in the parking garage of a downtown department store, while intangible extras can be for example making shopping an experience and creating a stunning atmosphere for the customer which is creating emotions. Customer loyalty schemes (see chapter five) are a special form of augmentation where customers can earn extras such as special offers exclusively for cardholders. 3.8 One to One Marketing and Relationship Marketing

Peppers and Rogers (1996) argued that the present economical systems of mass production, mass media and mass marketing will be replaced by a new paradigm, the one-to-one economic system. In this system, enabled through ICT, companies will fight for share-of-customer instead of market share. Customized production, media and marketing will enable firms to address customers need directly on a person-toperson basis instead of the currently used customer segments. From a customer perspective, the concept of the post-modern customer exists, who desires customized products and services at a location and time that is convenient to individual needs. This supports the notion of one-to-one marketing, which has flourished and became especially popular due to the rise of e-Business and the Internet. One-to-one marketing has suffered some set-backs since the e-Commerce hype, because implementation and technology problems havent been resolved as quickly as expected, but the concept remains part of larger value and relationship models, such as the notion of relationship marketing and CRM. Relationship marketing means to enter a learning relationship with the customer and to constantly improve the interaction. Through constantly learning from and about the customer, the firm should be able to raise the quality of the service to a level, which cannot be easily imitated by competitors. This should provide the firm with a competitive advantage through loyal customers that spend more and stay longer. Payne24 (2001) has argued that relationship marketing must create value not just for the customer but for all stakeholders of the value network. Therefore, in retailing, relationship marketing is also about the relations to suppliers, employees, investors, wholesalers, and consumers.

24 For a more detailed literature review on concepts and theories of customer value, please see Payne and Holt, 2001.

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One-to-one marketing always existed in retailing areas where transaction amounts are rather high, more frequent, and the retailer knows customers. However, the new technologies of e-Business are making it possible to personalize transactions with lower monetary value and where customers first have to be made known to the firm, such as in traditional convenience goods retailing. 3.9 A Definition of Consumer Goods25

Consumer goods are products designed for purchase and use by consumers. There are three types of consumer goods. First, convenience goods or fast moving consumer goods (FMCGs) are consumed rapidly and regularly. They are of low cost and involve little research (e.g. bred, milk, newspapers). Shopping goods are more expensive than convenience goods. Different manufacturers may offer different features. Because of cost and complexity of different features, consumers may wish to compare and evaluate, i.e. "shop" (e.g. clothes). Specialty Goods are expensive goods and rarely purchased. Consumers will go to great length to find the precise item or defer the purchase altogether (e.g. an expensive suit, furniture) (Bovaird, 2001). According to this definition, supermarkets and discounters are selling mainly convenience goods and some shopping goods, while hypermarkets are selling from both categories equally, and department stores are selling besides convenience and shopping goods also Specialty goods. 3.10 A Definition of Services in Retailing Service can be defined as a deed, act or performance (Berry, 1980 as cited in Lovelock, 1992), directed towards customers themselves, materials, and information (Morris and Johnston, 1987). Services are created by combining a set of activities that can be explained for example by using Porters concept of the value chain. For services, this means that support activities are the ones that are not directly in contact with the customer, such as corporate finance, billing, or operations. Primary activities therefore refer to activities, which are in direct contact with the customer or the customers possession the service is directed to. In this context, it is often distinguished between front-office and back-office, meaning that everything that is invisible to the customer and therefore happens behind the customer interface is back-office. In retailing, the stores where customers shop are front-office, while for example logistics and warehousing are invisible to the customer, and therefore back-office.

25

For a more detailed and academic definition of consumer goods, see for example Bucklin, (1963).

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Retailing is a service business. The main tasks of traditional retailing are 1) to provide the customer with necessary assortment of offerings, 2) managing the logistics tasks such as transportation, breaking bulk, and inventory handling, and 3) providing advice, advertising and credit functions to ease the purchase of the customer (Kotzab and Madlberger, 2001). In addition, the creation of an Internet e-Commerce channel would require the retailer to manage additional tasks such as 1) connectivity (providing a virtual store front), 2) interactivity (managing information flows that allow the consumer to actively participate in purchasing and other activities), and 3) security (providing secure transactions) (Kotzab and Madlberger, 2001). Further, the retailer has to take care of tasks, which the consumer has done before when shopping in physical stores, such as picking, packing and transportation (ibid. 2001). Depending on the retailers strategy, the degree of customization and self-service activities differs greatly. For example, supermarkets can sell meat in two different ways by offering it in cut, pre-packaged form, or over the meat-counter, assisted by sales personnel. Over-the-counter forms of selling represent a more customized service, and demand less of the customers self-service activities. Competition makes the core services of retailers a commodity, and drives retailers to distinguish themselves from competitors, which is a phenomenon known as the augmented product concept (Schmenner, 1986). Retailers therefore gain and re-gain competitive advantage by diversifying their offerings and creating supplementary or so-called value-added services26. 3.10.1 Distinguishing between Services Lovelock (1996) has distinguished services into tangible and intangible services. Tangible services can either be directed towards peoples bodies as for example restaurants or hairdressers do. In retailing, mainly tangible services directed towards peoples bodies are provided, such as in supermarket shopping, deli snacks or delivery of groceries. Another group of tangible services can be directed towards goods and other physical possessions such as shoe repair, dry cleaning, and industrial equipment repair or freight transportation does. For example, a Mister-Minute shoe repair booth in a Prisma hypermarket is representing a tangible service that is directed towards customers shoes. Intangible services are directed either towards peoples minds such as in education, information or broadcasting. In retailing, the Internet era enables the retailer to provide also intangible services such as information services on the retailers homepage for cooking recipes, newsrooms or chatrooms.

26

Though retailers are trying to diversify their service offerings and build new value-added services, significant competitive advantage is usually gained from supply chain management. Creating meaningful value-added services that are truly appreciated by customers remains a difficult tasks for retailers, even though new technologies are deployed to create new distribution channels and offerings.

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The second group of intangible services is directed towards intangible assets such as in banking, insurance legal services or accounting. For example, a retailer can offer through its Internet portal intangible services directed to customers intangible assets, such as providing banking services, applying for loans or selling insurance. It seems that retailers are not providing many tangible services directed to customers goods of physical possessions. An example would be a department store that sells sports equipment is offering not just alpine skies but also offers its customers to sharpen the edges and to wax their used skies. 3.11 Changing Relationship Characteristics in Retailing Figure 3.6 shows that food and nonfood retailers are trying to transform their customer relations into a membership relation where the identity of the customers is known and service is continuously delivered. This should be achieved by deploying marketing and technology tools, which develop the relationship and influence the customers buying behavior, purchase amount and the frequency of purchases. Continuous service delivery would be if a supermarket chain is delivering certain products that are purchased by a customer regularly to the customers home in time intervals that have been specified by the customer. This additional service would not require to diversify but to build online shopping and delivery competencies. Relations that include membership and continuous service delivery are argued to last longer than the other two relations in figure 3.6, which creates the benefit for the retailer through more loyal customers.
Type of Relationship between the Service Organization and Its Customers Membership Relation No Formal Relation

Continuos Delivery of Service Nature of Service Delivery Discrete Transactions

Insurance Banking Diversified Retailer that offers e.g. also Banking Services
Supermarket with Customer Loyalty Scheme Long-distance phone calls Theater series subscription

Radio Station Police protection Public highway

Supermarket chain Mail service Restaurant Movie Theater

Figure 3-6 Relationships with Customers Source: based on Lovelock, Christopher H. (1992), Classifying Services to Gain Strategic Marketing Insight, p.55. In: Lovelock, Christopher H. (ed.), Managing Services. 2nd edition, pp. 50-63, Prentice Hall, Englewood Cliffs, NJ, USA.

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The biggest driver for retailers to diversify their services into banking has been the Internet, which enables retailers to offer intangible services directed to consumers intangible assets by leveraging their brands in order to attract customers. Retailers are aiming to provide an array of services the customer can choose from. This includes diversification into selling products and services that have not been associated with the retailer before, such as banking and insurance. It also includes information services such as newsgroups; discussion forums and product related information on the web-site, such as cooking recipes and information about nutrition. For a brief discussion of this issue, please see paragraph Diversification in chapter three. In the multi-channel retail firm that deploys electronic channels as well, the method of service delivery is giving the customer three choices for interaction (Lovelock, 1996). First, the customer can go to the retail store or second, the service gets delivered to the customer for example in online shopping and home delivery. Third, customer and retailer transact at arms length as for example in intangible services that are directed towards intangible assets, such as banking and providing information. Also the order for online shopping is transacted at arms length, but executed by a home delivery, which makes it a hybrid form of service delivery. However, e-Business is offering the retail firm opportunities not just to let the customer choose the way of interaction or transaction, but also the level of activity of participating in the value creation process, or the value chain. For example, customers are participating in the offline retail networks value delivery by picking the goods from the store shelves and deliver them to their homes. In electronic home shopping, the customer engages in self-service activities by conducting unassisted transactions via the online channel to purchase intangible products (e.g. downloading music, books or filling out a complaint form) or to get information from a FAQ (frequently asked questions) web site. Customers can also choose their level of involvement in the process by either driving to the store and picking and transporting the goods by themselves, or by ordering them for home delivery. Therefore, consumers create value for themselves when they actively participate in the value creation process (e.g. Normann and Ramirez, 1993), but they also enjoy it when they can decide not to take part. This also means that the higher the consumers involvement, the lower the price of product or service for the customer. This new level of customer service pays tribute the proliferation of customer needs (e.g. Mller and Halinen, 1999). Customers may wish to buy a product through different channels at different points in time, depending upon the size of the purchase, the customers location, urgency, or whether the purchase is an initial buy or a routine buy (e.g. Cespedes and Corey, 1990). While the traditional distribution channels were characterized by a product and information flow starting at the supplier and ending at the end-consumer, in the multichannel retailer, the information flow is increasingly coming from the consumers and retailers side (e.g. Laine, 2000).

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The role of ICT (Information and Communication Technology) for these developments is crucial, because ICT is bringing the channel actors closer together and allows a bi-directional flow of information that creates a retailer/consumer relationship, in which the consumer owns more power than before (Doherty, 1999). The potential benefit of adding diversified services to the retailers portfolio is a membership situation that is characterized by continuous service delivery and therefore should create a deeper relationship to the customer. For a retailer to create such a value proposition, it needs a customer centric strategy that offers an array of services through the help of the firms business network. This means to create a value network for the benefit of all stakeholders, including the suppliers, wholesale and the end-consumer, and where the retailer represents the nexus of the network. E-Business is expected to be the enabler of these networks, for example through connecting the retailers customers through an Internet portal or through mobile commerce with its suppliers (which would leave the retailer as an intermediary). The retailer could also build a mobile-channel where the customer is linked through an Internet-enabled mobile phone to multi-businesses and contract partners of the retailer (these aspects are further discussed in chapter five in the context of e-commerce channels). Summarizing, one can say that electronic channels are offering new ways to organize service and product delivery. The new ways e-Business offers for conducting B2C business must be assessed rather carefully in food and nonfood retailing. Successful retailers such as Tesco (UK) have shown that with a strong brand and diversified online offers, a successful multi-channel retailer can be created, which improves and deepens its relations to its customers. E-Business in retailing is not offering just a channel for selling and buying goods or services, but also for transmitting any information in a bi-directional flow that benefits the customer or the retailer-customer relationship.

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Retail Strategy Objectives

The objective of chapter four is to develop an approach for describing customer centric retailers core competencies, which are required for building competitive advantage. The issue is approached by starting with the basics of Porters value chain analysis and how the firms value chain is embedded in the supply chains value system. The options for Porters generic strategies are explained to argue that a firm must have a clear perception of its business. Then, the generic options are combined with Bowmans more diverse strategy options. Hereby, cost efficiency strategy and customer centric strategy, emerge as the two basic directions for a food and nonfood retailing firm. The sources of cost efficiency are discussed to form a basis of the kind of activities a firm has to manage in order to improve its cost efficiency from a supply chain perspective. The transaction cost approach shows that the potential benefit for transforming transactions into services is higher on the B2B side than on the B2C side. Product and service is explained and connected to customer value in order to show how retailers seek to build value-added and create relationships to their customers and business network. A retail value chain model is setting customer value equation in context with the retailing firms value and cost drivers and the underlying processes. Competitive advantage is explained and argued that a firm needs to have a portfolio of strategies that are based on the business the firm is good at. Competitive advantage is discussed and it is concluded that it is not sustainable but can be re-gained. This leads to building competencies that arise from key success factors typical for the industry. The competencies are seen as a set of skills that enable the firm to cope with uncertainty and to build its core competencies. Last, a model is provided that suggests a certain process to get from strategic choice to segmentation, value proposition, customer interface design, evaluation and strategic redesign. The model is built around the firms core competence (in this case the customer interface) which is supported by skills in organization, information and networking competence.

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4.1

The Value Chain Analysis

Porters (1985) value chain analysis stems from the task of adding value and improving efficiency within a company and its complex processes. Porter recognized that firms need to deploy and organize their resources (e.g. money, people, machines) in well defined routines to ensure that products and services are produced, which are valued by the customer. Many scholars especially from organizational studies argue against well defined routines. For example, Weick and Westley (1996) argue that routines make organizations more bureaucratic and pay too much attention to the exploitation of resources. Instead, corporations should bring in adhocratic elements into their organizations, meaning they should affirm learning27 through mixing order (bureaucracy) with chaos (adhocracy). Also Hamel and Prahalad (1994) have argued that - though return on investment is a function of revenues and costs - most firms concentrate on the cost side to improve their return on investment (ROI). They do not pay sufficient attention to creating revenues because being innovative is much harder to them. Therefore, Porters recognition of organizing a firm into well defined routines is understood as know what you are doing but does not mean to create a bureaucracy, which I believe, Porter himself did not mean as well. Also, the main focus of Porters value chain framework, which is on costs and cost drivers, is understood in the awareness that it is just one part of the ROI - formula. Porter regards the value of products as a function of customer value28 that can be positively influenced by cost reductions or performance improvements of the product. Figure 4.1 shows Porters concept of the value chain that is divided into primary activities and support activities. The primary activities enable the firm to deliver a product or service while the support activities enable and improve the performance of the primary activities. These activities produce different levels of value added for the customer, which has different costs for the firm. The goal is that the customer is willing to pay more for these values than what it costs for the firm to produce them. The value chain analysis is used when the firm is assessing where in these activities value can be created or added in order to build or improve its strategic capability or competitive advantage (e.g. Johnson and Scholes, 1999).

For a bit deeper discussion of organizational issues, please see the paragraph about Key Success Factors in Retailing in this chapter. 28 Coulter (1998) has argued that drivers for customers demand for choice are three different values, which are rather similar to Porters concept. The first value is uniqueness or newness of a product or service; second, how quick a firm can respond to the customers needs (both aspects accord to Porters performance improvement); and third, its value for money (accords to Porters cost reduction). However, please see the paragraph about customer perceived value in this chapter for a more detailed discussion on the topic of customer value.

27

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Firm Infrastructure Human Resource Management Technology Development Procurement Margin Service

Figure 4-1 Porters Value Chain29 Source: Michael E. Porter 1985, Competitive Advantage, The generic Value Chain, p.37, Free Press, New York Primary activities (Porter, 1985) Inbound Logistics are the activities, which are associated with receiving, storing and distributing and disseminating the inputs to the product or service. In retailing, these activities can include for example the delivery process from the manufacturer to the retailer, and how efficient these delivery processes are according to automatisation. Operations are the activities that transform the input into the final product or service. In retailing, these activities include the packaging and labeling of items in the warehouse of the retailer. Outbound logistics is the physically collecting, storing and distributing of the product for example through transport from the warehouse to the store. Marketing and Sales are associated with providing the means by which buyers can purchase the product or service and are made aware of these. In retailing this includes the maintenance of the stores and their infrastructure and the promotion or advertising of products and services. Service includes these activities, which enhance or maintain the value of the product, such as product return, maintenance, installation or repair.

29 Because value chains differ from each other quite significantly especially when the firms are not in the same industry or are either manufacturers, distributors or service firms Porters general model of a value chain (that is actually resembling more the value chain of a classic manufacturer), is not showing the exact picture of a retailers value chain.

Marketing and Sales

Outbound Logistics

Inbound Logistics

Operations

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Support Activities (Porter, 1985) Procurement refers to the processes performed in the purchasing of inputs for the primary activities. In retailing, sourcing, procurement and replenishment are one of the most essential processes because of usually a large number of suppliers, required negotiating power and efficient process control of out-going orders and in-coming deliveries. Technology Development refers to all activities that have a technology or can be regarded as efforts to improve processes, products or services. In retailing, technology development is regarded as crucial for example to streamline procurement processes e.g. through automated replenishment processes from the store to the wholesaler. Human Resource Management includes all activities of recruiting, managing, training, developing and rewarding staff. It is a crucial factor for the innovative power of an organization and affects all activities of the firm. In retailing, for example special trained staff can provide the customer with better service, or the employees on the management level provide the firm with a competitive advantage because of their managerial excellence and experience. Infrastructure includes for example the systems of general management, planning, finance, accounting, legal and governmental affairs, and quality control and information management.

All organizations have to obtain resources and to provide products or services. In many cases, firms are concentrating on providing only on a few products or services. Hamel and Prahalad (1994) have argued that concentrating on delivering one kind of service or product for a particular market means to concentrate on a core competence, which should enable the firm to build or improve its competitive advantage. This means to share the tasks, which are necessary in order to produce a product or service. Therefore, several firms are brought together and their value chains become connected. For example, the goods the manufacturer produces become part of the service of a retailer when they are sold in the store. Through the connection of these value chains, a supply chain emerges because each firm is operating in co-operation with other firms, such as manufacturers, wholesalers or distributors (Johnson and Scholes, 1999). Figure 4.2 shows a supply chain in the retailing industry. In this case model, the suppliers are producing several kinds of goods, which are then shipped through logistics service providers (in this case the wholesaler) to the retailers warehouse, from where the products are finally delivered to the stores30. Looking for example at the value chain of the wholesaler in this model, the primary activities would be to provide and organize logistics, sourcing, ordering and replenishing products for the retailer. In addition, the wholesaler can provide information system services as a primary activity, and manage its own labels to the retailer in its marketing and sales activities.

30 Recent trends in the logistics process show that the direct-store-delivery forms are increasing in order to make the process more efficient.

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However, it is important to recognize that each participant of the value system has its own value chain, which is determined by the activities of the firm, meaning that a manufacturers value chain looks quite different compared to the wholesalers or the retailers value chain. Figure 4.2 shows a retail supply chain, whereby a supply chain is defined as the successive order of companies that participate in creating a product or service for a customer. In retailing, this especially includes the manufacturer (or supplier), the logistics provider, the wholesale company, the retailing company (including the retailing outlets) and the customers. Therefore, the supply chain includes every business partner - from the supplier via the retailer to the consumer31 (Walters and Hanrahan, 2000).

Store A Supplier A

Information Flow

Store B Wholesale and Logistics Company

Supplier B

Retailing Company Store C

Supplier C

Product Flow

Store D

Figure 4-2 Schematic Diagram of a Retailing Value System Source: Adapted from Michael E. Porter 1985, Competitive Advantage, Free Press, New York For instance, the product flow in figure 4.2 could be that customers have purchased within a given period a certain amount of coffee packages of a certain brand in store A and B. The purchases had been registered at the point-of-sale, and after e.g. the 500th package had been sold, an automatic order is electronically transmitted from the stores information system to the wholesaler. The wholesaler can now see the individual store amount and total amount which had been sold and will order the goods from the supplier, who might ship the products either directly to the stores or to the logistics center of the wholesaler.
31 The concept of the supply chain could also be extended to the supply network, indicating that supply chains have become increasingly dynamic and their relations are starting to resemble more a kind of network than a hierarchical chain. However, network theory is not part of this report and therefore most of the arguments for networks have been left out.

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The logistics center (or retailers warehouse) takes care of labeling, pricing, packaging and other activities (in case there is still something to do before the store can put the product right into the shelf) and transfers afterwards the goods to the store. All of the value chain partners have to process information for procurement, shipping, and order processing and securing and correcting this information. These information flows represent a considerable amount of the end product price, since employees handle many of these activities and not by automated data transactions. The potential of decreasing amount and cost of the transaction through deploying information technology is discussed later on in this chapter. 4.2 Generic Strategy and Competitive Advantage

A firm cannot be all things to all people Porter (1985:12) argues in his well-known model of generic strategies. In order to achieve competitive advantage, a firm has to make a choice on two different dimensions. Therefore, the firm should choose between cost leadership and differentiation. Second, it must choose on its focus as shown in figure 4.3 (Porter, 1980; 1985). The focus refers to the scope of activities and can be either cost focus (exploits cost behavior of consumers) or differentiation focus (exploits special needs of consumers). Porter also argues that cost leaders and differentiators must achieve parity or proximity to their competitors in order to deliver above-average performance. For the cost leader, parity means to achieve cost leadership while the level of differentiation remains the same compared to its competitors.

Competitive Advantage Lower Cost Cost Leadership Competitive Scope Broad Target Differentiation Differentiation

Cost Focus Narrow Target

Differentiation Focus

Figure 4-3 Porters Generic Strategies Source: Michael E. Porter 1985, Competitive Advantage creating and sustaining superior performance, figure 1.3 Three Generic Strategies p.12, Free Press, New York
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Proximity means that price advantages from the cost leadership should not be diminished by discounts the firm gives in order to gain an acceptable market share. In the differentiators case, parity means to achieve differentiation while the cost structure remains acceptable compared to competitors. In that case, proximity means to reduce cost in all areas, which do not affect differentiation. For example, the German hard discounter Lidl represents a focused cost leader because it is mainly exploiting the cost behavior of consumers. A customer centric retailer is exploiting the special needs of consumers because it offers differentiated services. For example, S Group is operating a whole range of different retail outlet formats because it is serving different customers with different needs. In S Groups SOKOS department stores, customers with a special need for service, shopping atmosphere, choice and brands are served, while in hypermarkets such as Prisma, customers with the need for time-saving one-stop-shopping are served. Therefore, discounters do not directly compete with traditional supermarkets or hypermarkets on the same product and service range32. Hard discounters compete only in a narrow segment which makes them more focused than other retailers and which allows them to concentrate on cost efficiency in their operations. Discounters do not pursue parity with their supermarket competitors because the plan is to attract price conscious customers and get them to shop for the basic products in the discount store. However, the discounter seeks for parity with other discounters because they compete directly, such as Aldi against Lidl in Germany. Usually all firms pursue proximity, though sometimes not in the beginning when they enter a market and start price wars with their new competitors. For example, when Wal-Mart entered the UK market, it launched a price campaign worth $400 million (EHI, 2001). Figure 4.4 shows that - based on Porters model of generic strategies - Bowman (1998) distinguished between more than just cost leadership and differentiation. For the retailing market, especially the range between differentiation (position 4) and low price (position 2) is relevant. Position three in Bowmans strategy clock is a hybrid strategy, where one finds elements of low cost and differentiation. The firm which pursues the hybrid strategy would actually be by Porters definition stuck in the middle because it would be under pressure from both sides cost leaders and differentiators who would take away the price-conscious customers and the ones with special needs.

Hard discounters merchandise range (1000 products; 60% food share) is much narrower than in supermarkets (5000 products; 90% food share) or hypermarkets (20,000 products; 30% food share). These amounts are estimates and can vary among retailers and countries.

32

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However, Cronshaw (et al. 1994) argued that Porters generic strategies can be interpreted weak or strong, whereby the latter means that Porters model leaves no other option than cost leadership or differentiation. The weak interpretation argues that if you are not successful in distinguishing yourself from your competitors by lower costs or differentiated products, you will not enjoy success overall. For the purpose of this report, the weak interpretation is applied33.

High Hybrid 3

Differentiation 4 5

Focused differentiation

Perceived added value

Low 2 Price

1 "No Thrills" Low Low Price 8

7 Strategies destined for ultimate failure (6, 7, 8) High

Figure 4-4 The strategy clock: Bowmans competitive strategy options Source: D. Faulkner and Cliff Bowman (1995), The essence of Competitive strategy, Prentice Hall; as cited in: Johnson and Scholes (1999), Exploring Corporate Strategy, 5th edition, p. 272

In figure 4.4 the hybrid strategy describes a low-cost-based strategy but also reinvestment in differentiation, which seems to be the most common strategy in groceries retailing. This is what customer centric retailing companies are doing by becoming more cost efficient on one side, but investing in value adding strategies for their customers on the other side. These customer centric strategies are characterized by significant investments in technology in the customer interface in order to gain more insight on the customers value perception and to offer better services and products.

33

Cronshaw et al. (1994) made their point by using PIMs database. They give a case example of Sainsburys, the second largest UK retailer and its slogan good food costs less at Sainsburys, which had been used in the midnineties as a strategy, and which was Sainsburys answer to the price competition it faced especially from Tesco. Sainsburys was positioned until that time clearly as differentiated and high-quality groceries retailer. However, whether Sainsburys was successful with this strategy is questionable, since the firms market share stagnated during the 1990s around 12% and even lost market share to its competitors in the second half of the nineties (see figure 3.10).

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However, customer centric retailers (differentiators) share with cost leaders the aim to become more efficient in supply chain processes to reduce their costs. Especially in reaction to price competition, customer centric retailers apply a strategy that was first proposed by Wal-Mart, called every-day-low-prices (EDLP), which seeks to eliminate all promotion activities and quantity discounts on the supplier and retailer side. The goal in this case is to achieve permanent cost reductions through improved logistics, ordering and sales management, which is then passed on to the consumer through every-day-low-prices (e.g. Griffith and Krampf, 1997). Another hybrid aspect of customer centric retailing is to launch private labels. On one hand, they are cheaper than manufacturer brands and therefore target price consciousness - and on the other hand they give more choice to the consumer as alternatives to manufacturer brands (e.g. Wileman and Jary, 1997). In order to explain figure 4.4 more practically, the example of German discount chains is used again. Hard discounters match the no thrills position, which combines a low price with a low perceived added value and a focus on a price sensitive market segment (Bowman, 1995 as cited in: Johnson and Scholes, 1999:271). The low perceived added value in the case of the discounter is the narrow product and service range and extreme low share of manufacturer brands34, which would provide besides choice and better quality also image for the consumer. However, these discounters usually offer an acceptable or good quality of products, which gets them more or less - customers from all income ranges to shop. The reason why discounters dont represent the low price strategy is because they are compared in this report to the overall groceries market (including e.g. supermarkets, hypermarkets). Low price indicates by definition that a lower price is achieved while at the same time the firm tries to maintain the same merchandise range and service quality as competitors, which is not the case in comparing hard discounters to supermarkets. Connecting Porters and Bowmans strategy options (figure 4.4) to food and nonfood retailing, this report argues that Bowmans strategy clock is turned back from Porters differentiation focus (4) and low price focus (2) to Bowmans hybrid (3) and no thrills (1) position. Therefore, customer centric retailers represent the hybrid position, and discounters the no thrills position.

34 The German hard discounters and their share of private labels: Aldi 95%; Lidl 70%; Penny Markt 50% (to be rising) (EHI, 2001).

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Illustration 1: S Group and Lidl as Hybrid versus No Thrills The S Group is representing a customer centric retailing firm that has diversified horizontally into food and nonfood retailing, restaurant and hotel business, agricultural business, car sales and gas service stations. Focusing on the food and nonfood retail business, S Group has further diversified in holding different store formats such as department stores (SOKOS), supermarkets (S-Market), hypermarkets (Prisma) and discounters (Sale/Alepa). Figure 4.5 compares S-Market, Prisma and Sale/Alepa to the German hard discounter Lidl, which is part of the German retail firm Lidl & Schwarz35. Lidl is Germanys second largest discounter and has been expanding to foreign markets in recent years quite successfully. Lidl is running its standardized discount outlets from Portugal to Poland and from Greece to England and is going to enter the Finnish market in 2002. Lidl is benefiting from its strategy to combine local products with its traditional discount product line that consists to 70% of private label brands. Because Lidl is pursuing a consequent standardization and efficiency strategy, it is able to expand quicker than its competitors such as the German hard discounter Aldi. Comparing S Groups stores and Lidl, it becomes visible that Lidl has advantages in cost efficiency because it concentrates on only one store format. Further, Lidl is not deploying any customer centric tools, which demand additional investments, such as customer loyalty programs, because as a hard discounter it aims to attract and retain its customers through low prices at acceptable quality. Therefore, figure 7.2 shows Lidl as the most cost efficient format but also the one with the narrowest product range and the lowest value added. S Group is pursuing a different strategy because its diversified store formats are run to serve different customers that have different needs. All three chains (S-market, Prisma and Sale/Alepa) can be considered as customer centric because of S Groups overall strategy. For example, the customer loyalty card scheme applies to all retail chains, whether discount or supermarket. Considering the stores position in figure 7.2, S-Market represents the traditional supermarket that is located in urban areas. The supermarket format is the least efficient36 of these stores but offers more value than discounters because of a wider selection of products and also some services. Prisma is a hypermarket that offers one-stop-shopping and is located in suburban areas or out-of-town areas. Its value added is the highest of the four chains because of its wide product range and additional services that are offered in these markets.

35 36

For a more detailed description of different store formats please see chapter three, paragraph Store Formats. For a comparison of store format costs, please see chapter four, paragraph Cost Efficiency in Store Formats.

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The reason for positioning Sale/Alepa as more value adding than Lidl is that Sale/Alepa discounters take the customer loyalty card, which makes the customer part of a value network. One can argue that Lidl is adding the same value as Sale/Alepa to its customers because it passes on the costs it saves from not having a loyalty card scheme. However, because the Sale/Alepa customer can use the card in many other locations as well, it creates a potential benefit that might be outweighing the loyalty card cost savings from Lidl, depending of course on Lidls price level. But Sale/Alepa discount chains cannot be as efficient as Lidl, because they are part of S Group and therefore belong to a diversified retail corporation that cannot concentrate on operating one store format only, in order to achieve operational excellence. However, the S Group has a hybrid strategy, meaning that it seeks besides customer centeredness also for cost efficiency and improves the efficiency of its value chain constantly.

High Prisma

Merchandise Range and Value Added

S-Market

Sale/Alepa

Low

Lidl

Low

Cost Efficiency

High

Figure 4-5 Comparison in Cost Efficiency and Value Added Both concepts the customer centric and cost efficient one are claiming to add value and to have a relation with the customer. The discounter claims to add value through low prices. The customer centric firm claims to add value through value for money, and services built around its customers, which are aimed to create a relationship and develop the customer.

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However, even from a customer value perspective that emphasizes emotions as relationship aspects, both strategies might have something to offer to their customers. For example, Aldi, the first German large-scale hard discounter, enjoys fame status in Germany and is having a relationship with its customers. Aldi is committed to deliver good quality to the lowest price possible, and enjoys emotional customer-retailer relations. Aldi even sells computers in its stores in special short term marketing campaigns, which is only possible because Aldi is a trusted retailer. Therefore, some discounters are able to create true relations even though they are pursuing cost efficiency. However, though one has to acknowledge Aldis legendary status in the German market, which no other discounter could replicate yet, the trust in Aldi seems to have had a positive effect for other discounters as well. For example, also Lidl is selling now desktop computers and notebooks in special-offer campaigns. Hard discounters cannot substitute traditional supermarkets or hypermarkets because there are always customers who are more convenience oriented than price conscious. However, if Lidl would succeed to establish relations with its customers based on trust they might enjoy loyalty even from price conscious customer to a certain extent. One difference between S Group and Lidl is that S Group has more possibilities to create a relation to its customers because - as a customer centric retailer - it invests more in business-to-consumer channels and technologies than Lidl, the discounter. Most store formats S Group is operating also offer a broader merchandise range, which is important for consumers who want also choice besides low prices. S Group could seize the more up-market customers needs and create a more memorable shopping experience in the supermarkets (though the extent of this effort might be quite limited). The traditional supermarket and S Group discount stores might face the toughest competition from the Lidl discount stores because they are closest in proposed value, while S Groups Prisma markets are offering one-stop-shopping and therefore offer higher value added. But there is a chance that if Lidl would locate its stores very close to the Prisma stores in the classic out-of-town areas, it could attract Prisma customers to shop for certain goods in the Lidl markets. However, there are various scenarios of competition and various dimensions for customers to choose a certain store. The purpose for discussing this issue has been to take a practical example of competition and to show that customer centric strategy goes beyond developing existing customers. It also requires building the right value added services and creating relationships with customers in awareness that relationships and loyalty are not a monopoly for customer centric retailers but can also be created by pure cost efficient retailers.

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The following paragraphs Sources of Cost Efficiency and Transaction Cost Approach should provide the basis for understanding cost and value drivers in retailing. Subsequently, this chapter will discuss issues such as how to use cost efficiency and customer added value to build competitive advantage and what competitive advantage, core competence and key success factors mean in a dynamic and uncertain retailing environment.

4.3

Sources of Cost Efficiency

Johnson and Scholes (1999) have described four sources of cost efficiency37. Figure 4.6 shows these four sources, which there are: economies of scale, experience, product and process design and supply costs.

Economies of Scale e.g. -Mergers and Acquisitions -High purchasing volume -negotiating power increases with size

Experience e.g. -skilled personnel -knowledge of the market and competition -learning curve effects

Cost Efficiency Supply Costs e.g. -Purchasing Alliances -Purchasing from low cost countries -Reverse Auctions -Preferred Suppliers

Product/Process Design e.g. -effective demand forecast -effective sourcing -short order cycle times -high inventory turnover

Figure 4-6 Sources of Cost Efficiency Source: based on Johnson and Scholes (1999), Exploring Corporate Strategy, p. 166, 5th ed. Prentice Hall, New Jersey.

37

Johnson and Scholes explain based on R.B. Grant, Contemporary Strategy Analysis, 2nd ed., Blackwell, 1995, p. 122; and on B. Karlof, Strategic Precision, Wiley, 1993, chapter 3.

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4.3.1

Economies of scale

Economies of scale play an important role for cost efficiency because the ability to sell at a high price increases with the firms market position, whereby the ability to exert negotiating power in the purchasing process increases as well due to large purchasing volumes (Porter, 1985). Further, the advantage of economies of scale can be useful for vertical integration with suppliers, because these decisions require investments, which are usually more accepted if the buyer could assure to take large volumes from the supplier. For example, Wal-Mart (US) has established a private purchasing platform, which integrates its suppliers, wholesalers, the retail stores and even the customers. WalMart is by far the worlds biggest retailing firm (with 199 million in sales compared to the next largest retailer Carrefour with 65 million). Therefore it owns large financial resources and purchasing power, which enables the firm to set up a private purchasing platform on its own and convince suppliers to join. Economies of scale also refer to the decrease of unit prices when sales or production volume increases. The benefit of scale on the experience curve (or learning curve) provides the organization with the chance to use its resources more intense, which translates into a more efficient use of resources. These resources can be of tangible nature (e.g. raw materials, machine hours) and intangible nature (e.g. gains in experience and knowledge, which leads to a better production process design). In manufacturing for example, each doubling of unit output in a factory decreases the cost per unit by a constant fraction, which is often about 20% (see e.g. Mintzberg, 1998:97; Kauffman, 1995:124). In retailing (which is not a manufacturing industry but a service industry), the share of operating costs per unit sold decreases with the increasing amount of units sold. For example, hypermarkets are more efficient than supermarkets because their higher turnover, which decreases costs per unit sold, such as work hours and therefore productivity increases (e.g. sales/employee).

4.3.2

Experience

Johnson and Scholes argue that learning from experience sets resources free, which were bundled before in the business process such as production and procurement and logistics. These resources can be used for establishing a better market position and investing in further improvements (Johnson and Scholes, 1999). Experience also means to know the market, the business and the customers, which makes experienced employees an important asset for creating revenues. However, for cost efficiency the knowledge and experience of employees is equally important.

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For example, when Tesco decided on their distribution model for electronic groceries shopping, the experience and knowledge of the retailing business was critical to the ventures success. Tesco decided not to build automated warehouses (as pure online grocery retailers did) but to use their existing store network and start to pick the orders by hand, as long as customer demand was low38. Also Wal-Mart has shown that experience and innovation leads to increased efficiency. For example, at least half of Wal-Marts productivity edge in the 1990s comes from managerial improvements and have nothing to do with Information Technology. Better training of personnel that works at cashiers and monitoring of utilization lead to an increase of 10% to 20% in productivity. Further, Wal-Mart cross-trained its staff in order to function effectively in more than one department (Johnson, 2002).

4.3.3

Product and Process Design

Figure 4.6 shows in the bottom right corner product and process design. The retailers design of the supply chain and customer interface, (or distribution channels) such as stores and on-line channels influences its efficiency e.g. by deciding on the amount and kind of chain models. 4.3.3.1 Cost Efficiency in Store formats For example, discount store formats are more efficient than supermarkets, because of their narrow product range, high grade of standardization and focus on only a few tasks, such as supply chain efficiency or sourcing for a much more limited number of products than customer centric retailers have to. If these store formats are compared with each other according to their cost structure for space, staff and capital, one can find the following cost structures, which are based on the German retailing market (Katsaras and Schamel, 1999). The main operating costs for retail outlets are labor costs and space costs whereby capital costs play indirectly through inventory turnover and investment intensity of the format an important role. The total costs of a branch store relative to annual gross turnover39 are the lowest for discounters (13.6%), hypermarkets (19%) and supermarkets (19.7%) whereby labor and space costs have a share on these costs from 60 to 85% (Katsaras and Schamel, 1999). Space costs refer to the costs of maintaining the retail outlet, such as rent and electricity. They usually vary from roughly 4 to 6% of the outlets gross turnover. By choosing locations which are rather outside of the town center, the firm can decrease its operating costs, as for example the German hard discounter Aldi did, by moving out of the city centers (EHI, 2001).

Please see chapter five The UK Online Grocery Market and Tesco for a more detailed discussion on Tescos online grocery model. 39 The figures are rounded, and are based on the German retail market (Katsaras and Schamel, 1999).

38

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Staff costs refer to wages, salaries, paid premiums and social costs and usually decrease for larger food retailing outlets. The figure varies roughly between 13% for supermarkets, and 8% for hypermarkets, while discount markets have the lowest figure, with approximately 7% of the outlets annual gross turnover. Capital costs refer to depreciation and interest payments, whereby the latter is influenced through the ratio of inventory turnover, because capital used to purchase these goods is bound for the time they havent been sold yet. The average frequency of annual inventory turnover decreases with store size and with the share of non-food products. For example, discount supermarkets turn their inventories roughly 16 times per year, supermarkets 12 times, and hypermarkets only 7 times, which has a direct impact on their profitability and margins. When inventory rotation is increased, the retailer can offer more competitive prices while maintaining its profitability, which is shown in the following example by Christensen (2000). A traditional successful department store earns an average gross margin of 40% while it turns its inventory for example three times a year. Therefore, the department store earns three times 40% which is 120% annual return on the capital invested in inventory. Amazon.com, the internet book retailer turns its inventory 25 times a year, which means that it needs only 5% gross margin compared to the department store (Christensen 2000). A discount store with an inventory turnover of 16 times per year would need only 7.5% gross margin to earn the same rate of return on capital invested in inventory. Of course, the merchandise range and business model is completely different of these three retailers, but the purpose to demonstrate the effect of inventory turnover on gross margins has been served.

4.3.3.2 Supply chain process automation Another important aspect of process design is the supply chain process. Jouko Nieminen, Managing Director of Intrade Partners, the wholesale, logistics and sourcing partner for Shopping and Specialty Goods in S Group described in an interview that the state of supply chain integration varies quite much among retailers. Proof for his argument can be found if one compares for example Kesko and S Group the first and the second leading Finnish retailers. While most of S Groups sales are collected at the point-of-sale and sent automatically from the store as orders to the purchaser (Intrade Partners), Kesko has not completed its order automation yet. Differences in supply chain process automation get bigger if one considers large international market players, such as Wal-Mart. Wal-Mart owns one of the best automated supply chains and ECR systems, where in many cases orders get directly from the store to the supplier, which is a major competitive advantage for the firm (Accenture, 2001a).

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Wal-Mart had proofed in its beginnings that process design contributes more to profitability than economies of scale. In 1987, the firm owned a US market share of just 9% but was 40% more productive than its competitors40. By 1995, Wal-Mart had increased its market share to 27% while its productivity lead compared to competitors reached 48%. 4.3.3.3 Supply chain techniques Supply chain techniques are important instruments for managing the supply chain and improving process efficiency. In retailing, these advanced techniques have become increasingly important and they directly reflect a firms supply chain process design. Supply chain management includes for example Quick response (QR), ECR (efficient consumer response) or category management (CM), which is briefly explained in order to give some background information on supply chain techniques. ECR (efficient consumer response) ECR (efficient consumer response) is the close co-operation in operational logistics and information technology between all partners in the supply chain. The customers purchases are scanned via checkout scanners at the point-of-sale (POS or EPOS41), which is part of the information systems technology and are and then analysed, for example through data mining. The system automatically transmits orders to the manufacturer to be executed. The aim is to avoid unnecessary storage, eliminate out-of-stock situations, and use logistics more efficiently and to improve storage operations. Further, ECR seeks to reduce unsold goods, and consumer returns and complaints (Katsaras and Schamel, 1999). ECR includes efficient assortment for example through category management (CM) and efficient promotion through using the EPOS (electronic point of sale) data to analyze the impact of campaigns and in order to base management decisions on facts. Further, efficient product introduction should be fostered through the exchange of EPOS data between the retailer and the manufacturer which increases the knowledge about consumer preferences, the right pricing strategy and the right place on the shelf (Katsaras and Schamel, 1999; Hoffman and Mehra, 2000). For example, Wal-Mart is providing its suppliers with a two-year purchase history of its customers. The cost reduction potential for ECR in European food retailing is estimated with 2% to 3% of annual turnover in gross sales, whereby 2/3 of savings are expected to come from the logistics part, and 1/3 from the marketing operations (Katsaras and Schamel, 1999).

40 41

Wal-Mart was 40% more productive measured by real sales per employee. EPOS = Electronic Point of Sale

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For example, Tesco has installed a private digital network, which integrates all stores in real time and connects the data with multiple areas. The network spans from operations in the customer interface where it derives the data via POS42-scanner and integrates it in the customer accounts and data warehouse, where the firm also uses data mining techniques for analyzing purchasing data and forecasting demand more effectively. The data is also integrated in the inventory control systems where changes can be made in real time and sent directly to the central warehouse for managing new deliveries. While Tesco has an EDI system in use to link with its main suppliers, it also manages its supplier relationships through integrating its distribution system in an Extranet, called TIE (Tesco Information Exchange). In the TIE application, first only the largest suppliers were integrated (a few, like Nestle and Procter and Gamble), but the number constantly increased to about 400. The intention for the Extranet was besides fulfilling tasks of the EDI system to give its preferred suppliers better access to up-to-date information from the EPOS system and to track sales and inventory, and fulfill ECR tasks, such as efficient assortment, promotion and product introduction (Ramaswamy and Dikalov, 2001). Quick response (QR) Quick response has been implemented with the use of EDI. It is a collaboration technique, which connects the retailer directly with the manufacturer and the manufacturer even with the provider of raw materials. The information is collected at the EPOS and sent directly through the EDI system to the supply chain partners. It should save time in the order-deliver-manufacture process, and it was originally designed for predictable, basic products such as linens and towels but is now applied to other product categories as well (Maltz and Srivastava, 1997). Maltz and Srivastava name an example from the textile industry. The retailer has a risk of having ordered the merchandise collection for the whole season without actually knowing which merchandise would sell and in what amounts. QR would enable the retailer to order on a weekly or bi-weekly basis, with having already a feedback from the sales and therefore being able to adjust order amounts and merchandise design, for example when it becomes clear which colors are being bought more than others by the consumers. Therefore, instead of ordering the whole merchandize at once, the order can be made according to customer demand, which reduces the risk for the retailer. Category management (CM) Category management (CM) is another supply chain management technique. Its goal is to promote, develop and manage products in categories of the same kind (SKUs stock keeping units) by optimizing the mix of high-priced and low-priced products. The focus of category management lies on managing rather the retailers entire product categories as profit centers than a manufacturers single brand (Gruen and Shah, 2000).

42

POS = Point of Sale

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The co-operation between manufacturers and retailers through software programs for collaborative sales forecasting and promotion planning is taken one step further through feeding the retailers sales forecast into the manufacturers production schedule. Software programs already offer a web-based real-time alert that reacts when a discrepancy between the retailers buying forecast and the manufacturers production schedule occurs. These programs are expected to decrease out-of-stock levels from as high as 10% to less than 1%, which should improve inventory turnover by as much as 10% and increase sales as well (Business Week, 2001). For example, considering the out-of-stock of a product with 50% brand loyal customers and 25% of customers not willing to purchase something else instead, a decrease of out-of-stock from 11% to 1% would mean a sales increase by 1.25%43. 4.3.3.4 Vertical integration into wholesale Retailers and manufacturers are increasing vertical integration by acquiring wholesale companies and restructuring logistics activities. Through acquiring wholesalers, the retailers are saving on gross margins and can influence directly the product sourcing and purchasing process, and streamline their order processes for example by linking the stores orders directly with the wholesalers IT system. In addition, product transport can be outsourced to specialized logistics service providers. The International Labor Organization (ILO) has mentioned in its report a shift in ownership of European wholesale companies, based on data by Coopers and Lybrand (1999). The results show an increasing vertical integration into wholesaling of retailers and manufacturers. Between 1981 and 199544, 38% of European wholesalers in the food and drink business were acquired by manufacturers, followed with 33% by retailers, 11% by other wholesalers and only 3% by logistics service companies. In the clothing industry, vertical integration of manufacturers was the strongest by far with 62% of acquisitions, followed by 17% acquired by retailers, 8% by other wholesalers and none from logistics companies. Logistics delivery models Logistics delivery models also belong to the process design, which contributes to the companys cost efficiency. According to the ECR Performance Measures Operating Committee, (as cited in ILO, 1999) the three main logistics strategies are wholesalersupplied retailers, self-distributing retailers and retailers which are directly supplied from manufacturers, called DSD (manufacturer direct store delivery). The wholesaler-supplied system can be regarded as the traditional model, which dominated the old supply chain model. The products are manufactured by the producer, then delivered to the wholesalers distribution center, and finally to the retailing outlets. Separate companies perform all three processes.

0.1 out-of-stock x 0.5 brand loyal customers x 0.25 not willing to purchase something else = 0.0125 lost sales The percentages are based on the total amount of European wholesale companies, which have been acquired in the period between 1981 and 1995.
44

43

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However, in the past years, the increasing integration of wholesalers has also lead to a higher number of self-distributing retailers. In this system, retailers (but also manufacturers) have direct control of the distribution process, which means that products flow directly from the manufacturer to the retailers distribution systems. The highest integrated form of co-operation between the manufacturer and the retailer is represented by the manufacturer-direct-store-delivery (DSD), whereby manufacturing and distribution is usually controlled by the same firm. In this context, the supplier or manufacturer prepares the order already in parcels according to the store they will be shipped to, which is called cross docking. Retailing firms are dealing with all three forms of distribution, as is described in the illustration below. Illustration 2: S Groups Supply Chain Process The S Groups most important sourcing and logistics services considering daily consumer goods, shopping goods and Specialty goods are Inex Partners Oy (jointly owned by SOK and Tradeka/Elanto) and Intrade Partners Oy, owned by SOK. Intrade Partners is sourcing for all consumer goods (except daily consumer goods) and shopping or Specialty goods (e.g. textiles) for S Group and provides the logistics services, as well. Here, the focused the focus is on the part of the non-food purchasing process, which is handled by Intrade Partners. Intrade Partners is more than a wholesale company for S Group because of its deep integration in the groups processes, which is ensured through S Groups ownership of Intrade Partners. Intrade represents the intermediary between the supplier and the S Groups chains SOKOS and Prisma, which are the distributors for most shopping and Specialty goods in S Group. Intrades co-operation with these chains include the planning of the product range and preparing the goods already for the shelf (includes e.g. labeling), which happens in most cases in Intrades warehouses. These integrated tasks of ordering, merchandize planning, logistics and order fulfillment create a significant information flow between the chain partners (e.g. SOKOS department stores) and Intrade, which passes the information on to the supplier or manufacturer. Intrade computerizes the items it receives from the supplier, and shares the product information with all concerning stores of S Groups chains, such as Prisma and SOKOS department stores. Intrade is managing national and international supplier relationships, which includes for example the sourcing for S Groups private labels in Specialty goods, such as private brands for SOKOS department stores textiles. Information flow From the supply side, 60% of orders are received via EDI whereby the rest is transferred via Internet (e-mail), automated fax or paper. Intrades sourcing database contains over 350.000 different items from more than 2.400 different suppliers. According to Managing Director Jouko Nieminen, there are approximately two more years before most of these processes will be conducted via the web browser technology.
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From the retail side, 95% of orders come via the S net from one of the S groups sales outlets directly to Intrade Partners. Orders can be distinguished between seasonal orders (e.g. fashion) and orders based on a continuous range, certain order cycles even. The inventory rotation in S Group is in non-food retailing 6 times a year, which represents industry average. Logistics Flow Direct-store-delivery All imported products (except some products from the EU manufacturers) go directly to the warehouse. Therefore, mainly domestic products, where most of them are branded products with their own distribution system, are delivered directly from the supplier to the store. The amount of DSD products, which are usually automatic replacement orders and pre-ordered delivery, is roughly 40%. Cross-docking Some suppliers prepare the order already in parcels according to the store they will be shipped to, which is called cross-docking. These parcels are shipped to the warehouse, from where Intrades logistics deliver them to the stores. Though cross docking is the most cost effective form of shipping for the retailer, problems with labeling, and others can occur if the reliability of the suppliers processes is not high enough. Therefore, Intrade prefers to receive from problematic sources the goods in the central warehouse for the final handling, labeling and marketing information. However, roughly 75% of the goods received in the warehouse are cross-docking finished and are stored for further shipping and 25% is not-prepared warehouse delivery.

4.3.4

Supply costs

Porter argues in his model of the five competitive forces (1980; 1985), that bargaining power of buyers as well as the bargaining power of suppliers affects a company operating in a given market because the success of a firm also depends on its ability to negotiate purchasing prices as well as selling to a profitable price. The impacts these two factors have on a retailing firm are intense because of the existing rivalry in the industry and the market characteristics (maturity and price competition). Therefore, the industry structure of the retailers, but also of the suppliers plays a role for negotiating supply costs. The power of buyers The power of buyers is likely to be high when there is a concentration of buyers (Johnson and Scholes, 1999). For example, most mid-sized European grocery retailers are members of purchasing alliances (see table 5.1), in order to concentrate certain purchases and increase their negotiating power. The power of buyers also increases when there is a large number of suppliers competing for a small number of buyers, or when there is a sufficient number of alternative suppliers, which gives the buyer room to negotiate (Johnson and Scholes, 1999).
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In addition, the pressure to achieve the most favorable product price increases from the inside of the firm, when the core product costs are high, and the firm is driven to shop for the best product price (Lowson, 2001). Retailers are trying to increase competition among suppliers through reverse auctions in e-Marketplaces, where they offer a contract to produce a certain product to a certain quality, quantity and price. This tactic is especially used for products which are sold under private labels in the retailing stores (please see chapter five, paragraph e-Marketplaces for more detailed information on reverse auctions). The power of suppliers The supplier power can be high when there is a concentration of suppliers operating in a market of highly fragmented buyers. Further, supplier power increases if the buyer is less sophisticated in its business operations as the supplier (Johnson and Scholes, 1999). The supplier also has a strong position when it owns a strong brand, which represents a major reason for the customer to shop in the retailers store. For example, the supplier power in European food and non-food retailing was relatively high until the 1980s because of their large size and strong brands, but decreased with the emergence of large-scale retailers and their gaining sophistication in business operations such as in marketing. This is demonstrated by the fact that in 1994, the European sales figures for the top ten European grocery retailers were 2.5 times higher than the European sales of the top ten FMCG45 manufacturers46 (see also table 3.1). The previous paragraphs have explained the sources of cost efficiency for a retailing firm, which can be distinguished into economies of scale, experience, supply costs and product/process design. The role of e-Business has been mentioned for each field. In retailing, e-Business is especially important for production and process design and supply chain processes, considering for example supply chain process automation, vertical integration or compressing supply chains, effective logistics and collaborative e-procurement. In the following paragraphs, a simplified, theoretic model of a cost structure of a product or service is provided in order to explain that retailers are trying to transform transaction costs into service. However, these attempts are regarded in this report to be more beneficial within the B2B side of the supply chain than between retailer and consumer.

FMCG = Fast Moving Consumer Goods However, the position of manufacturers remains strong, especially if we consider the top five FMCG manufacturers such as Unilever, Nestle, Philip Morris, Danone, Procter and Gamble, which all have a dominant position in each of the European markets, while the retailers position vary from country to country.
46

45

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4.4

Transaction Costs

Transaction costs are the costs of running the economic system and can be regarded as the equivalent to friction in physical systems (Arrow, 1969). Porter has shown these frictions in his value chain analysis (see also figure 4.1), which can be used as a tool to assess where in the value chain (and supply chain) frictions can be streamlined (Porter, 1985). Williamson has argued that decreasing the cost of information and the cost of physical transactions by improving the business processes increases the efficiency of the value system and therefore the efficiency and competitiveness of the supply chain participants (Williamson, 1985).

Share of core product from the total cost (the product itself) Share of transaction costs from the total cost including customers transaction costs (e.g. sourcing, ordering, delivery, payment of wholesale goods, customers sourcing costs).

Share of service from the total cost (e.g. customer service, customer returns)

Figure 4-7 The Value Structure of a firms offering Source: adapted from Karjalainen, N. (1999), The effect of Electronic Commerce on Businesses Masters Thesis, Lappeenranta University of Technology, p. 113 based on PriceWaterhouseCoopers Figure 4.7 shows that a firms offerings consist of a product, a service and the transaction (Karjalainen, 1999). While product costs refer to the costs of the core product itself, transaction costs refer to all activities, which have to be performed in order to get the goods from the manufacturer to the store. For example, this includes product sourcing, ordering, logistics delivery, storage, packing and labeling and payment. The service costs refer to all activities that are performed to assist the customer in order to conduct the purchase. This can include advising the customer in choosing a product, payment options, delivery, installment, maintenance, repair or product returns.

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For a retailer with physical stores that is selling mainly FMCG products like a supermarket, this means that most customers come to purchase a product but receive relatively few other services. Therefore, the supermarkets offering consists mainly of product costs and the transaction costs, which are the retailers main service, since they are incurred when moving goods along the supply chain into the retail outlet in order to present them in a manner so customers can purchase them. In a department store, the service share is higher for example in clothing, where sales personnel are assisting the customer. In the consumer electronic department, the service share might be even higher in case the customer receives also service in delivery and installment for a more complex product. Two main issues arise for transaction costs. First, the firm is able to decrease transaction costs, which makes product costs and service costs larger relative to the transaction costs, which results in a higher net value for the consumer47. Second, the most desirable situation is created if the firm could not just decrease its transaction costs, but also transform them into service for the customer. Here, two kinds of customers exist. One group is the supplier retailer relationship (B2B), which is seen as a customer relation though in many cases it is the buyer/retailer that is assisting the supplier with service, for example in access to inventory figures. On the other side is the retailer consumer relation (B2C). This report argues that for a food and nonfood retailer, the potential for transforming transaction costs into service is higher on the business-to-business side of the supply chain than on the business-to-consumer side48. This is, because the complexity of the products and services that are offered by retailers to consumers is rather low, and the characteristics of the retail core services do not allow them to be easily digitized, contrasting to for example retail banking49. But because the possibilities to transform transaction costs on the retailer-consumer side are rather low in food and non-food retailing, a less transaction cost oriented approach for customer value is needed, which acknowledges relationship creation.

47 This is also a positive effect because the customer usually recognizes only the product part, service part and own transaction costs but does not consider the entire product chain or value chain. Therefore, the retailers transaction costs remain usually unconsidered in the eye of the consumer. 48 While some transactions seem to be born for a transformation into customer value-added service, for other transactions it might be unreasonable. Because the nature of transactions usually depends on the nature of the firms business, also not all industries are equally able to transform transaction costs into customer value added service. While in Food and Nonfood Retailing not many eye-catching solutions have been found yet (on the B2C side), other service industries offer quite obvious transformations. For example, UPS (United Parcel Service) is offering its customers to log on to their Internet portal by entering the product code of the parcel that is just being shipped. Subsequently, the customer can check the latest information about where the parcel is, depending on what scanning point it just had passed in the UPS delivery chain. In this case transaction costs that are operated by UPS anyway in order to track their parcels have been made available to the customer and represent therefore a value added service that has been created through transforming transaction costs into service. Food retailing is a different business, and the possibility for transforming transaction costs into meaningful service for the end-consumer definitely needs further research. However, the B2B side is offering in retailing plenty of possibilities for transaction cost transformation. 49 For example, the core service of a retailer (on the B2C side) is to provide the necessary assortment offering, advice and payment service. The customer will after the purchase transport the goods to his/her home. In that case, retailing is mostly a business where tangible products (in many cases perishable goods like fruits, milk, frozen goods) are purchased and transported to the customer either by himself/herself or other means. The core service is therefore not digitizable since it is a tangible product (of rather low cost/weight ratio, even). Retail Banking in contrast, can digitize its core service, which is providing financial transactions and access to accounts via electronic means, basically from anywhere.

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Electronic distribution channels could be deployed not just as means to sell and buy goods and to transform transaction costs, but also to transmit other information that is useful to customers, and by using it as a feedback channel. Therefore, e-Business is providing new possibilities for retailers to enhance their relationship to end consumers probably not by transforming transaction costs into services, but by adding services that are appreciated by customers. On the B2B side, the complexity of the retailer-supplier relation is much higher, which gives more space for transforming transaction costs into services. For example, Wal-Mart is offering suppliers to access to inventory information through its private e-Purchasing platform and to check inventory levels in real time. Hereby, transaction costs are transformed into valuable information that is used in a collaborative way by supply chain partners50. In addition, other potential benefit can be expected, such as increasing sales through lower out-of-stock levels, shorter order cycle times and higher inventory turnover, which increases the competitiveness of both sides51. 4.5 Customer Value Equation and Supply Side within the Retail Value Chain

Walters and Hanrahan have developed a comprehensive picture of the retail value chain, which puts the customer value equation in context of the retailing firm and its value chain partners (2000). However, the main focus of this model is directed towards the customer value only, and mentions the value for the remaining network partners rather briefly, in the area of relationship management. Therefore, this study understands Walters and Hanrahans model as to achieve value for the ultimate endconsumer in the awareness that achieving this value is only possible when the value of the B2B relationships is increased as well. Figure 4.8 basically shows three large areas, which are the customer (including value and cost criteria), the firm (including value drivers and cost drivers) and the underlying processes, which are supply chain management, relationship management and information systems and techniques. The ultimate goal for this value system is to achieve a positive customer value equation. The outcome is influenced by the customers value criteria such as product or service performance, security, reliability and convenience. The customers cost criteria derive for example from search, transaction, installation operations and maintenance. For example, in the context of grocery retailing this equation would mean that the customer values a save, healthy and delicious looking product that is always in stock, at a reasonable price and in a store convenient to reach. The merchandise range should be wide enough in order to enable the customer to buy all products needed to do the shopping. The retailers task is to deliver the product or service at a price the customer is willing to pay, according to the customers value equation.
50 For more information please go back to the paragraph Sources of Cost Efficiency in this chapter, or go to chapter five, paragraph B2B e-Commerce. 51 The tools for decreasing transaction costs (such as ECR) have been introduced in the former paragraphs about supply chain collaboration techniques.

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However, since the competitors might be offering the customer the same options, the firm must improve its value delivery to attract the customer and work out solutions how to maintain and develop the relationship.

Security Performance Aesthetics Convenience Economy Reliability

Customer Value Criteria

Value Drivers

Availability Choice Exclusivity Continuity Quality Information

Supply chain Management Techniques

QR ECR CM VMI CMI Preferred supplie Supply chain integration SRC

Customer Value Equation

Cost-effective customer value delivery

Facilitators

Relationship Management

Specification search Customer Search Cost Transaction Criteria Installation Operations Maintenance

Cost Drivers

Inventory Facilities Transportation IT Systems HRM

Information systems and technology

EDI EPOS EFT "Non-store" shopping

Figure 4-8 The retail value Chain Source: Walters, D. and Hanrahan, J. (2000), Retail Strategy Planning and control, p.335 figure 16.1 The retail value chain, Macmillan Business Press, London As shown in figure 4.8, the firm is improving its value drivers such as choice, merchandize range and product and service quality. It is also improving the way it provides information and how it communicates with the customer. The cost drivers for establishing, maintaining and improving these services are for example inventory costs (influenced e.g. through merchandise range), facilities (e.g. choice of distribution channels), human resource (e.g. influenced by service level in stores) or IT systems. For example, Tesco, which had been the first online grocery provider in the UK in 1996, has continuously improved its value offer for customers by adding non-food products, consumer electrics and finally financial services to its product and service portfolio it offered through its web site www.tescodirect.com. Originally, Tesco started by providing its online grocery delivery only within a certain distance from its neighborhood stores because the items for online delivery were picked from the store shelf. However, the company started to increase reach by contracting with a nationwide parcel delivery service, which delivered non-food products.
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The firm also improved its value through offering more information through its web site, for example through providing tips for nourishment, recipes and a calculator which compared Tescos prices to competitors (Ramaswamy and Dikalov, 2001). On the right hand side of figure 4.8 supply chain management, relationship management and information system management are shown, which belong to the main drivers of the firms value and cost improvement. While supply chain management and information systems integration have been discussed in the former paragraphs about Sources of Cost Efficiency, the role of relationship management will be explained in the following paragraph.

4.5.1

Relationship Management and Preferred Supplier Relations

Relationship management (fig. 4.8) is the third task of back-office processes and it is strongly linked to the idea of tightening the supply chain and creating a network of managed and improved relations with business partners. Johnson and Scholes argued that collaborating within a supply chain is reasonable when the value added from collaborating is greater than operating alone and when the collaboration allows the organization to concentrate on its own core competencies and therefore avoid peripheral, wasteful activities (Johnson and Scholes, 1999:123). Fernie (1998) argued that owning strong links with suppliers benefits the replenishment process, inventory levels, procurement processes and merchandising campaigns. For example, establishing preferred supplier relations is important because the retailer needs to rely on the quality of the manufacturers products and on the execution of the delivery process. Having preferred supplier relationships also increase the experience effect and set resources free through continuous development of the cooperation and information sharing. System lock-in (Hax and Wilde, 2001) is created by a mutual beneficiary relationship, which adds value to both parties and keeps the supplier from collaborating with the direct competitor. Fernie argues that investments in supply chain technology, EDI and EPOS (electronic point of sale) makes collecting and transferring data easier and moves the supply chain partners closer together. It makes the processes more efficient which reduces transaction costs and adds value to the supplier retailer relation (Fernie, 1998). However, e-Commerce is increasingly substituting EDI through web-based technologies that will finally cause these supply chains to transform into supply networks. This transformation will create value for both sides suppliers and buyers and as a consequence create value for consumers when efficiency gains are passed on through lower prices and when additional services can be created through the value network that are customized to B2B relations and to B2C relations. Hax and Wilde (2001) have argued that preferred supplier relations and the implementation costs of IT networks represent create a so-called system lock-in, meaning that both parties are stuck with each other, which is as long desirable as both parties are deriving benefits from the relation.

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However, with increasing sophistication of the suppliers information systems in the long-term, it should become easier to connect and disconnect with retailers or other parties, which will decrease the switching costs. But the continuous rise of such preferred relationships gives reason to think of the emergence of competing supply systems rather than competing retailers themselves. Therefore, a more detailed view on purchasing alliances and lock-in effects for suppliers will be given in the paragraph on e-Marketplaces. In fact, the redesign of the firms supply chain and customer interface processes demands significant innovative power itself, as it has been described by Visa Palonen, Vice President at SOKs e-Business division (2001), and which takes us to the investigation of some key success factors a retailing firm must develop in order to manage its competencies and build competitive advantage in cost efficiency and customer centric strategy. The following paragraphs will also discuss corporate strategy is discussed in the light of a competitive, unstable environment. Hereby, generic strategy and competitive advantage are taken up again and it is questioned if sustainable competitive advantage really exists, which finally leads to the discussion of what core competencies a retailer needs to build and what their impact on corporate strategy and e-Business strategy can be.

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4.6

Key Success Factors

The key success factors, usually of technical and economical nature, derive from the industry the firm is operating, and can differ between competitors. They are usually known to the market players but might be hidden to outsiders of the market (Hofer and Schendel, 1978 as cited in: Walters and Hanrahan, 2000). A sustainable position for a firm within its industry derives from delivering value and surviving competition, which means to manage the concerning key success factors successfully. Walters and Hanrahan (2000) argue two basic questions as the fundament for key success factors in retailing industry. First, the firm must have a clear picture of the customers value perception by asking, What do our customers want? and second, the firm must survive competition and therefore assess and build strategic capability. In order to assess the firms strategic capability in retailing, Walters and Hanrahan have distinguished between three main aspects of key success factors. Figure 4.9 shows these factors as business, information and organization strategy.

From: an emphasis on internal cost control, administration and cash accounting To: an emphasis on decentralization, customer commitment and value delivery business activities Example: Customer centric strategy of cost efficiency strategy Business Strategy

Objectives, KSF's, process design and management

Information Strategy From: emphasis on costs reduction and efficient administration To: an emphasis on creating customer value through innovation within an integrated value chain Example: CRM, purchasing platforms, mobile commerce, online shopping

Organization Strategy From: a centralized, internally focused and "mechanized" orientation To: a devolved, empowered and customer focused orientation Example: Decentralized organization with flat hierarchies and profit centers

Figure 4-9 Key Success Factors In Retailing Source: David Walters and Jack Hanrahan (2000), Retail Strategy Planning and Control, p. 353 Macmillan Business Press, London.

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4.6.1

Business Strategy

The business strategy has been defined in chapter two as the pattern or plan that integrates an organizations major goals, policies, and action sequences into a cohesive whole (Quinn, 1996). Therefore, the goal of the retailing firm is to create value for its customers, suppliers and other stakeholders. The customer centric retailer seeks to achieve this goal through becoming more cost efficient while pursuing a customer centric strategy, which leads to certain action sequences in organization planning (e.g. empowerment) and information planning (e.g. supply chain integration). Figure 4.9 emphasizes the change of paradigms from creating product and service quality and utility to creating total quality and utility across every aspect of the firms relationships. This includes foremost the customer-retailer relation, where the focus has shifted from thinking in short-term relations to long-term relationships (Grnroos, 1992). Business strategy, organization strategy and information strategy are interrelated (figure 4.9), for example when the retailer may decide within its business strategy to join an e-Marketplace. The planning and implementation of such an undertaking would have a direct impact on the organization strategy (e.g. through change in organizational processes) and information strategy (e.g. through new technologies that is changing information flows). 4.6.2 Organization Strategy

Changing from rigid or conventional processes to new, empowered, customer centric and technology intensive strategies (figure 4.9) demands an innovative organization, which is difficult to build and therefore organization strategy belongs to the three key success factors. The better people a firm has, the better decisions based on facts and foresight it can make. Especially when paradigms are shifting in an industry and uncertainty is increasing due to technological innovations such as data mining or online shopping; a diverse portfolio of strategies is needed, which can only be created by a diverse portfolio of people. In the UK, a survey among the grocery retailing industry has shown that hiring and retaining good employees are the two most difficult issues (Progressive Grocer, 2001). This information becomes even more critical, if one considers that more than half of Wal-Marts efficiency gains in the 1980s and 1990s had been created by managerial improvements, and not by technology (Johnson, 2002). Therefore, a retailers employees are a critical success factor. Considering the organizations culture52, the business strategy can shape the organization by lining out a commitment to certain key values, which should translate into its organizational strategy.
52 Organizational culture can be defined for example as a set of values, beliefs, and feelings, together with the artifacts of their expression and transmission (such as myths, symbols, metaphors, rituals), that are created,

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In the case of Tesco, these values have been commitment to experimentation for example when it invested into supply chain technologies and information technology as one of the first European retailers and it also was the first retailer in the UK to open an online grocery channel in 1996. Further, Tesco is committed towards innovation of services around customer needs which it has demonstrated with introducing more convenient store formats in the early 1990s (and diversified them as different store formats for different customers), or when its customer loyalty card scheme (Tesco Club Card) has been used to increase loyalty and customize services. Walters and Hanrahan refer in organizational structure to the shift from a centralized, internally focused to a decentralized, flat and responsibility-fostering structure. However, this report is not pursuing the topic of organizational issues any further, but is important to recognize that organizational theory and culture has a great deal to do with an organizations success. 4.6.3 Information strategy

Information strategy (see fig. 4.9) refers to the transformation from a rigid, cost focused organization to a networked organization where information technology is spanned over the entire organization, connecting the customer interface with the backend, such as manufacturers. E-Commerce is creating a network within the firm and connects it to other networks, such as electronic purchasing platforms do. The result is an integrated value chain where information from the customer interface is shared with other business partners. Additionally, one major key success factor is how well the retailing firm can use the data it has derived from the customer interface (e.g. from a store or an on-line channel) for example to analyze it and use it to customize services, develop customers and share the information with its strategic partners in the supply chain (Laine, 2000). Supply chain management is an important key success factor for information strategy and represents a major source of cost efficiency. It improves the cost structure for example through deploying ECR technologies and building flexible supplier networks through e-Commerce applications as the example of Tesco has shown53. In the following paragraphs, it will be discussed which of these key success factors are creating competitive advantage, and therefore belong to the core competencies of the customer centric retailing firm. Competencies will be identified that support the firms choice of core competence. Finally, a process-oriented model of strategic choice, customer value proposition, customer interface design and performance evaluation is introduced, that is wrapped around the competencies the firm must master in order to build competitive advantage.

inherited, shared, and transmitted within one group of people and that, in part, distinguish a group from others (Cook and Yanow; as cited in Weick and Westley, 1996).
53

For more details refer to paragraphs Sources of Cost Efficiency and to chapter five.

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4.7

Competitive Advantage and Core Competence Competitive Advantage

Hamel and Prahalad (1994) describe competitive advantage as the firms ability to use resources more efficient than its competitors through what they call resource leverage. Competitive advantage is a skill, knowledge or a resource, which is difficult to copy, or to gain by the competitors. Resource leverage is achieved by concentrating on a bundle of tasks or competencies, which are then called the firms core competence. This implies that a firm has to choose what it wants to do best because it cannot be the best in everything and for everybody, which takes us back to choosing a generic strategy (Porter, 1980). Numerous authors have promoted the idea of sustainable competitive advantage, but this report is looking at it by using Beinhockers argument that competitive advantage is not sustainable54. In the best case, competitive advantage can be maintained or re-gained in what Kauffman (1995) calls the red queen race, which means that competitors keep changing and catching up to one another in a never-ending race simply to sustain their current level of competitiveness. This argument is supported by a research of the performance of more than 400 companies and their records from the past 30 years. The study concluded that in average, firms could maintain their competitive advantage for not more than five years and regress to the industry mean after three to seven years, again (Beinhocker, 1999). However, though firms cannot sustain competitive advantages; some are able to create new advantages continuously. In order to stay in this race which takes place in an increasingly uncertain environment, the firm must have strategies that are performing well in a variety of possible future environments. However, this strategy does not mean to diversify but it rather means to build a portfolio of strategic experiments in a business the firm knows, which is the point where Porter, Hamel and Prahalad and Beinhocker meet. Porter argues the firm must have a clear perception of what business it is in. Hamel and Prahalad argue to concentrate on core competence and develop new ones through constantly exploring and testing the future. Beinhocker says it all is an adaptive walk where different strategies have to be tested while keeping the firms current business running. However, the argument the firm should test the future of only the business it knows must be extended in the case of retailing, where firms are looking also into options of diversifying their services for example by offering banking and insurance services through their Internet portals.

But in fact, the sustainability of competitive advantage has been criticized also by numerous authors concerning sustainability of cost leadership (see for example Johnson and Scholes, 1999).

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For the purpose of this report, this kind of diversification is still understood as exploring the future strategic options in a business the firm knows. And besides, the firm can also develop competencies in areas that are somewhat related to its business55. Beinhockers argument applies to retailing as well, where the business environment is becoming increasingly uncertain because besides competitive pressures and market entrance from new competitors, the disruptive technology56 of the Internet is changing the way to do business. The outcome of many of the tools and technologies in e-Business is partly uncertain, if one looks for example at the potential benefits of e-Marketplaces, data mining, personalization, the role of online shopping for retailers offline businesses, and the future role of m-Commerce for retailing. Therefore, retailers are placing different strategic bets, of which some are smaller (e.g. launching small m-Commerce projects) and some are bigger (e.g. joining an eMarketplace). These undertakings could change the industry structure for example in share of online to offline business, the place of conducting these transactions and who will conduct them. The new tools for customizing services and products for example through data mining might also change the widely accepted characteristic that returns diminish and create a kind of service the customer is actually willing to pay more. However, to perform all these tasks, the firm needs to start early with developing its competencies, which is argued in the next paragraph. Building Competencies Needs Foresight and Takes Time to Develop Hamel and Prahalad (1994) have argued that building competencies57 takes true commitment from the management and foremost, it takes time. Because a firm aims to get ahead of its competitors, it needs to develop industry foresight, which enables it to make smaller and bigger bets on the future in the business it knows. This requires developing competencies in organization, information and networking capabilities. Tesco has started to build its competencies already in the 1970s, which resulted in a competitive advantage, for example regarding the firms organizational culture or technological and distribution know-how. Tescos success in online shopping derives from the excellent logistics capabilities, the firms tradition of deploying information technology and its customer centric attitude and culture. Therefore, when Tesco launched as the first UK grocery retailer its online shopping site, it was able to succeed because it had better competencies as other market players. Nowadays, Tesco is dominating the UK online grocery market with owning a share of 70% and offering also non-food products and services through its Internet portal.

For more details please refer to paragraph Diversification in chapter three. For example Christensen and Tedlow (2000) described the shift which is awaiting the industry as to be caused by the Internet, which he argues as disruptive technology. 57 One also has to distinguish between competencies, which are difficult to imitate, and the ones, which buy the firm only time, because its competitors can learn or achieve the same competency in a relatively short period as well. Competencies that are difficult to imitate mean a competitive advantage.
56

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Also Wal-Mart, which is known for its sophisticated and technology intensive supply chain management, has started to invest in supply chain technology in the 1970s. As a consequence, Wal-Mart was able to implement its EDLP strategy, where it aimed to offer low prices but at the same time kept operating costs as low as possible to maintain margins. Walt-Mart has been investing in technology more and earlier than its competitors, which gave the firm a productivity edge of almost 50% compared to its competitors in the 1990s (Chain Store Age, 1999; Johnson, 2002). Wal-Marts supply chain excellence is one of its most important core competencies because it cannot be easily imitated by competitors. 4.7.1 Core Competencies of a retailing firm

The business the firm is into and the strategies the firm is developing to survive competition translate into a set of activities that are called competencies. These are based on the key success factors, which have been identified earlier (figure 4.9). However, figure 4.10 shows that two of the former key success factors remained, which are information competence and organization competence, while instead of business strategy, the third skill for successfully developing the firms core competencies is networking competence. Organizational competence relates to what has been described in the Tesco example as openness to innovation and developing solutions around customer needs. It also relates to developing the skills that are needed for the information and technology competencies. Another important issue for organizational competence is to deploy and re-deploy skills, to be flexible, in order to avoid path-dependence, which has been argued by numerous authors as actually one of the hardest competencies to build (e.g. Hamel and Prahalad, 1994). Information technology competence relates to the supply chain management as for example to make EPOS data available to suppliers, implementing ECR, or linking the firm with other businesses and customers. It is crucial for operations such as deriving customer insight (CRM) and providing Internetbased services (e-commerce). It enables the firm to create an e-Business architecture, which provides the basis for serving the customers as a multichannel operator. In this context, network management competence becomes important, because the multi-channel retailer needs to create a network inside the firm to enhance information flows. The firm also needs to create a network with the outside, for example with suppliers (or purchasing platforms, which are networks themselves) or with contract partners, for example in the customer loyalty program to increase the value of the network. The firm also needs the competence to leverage its customer base and to increase transaction amounts.

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These three underlying competencies or skills are needed for the retailers choice of core competence. Of course, most of the core competence is determined through the characteristics of the retail business, because closeness to the customer means that the customer interface is a principal core competence of the customer centric retailer. However, the retailer might have additional core competencies, such as building a world class supply chain system as Wal-Mart is committed to. Another core competence can be to build a world class brand, which is leveraged through a comprehensive product and service network, as in the case of Tesco. The question must be how many core competencies a retailing firm can have and still create and maintain world class standard in each of its competencies. It has been argued that concentrating on a certain store format will not just increase efficiency, but also improve the retailers performance in this segment. For example, Wal-Mart has chosen already in the 1970s to build only large-scale hypermarkets. Concentrating on this store format as a core competence enabled WalMart to achieve world class standard. In addition, Wal-Mart was committed to the use of supply chain technology long before the Internet age. For example, Wal-Mart started a co-operation with Procter & Gamble in 1987 to make its supply chain run more smoothly and to improve cost effectiveness (Business Week, 2002). Therefore, Wal-Mart considered specialization in the customer interface on one store format and the commitment to technology leadership on the B2B part of its value chain as its core competencies. Tesco has been committed to supply chain technology as early as Wal-Mart. In the customer interface, Tesco is concentrating mainly on supermarkets. Tesco has chosen to become one of the first multi-channel retailers with a strong and worldwide brand, and a global strategy. The basis for Tescos and Wal-Marts achievements is their skills in organization, information and network competence. Figure 4.10 puts the core competencies in context of the retailers customer centric business process. The core of the figure is the core competencies, which are created through the underlying competencies in organization, information and network competence. The process around these competencies shows what had been discussed in this chapter. First, a strategy is chosen to get a clear perception of what business the firm is in, which had been in our case the customer centric strategy. This must be seen in the light of building a portfolio of strategic experiments in a business the firm knows. Choosing the strategy effects everything what happens afterwards in figure 4.10. After it is clear to which customers the firm will offer its products and services, it makes a value proposition based on the needs of these customers. The value proposition and the chosen customer segment must be in accordance with the design of the customer interface. Further, the value proposition has an impact on the development of core competencies, and vice versa, since the firm cannot propose something it does not own or cannot acquire the competencies for.

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Serve Choose
your Strategies customers segments find out value perceptions

Your customers

Propose

a value to your customers for Products services

Design

the customer interface physical + virtual = multichannels communication interaction

Respond to needs Create partnership and loyalty Develop Relationships Get Feedback Get new Customer insight

your competencies through Customer Centric Thinking and Acting in Organization strategy Information and Technology strategy Networking strategy

Core Competence Develop

Evaluate

your performance leads to Process and network redesign

Adjustment in strategy and value proposition

Figure 4-10 A Process oriented Framework of a Retailers core competence

Also the design of the customer interface has a direct impact on the core competencies and vice versa. Without the right competencies, the retailer cannot execute the customer interface, and on the other hand the customer interface determines the kind of competencies which are needed. In the process of serving the customer, the goals of the customer centric strategy are pursued (figure 4.10) and finally evaluated through the feedback the retailer receives from its information system which is running in the back of all processes and which connects all operations. Depending on the feedback, the firm decides to adjust and develop further actions, which might include adjusting its strategy and value proposition. The purpose of this chapter had been to conclude that the customer centric retailing firm is constantly looking for innovative sources of future growth through customer centric thinking while at the same time becoming more cost efficient and developing a portfolio of strategies that work in a future with an uncertain outcome. E-Business is regarded as a way which can help the company to achieve cost efficiency and its customer centric goals. Chapter five is now introducing a number of these small and big bets about the future that might deliver better value to the business network with the ultimate goal to enhance customer value and to create competitive advantage.

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E-Business techniques and tools in Retailing Objectives

Chapter five describes e-Business techniques and tools from two main concepts, which are CRM and e-Commerce, whereby the latter is divided into B2B (e.g. eMarketplaces) and B2C (e.g. online shopping). The structure and content of chapter five is rather similar to how Knox and Ryals (2001) have described the key characteristics of CRM: Long term retention of selected customers. (Here: creating relationships between customers and the retailer; see also chapter four). Gathering and integrating information about customers. (Here: deriving customer insight through collecting individual customer information; describing the current state of technology and implementation). Use of dedicated software to analyze this information (often in real time). (Here: Using data warehousing and data mining to gain knowledge about the customers value perception and needs; evaluating the impact on merchandise campaigns; developing customers for example through personalized offers). Segmentation by expected customer lifetime value. (Here: identifying profitable customers, developing customers and cross-selling of new products and services). Micro-segmentation of markets according to customer needs and wants. (Here: segmentation of customers based on what you eat, trade-off between one-to-one marketing and the current state of technology). Customer value creation through process management. (Here: Creating new channels such as online shopping; performing with operational excellence; simplifying transactions through enhanced supply chain integration and building new channels by using new technologies such as mobile commerce).

Especially supply chain management and process integration have been addressed in this chapter through virtual exchange platforms such as e-Marketplaces. The other focus for processes lies on the B2C part of the retail value chain, the retailer-customer interface where for example online shopping and mobile commerce are addressed.

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CRM - Customer Relationship Management Introduction In the beginning of this report, CRM has been defined as a concept that aims to understand, anticipate and manage the needs of an organizations current and potential customers. The essence of CRM is a customer-centric business philosophy involving the seamless integration of marketing, sales, service and support processes. CRM deploys technology to derive customer insight from data analysis. CRM can lead the firm to build competitive advantage because when the firm knows what the customers needs or values are, it can allocate more resources to these tasks and therefore avoid other wasteful activities58. Further, knowing the customers value perception enables the retailer to build a value proposition that creates a relation between the retailer and the customer. One of the most significant points for CRM is that it suggests shifting from managing product portfolios to managing portfolios of customers (Knox and Ryals, 2001). However, this argument does not pay full attention to the possibilities of electronic commerce and CRM, because e-Commerce also enables the customer and the retailer to interact with each other. Visa Palonen, vice president of SOK e-Business division argued in an interview that interaction, instead of a one-way communication might even enable the customer to manage his/her relation with the firm, which would take us from customer relationship management (CRM) to a customer managed relationship (CMR). Though this idea of customers managing their relation with - for example their groceries retailer, might seem today rather visionary, this picture becomes reality with increasing diversification of retailing businesses for example into financial services and online shopping or mobile commerce, where the retailer serves not just the customers needs for groceries, but uses this contact to sell additional products and services. For example, the idea of the value shop (Stabell and Fjeldstad, 1997), which means solving the customers problems, might create the necessary bond between the retailer and the customer, which is crucial to make the customer want to have such a relationship. However, the main focus of this chapter is to describe CRM solutions for e-Business from a more process-oriented point than from a pure philosophic or marketing point of view. This is approached by looking first on what kind of information is gathered for CRM and what segmentation has to do with it.

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Johnson and Scholes, (1999)

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5.1

Individual Customer Information (ICI)

Gathering and integrating information about customers, as part of CRM takes us to Laines (2000) concept of individual customer information (ICI), which he describes as information where customer purchase data is linked to individual customer data in order to understand customer behavior. These actual purchases linked to identified customers should therefore at least include who is purchasing what (Laine, 2000:13). ICI can be derived from telephone marketing or mail order, but in the context of electronic commerce, customer loyalty cards and registrations on the web site are the main source of connecting purchases with customer data. In fact, a purchase through the Internet is solving the problem of connecting customers with purchases rather convenient because one has to identify himself/herself to conduct the payment transaction and receive delivery. Retailers usually identify the customer on an aggregated segment level, or in some cases even on the individual level. The so-called one-to-one marketing (microsegmentation) has been argued as the future of e-Commerce, where individual offers are sent to individual customers based on individual purchases and even manufacturing would be based on individual demand. However, Arttu Laine has mentioned in an interview that in the recent stage of eCommerce, retailers are even struggling to implement CRM models that send offers to aggregated customer segments. Therefore, the more advanced one-to-one marketing is a rather visionary approach59. For example in the UK grocery retailing business, Safeway has quit their customer loyalty scheme, while Tesco and Sainsburys have re-launched theirs, because the fact that most competitors had such frequent shopper programs diminished competitive advantage. In addition, some of the firms failed to analyze the data they had gathered for deriving customer insight, which was supposed to increase their revenues. However, these implementation problems are mentioned in this chapter on a later point. ICI in the current stage of retailing means to identify customers rather on an aggregated segment level (customer segmentation) and delay the attempts to get a view of the single customer until the technology has become more mature. 5.2 Customer Segmentation

The goal in customer segmentation is to gain insight about who the customers are and what they want in order to address their needs not as individual customers, but as aggregated customer segments.

59 Some retailers have started with manufacture to order experiments already as had been explained in the case of Lands End in chapter three, but this approach is not directly related to CRM, because in the case of Lands End, the customer has decided on its own to approach the retailer see chapter three, paragraph transaction cost approach and customer perceived value (New York Times, 2001).

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Figure 5.1 shows the development of customer segmentation, which moved from traditional segmentation characteristics such as social grade and demographic data to lifestyle data. Lifestyle data is strongly connected to the retailer lifestyle data, which acknowledges that what you eat tells even more about who you are. In fact, some retailers even argue to have identified certain items, which if they disappear from a customers shopping basket, the customer is going to disappear soon, as well (Laine, 200:34). The analysis based on what the customer buys also enables the retailer to spot wholes in the basket. Subsequently, the retailer sends a voucher to the customer in order to motivate him/her to shop for the items on the voucher in the store, which belongs to the issue of developing the customer.

WHAT YOU EAT (Retailer Lifestyle Data) WHAT YOU THINK (Lifestyle data) WHERE YOU LIVE (Geodemographic data) WHAT JOB YOU HAVE (Social Grade)

Figure 5-1 Development of Segmentation Source: Laine, A., (2000), Information from the Masses, p. 34, Oxford Institute for Retail Management, Oxford, UK Individual customer information based on what you eat, which is collected as aggregated customer information creates better opportunities for direct marketing than information based on social data or demographic data alone. For example, the retailer is sending a direct mailing about a special offer on red wine to customers who usually purchase red wine. This represents an aggregated offer which is directed to a customer segment represented by individual customers and based on what they eat /drink. One step into the future could be to adjust the way the offer is made according to the individual customers profile. This would create a more catching offer. Another way that describes the we measure you by what you eat approach, is that meal events, such as dinner or snack have been created. The aim is to get the customer to shop for as many meal events as possible in the store. The customer is classified within his/her segment, and in case the shopping basket is missing some of the typical items what people in this segment eat on that certain meal event, the customer receives a voucher for these missing items (Laine, 2001).

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Identifying profitable customers According to Laine (2000:33) one of the underlying reasons for identifying and selecting the profitable customers is the Pareto Rule, which roughly applies to the retailing sector as well. The Pareto rule is a general phenomenon, which applies to most of businesses and organizations by arguing that for example, 80% of profits come from 20% of customers. A study by the consultancy AC Nielsen and the French University INSEAD has argued that identifying profitable customers is just as important as identifying loyal customers. The study found out that a stores loyal customers60 account for only 22% of the profits, while the least loyal customers61 still account for 11% of profits (Progressive Grocer, 1998). Therefore, it is important to identify the profitable customers, connect their purchases with their personal data (name, address) and try to turn them into loyal customers. However, it has been argued (e.g. Laine 2000) that most firms face difficulties with identifying and connecting these profitable customers and profitable products because the accountancy system has to be integrated as well, which increases the complexity of the task. 5.3 Loyalty Card Schemes

Customer loyalty schemes can use different mechanisms to transport the data such as vouchers or coupons, whereby for the purpose of this report, the focus lies on the loyalty card, which represents the newest mechanism for connecting purchasing data and personal customer data. For the purpose of this report, the customer loyalty scheme is defined as a card-based scheme that links a consumer and an organization in a long-term mutually beneficial relationship, based on an exchange of information and rewards (Worthington, 1996 as cited in: Laine, 2000:18). In the European Union, the UK is the most developed market for loyalty schemes while in central Europe customer loyalty cards are not as common yet. Most UK grocery retailers have started to implement the card in the mid-nineties, such as Tesco and Safeway in 1995 and Sainsburys in 1996 (Laine, 200). In Finland, S Group launched its S Bonus card (S-Etukortti) nationally in 1994 (S Group, 200a). Loyalty card schemes have different strategies, for example to use it for attracting mainly new customers or to develop the purchasing amount of principally existing cardholders. Especially developing existing customers purchasing behavior, for example to motivate them to shop also for other services or products the retailer has in its portfolio means to develop customer retailer relationships. For example, diversified retailers such as the S Group could offer its cardholders additional discounts for S Groups hotel businesses or restaurants in order to provide an incentive for its customer to use these services as well. In fact, this is where the customer loyalty scheme becomes a value network (Stabell and Fjeldstad, 1998) because the more services the customer can use with his/her card; the higher is the benefit of the card.

60 61

The study has defined loyal customers as to make half of their weekly purchases in the same grocery store. The least loyal customers are defined as to make not more than 10% of purchases in the same store.

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But customer loyalty cards represent cost barriers for CRM. One of the cost factors is the reward or bonus, which is granted to the customer when items are purchased in connection with the loyalty card62. In the UK, which is the most developed market for loyalty schemes with around 90 million subscribers, in many cases this bonus had been increased or changed by retailers into a progressive bonus because most customers had two or more loyalty cards, which reduced the competitive advantage of the program (Laine, 2000). A progressive reward system is used where the reward or discount increases with increasing purchases. The progressive reward system is chosen in order to motivate the customer to make a choice between several competitors on the market because bonuses accumulate with purchases. Due to the investments in granting bonuses and allocating human and financial resources a customer loyalty card scheme should increase the firms turnover by 3% to 4% in order not to create a loss for the company. Laine (2000) also argued that the more detailed a firm analyses the data the higher is the cost, which is supported by the example of Safeway. In 2000, Safeway abandoned its loyalty scheme, which cost the company each year 50 million. Safeway was known for gathering vast amounts of data and braking it up into over hundred segments, while other companies, such as Tesco have divided their customers only in a dozen segments to keep complexity and therefore costs low (Laine, 2001). Because of these costs, new ways of collecting customer purchasing information are advantageous such as the Internet (e.g. a customer is registering through the retailers web portal). The Internet provides this advantage because the customer identifies himself/herself automatically when logging in or purchasing a product even for the first time through transaction information (e.g. credit card number, address, name), which makes the process of getting the data easier. However, the data still must be analyzed, which represents another barrier for maximizing the benefits of CRM. However, Barnes (2001) argues that customer loyalty programs might create loyalty rather to the program than to the firm or brand itself, if a relationship with the customer is not created. Therefore, besides customer loyalty programs that aim to stimulate purchasing behavior, the firm needs to create a relationship that is connected to the brand rather than just to the program. Barnes is using Clarkes research on the Canadian Air Mile Program. Clarke argues that whether a participant of the program leaves or not, customers will be loyal to the air mile program instead of being loyal to the brand. For example, if Shell leaves the program and starts its own loyalty scheme while another Gas Company substitutes it in the original program, the consumer might very well stay with the original program63. For retailing this means to create a relation between the customer and the retail brand. For example, Tesco has established its Tesco Club Card, which is just one part of the companys consequent branding strategy. Also, S Group has introduced its S Bonus Card that works as an umbrella for S Groups different businesses (hotels, restaurants, and supermarkets).
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For a practical insight on customer loyalty card schemes please see the case study in chapter seven. Clarke, Nicholas, (1998), The Limits to Air Miles. Marketing Magazine, 13th April; as cited in Barnes, (2001:155).

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With building the S card as a brand, the customer might become more affected to the customer loyalty scheme than to the S Groups brands. However, S Group is much more diversified than Tesco, and might aim at a mixed strategy where it connects its businesses with the card, but still promotes its brands as individual product and service brands, such as restaurant chains, and other businesses. Illustration 3: S Groups Customer Loyalty Program Customer Loyalty Scheme Customer owners S-Groups members of the customer loyalty scheme, called the customer owners are members of the regional cooperative societies and receive monthly a letter from the regional cooperative societys management along with a statement of their accumulated bonuses, an S-Account statement and a club magazine. The number of circulating customer loyalty cards was about 1.9 million of which approximately 53% were equipped with direct charge and 30.000 with credit card function. The difference between a regular customer loyalty scheme and S Groups customer owners is due to S Group being a co-operative society and customer owners are therefore granted more rights than members of regular loyalty schemes of e.g. private owned retail corporations. The annual report says, that as members of a cooperative society they are entitled to benefits for using the services of the S Group, and as owners they have the right to participate in the development and decision-making processes of the S Group (S Group, 2000b). As shown in table 5.1, S Group has started with its customer loyalty scheme nationwide in 1994, which is quite early compared to its Finnish and central European competitors. In fact, S Group started around the same time as the British retailers. Tesco has introduced its loyalty card (Club card) in February 1995 and Sainsburys (Reward Card) in 1996. At the end of 2001, S Group counted 970,200 participating households in the customer loyalty program, with roughly 1.95 million cardholders. The bonus sales, which determine the total amount of sales, created by customer owners amounted in 2001 for 3.8 billion, which is 16% up compared to the previous year. The total retail sales of S Group were 6.6 billion, meaning that more than 50% of sales are coming from customer owners. In 2001, 100 million was returned to customer owners as bonus payments, which is an increase of 21% to the previous year. S Group has returned by far the highest amount of bonus payments to loyal customers, compared to Kesko, which returned 60 million to its 2.7 million cardholders (1.5 million households). The third largest market player Tradeka has returned 29 million to its 1.6 million cardholders, or 930,000 households.

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As it has been argued in chapters four and five, the increasing diversification of retailing businesses enables the firm to leverage its customer base. In the case of S Group, almost 1 million participating households and almost 2 million cardholders represent a precious basis for cross selling. S Group has been connecting its loyalty card with the Groups different businesses, which resulted in a value network that offers the customer a wide range of services for using the loyalty card, as for example in hotels, restaurants and bars, and service stations. In addition to S Groups own facilities where the card can be used, the firm has established contracts with other business partners, such as Dell Computers, Tapiola Insurance and the telecommunications provider Radiolinja. Table 5-1 Time line of the customer owner system
1989 First regional co-operative societies start to grant bonus benefits to their own customer-owners. 1993 The S-account was introduced in one co-operative society. 1994 National S Bonus is launched. Purchases made in other cooperative societies also accumulate bonus benefits. 1997 Introduction of national bonus system partners. 2000 The number of customer-owner households exceeds 800.000.

Source: S Group, (2000), S Group Today, Brochure, Helsinki According to Marika Alhonen from SOK customer owner services department, the success of S Groups loyalty scheme can be measured for example by looking at the ratio of annual average purchases per customer owner. Looking at the figures from 1998 to 2001, there has been a clear increase. While in 1998 the average amount was 3485, it increased to 3679 in 1999, to 3918 in 2000 and reached 3980 in 2001. Ms. Alhonen explains the sharp increase with an increasing amount of partnerships S Group has initiated, and the opening of new Prisma, S-market and Alepa stores, which has been accompanied by traditional marketing campaigns. However, though also some forms of e-Commerce have been started in 1999 and 2000, the impact on the increased customer owner purchases has been rather difficult to measure. In order to create better services and to improve the relation to its customers, S Group is planning to create virtual committees who can interact with each other and with S Group via the Internet. Customer committees have been traditionally a way for customer owners to influence the coops activities, Ms. Alhonen says.

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5.4

Data Warehousing

Data warehousing is a form of database management. Database management is the procedure to gather, integrate, apply and store information related to specific subject areas, such as customer databases, vendor databases or product category databases, where the retailer stores information for example about customer purchases or product information. These databases are running separated from each other, while the data warehouse contains copies of the data from these operational databases in a separate location, which enables the firm to access the data any time and conduct analyses without interfering with the operational data systems (Berman and Evans, 1998:242). Kelly (1997:23) describes a data warehouse in the following six key characteristics: 1. Separate from the operational systems in the enterprise and populated by data from these systems. 2. Available entirely for the task of making data available to be interrogated by business users. 3. Integrated on the basis of a standard enterprise model. 4. Time stamped and associated with defined periods of time, i.e. calendar periods or fiscal reporting periods. 5. Subject oriented. Most usually the subject customer. 6. Non-volatile, to the extent that updates do not occur on an individual basis. 7. Accessible to users who have a limited knowledge of computer systems or data structures. Firms usually run on more than one operational system, which makes an integration of the operational systems such as marketing, finance and production necessary, because the data warehouse extracts data from these different business operations, in order to cross reference the data and draw conclusions. The data which is generated by these operational systems (e.g. sales and customer data) is separated and transferred to a database, called a data warehouse. This separation is made in order not to slow down the operational system when the data is analyzed. Nearly all data is built around the time dimension in order to generate queries for a given period, such as a week or a month. For example, a retailer measures the impact of a marketing campaign by comparing the recent sales figures with last years figures. The data that has been transferred is mostly non-volatile which means it is not going to change anymore. Data changes in the operational system are usually transferred to the data warehouse in for example weekly snap shots of inventory figures. The data warehouse reflects the organizational structure of the firm and its business operations. It collects for example operational data from order processing (orders, price, and inventory), inventory/price (price, inventory and price changes) and marketing (customer profile, price, marketing programs). The data warehouse summarizes the collected data into categories (e.g. customers, products, orders, inventory and price), that enable queries, or data mining processes.
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5.5

Data Mining

Data mining is the use of statistical analysis to uncover hidden patterns in independent variables (The Data Warehouse Information Center, 2001). Drawing conclusions and discovering hidden patterns has started in the 1980s with database marketing. Customers were divided into segments based on an analysis of their purchases (for example by recording credit card transactions or loyalty card transactions). Further, credit history and other financial data, standard demographic and new lifestyle data is recorded and analyzed. Based on this analysis, a conclusion is made and offers or advertising are directed to the customer (Data Warehouse Information Center, 2001). As mentioned before in context of customer loyalty schemes, the retailer is seeking to uncover and interpret the hidden patterns through the data analysis. The aim is to uncover hidden behaviors for example about what variable in the marketing campaign has influenced certain customers to make their purchase. However, the required resources for the analysis of the vast amount of data, which have been gathered by firms, are significant because implementing, designing and executing data mining programs is a complex and difficult task and requires highly skilled personnel. Difficulties to allocate sufficient resources to these tasks have forced retailers to reduce data mining activities (Laine, 2001; Data Warehouse Information Center, 2001). Data mining has been argued to deliver a personalized Internet in the future through detecting and analyzing information even in real time. Data mining programs can detect changes in customer behavior in real time and adopt the content for example of a web page. The goal is the personalization of web content in order to direct information to the consumer, which is according to his/her individual interest. Marketing expenses are expected to decrease and revenues to increase once the consumer because advertising could be directed more efficient to the consumer with leaving most offers and information he/she is not interested in. Further, the customer would therefore spend more time on the web site64 (Konrad, 2001). Few online retailers make full use of data mining programs because of their complexity and the required statistical and mathematical skills analysts and programmers must have. But data mining developers have already engaged in developing programs, which can be used by non-statisticians for a wider application. However, Konrad argues there are no ready made products yet, which makes data mining rather expensive and difficult to use (Konrad, 2001).

However, Konrad also argues that analysis is more complex than it might seem because a certain disconnection between exists between what consumers buy and what they desire. Therefore, data mining and personalization of web content has to consider more dimensions than personalizing content based on purchases (Konrad, 2001).

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Several forms of data mining exist, whether offline or online, such as predictive modeling which is a combination of data warehousing and data mining, where analysts pull information sets from the warehouse out, and analyze them through a data mining program (OConnor, 2001). Another form is collaborative filtering, which has been argued as a rather inexpensive method. It operates on the assumption that groups of users with similar tastes exist and therefore draws a conclusion in order to recommend products to the viewer that have been purchased by other users in the same context (for example as used by Amazon.com). The model is rather inexpensive and works well as recommendation engine, but it is product centric and does not explore why the consumer prefers a certain product (OConnor, 2001). Market research is one benefit retailers will derive once the data mining technique has become more mature because a major part of their customers (loyalty card holders and online customers) can be analyzed directly by the retailer, which might put market research agencies in second row and save costs. Retailers have the advantage of owning the customer interface, which gives them the benefit to gather information directly from their consumers. Manufacturers or suppliers do not have this possibility and therefore have to seek for the customer contact through an intermediary. In many cases retailers and preferred suppliers are collaborating and share data to develop new products or try to increase sales through category management. For example, Wal-Mart shares through its private purchasing platform sales data with its suppliers by providing them with a two year purchase history of its customers (Accenture, 2001a). Retailers are also using their online channels to gather customer information, for example by offering discounts or specials where the customer in return fills out a personal profile. For example, Kmart (US) owns 92 million purchasing histories from 6.3 million customer surveys through offering them a discount on product purchases. Kmart aims to connect both databases and to identify online the offline customers in order to create personalised offers and show content according to the customers segment in order to keep them interested while they are on the web site (eCompany, 2001). Laine mentioned in an interview that the location driven brick-and-mortar-retailing business also benefits in location analysis when using individual customer information and data mining. Individual Customer information (ICI) can be one part of the aggregated data that is collected in order to decide where to open or close a store. The data might show that opening a new store within a white space area (an area where there is no store yet of that retailer) will lead only to cannibalization of the existing own stores, because a big part of the customers who shop in the existing stores live in the white space.

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Deriving Individual Customer Information as Challenge Most retailers face difficulties with implementing processes, which are supposed to derive individual customer information, such as data mining. These difficulties are one reason why some UK retailers have either quit customer loyalty programs or relaunched. Asda has discontinued its long pilot phase of the customer loyalty program in 1999, while Safeway announced in 2000 to quit their loyalty card scheme. Tesco and Sainsburys are continuing, though both firms have re-launched their schemes in 1999. All these companies have gathered since the start of their loyalty programs huge amounts of data, which is waiting to be analyzed in order to reveal the customers hidden patterns (Laine, 2001). However, the resources it takes to analyze these data have been underestimated, especially considering the immaturity of the technology in that stage of development. Since there is very low support from solutions for data mining, the retailers departments could not handle the need of human resource it would have required to pursue sophisticated analysis (Laine, 2001). Laine has argued in his research that especially during the experimental phase of e-Business projects, goals should be realistic. Companies such as Tesco succeeded by keeping it rather simple with only 10 to 15 segments, while Safeway tried to analyze over one hundred (Laine, 2001). Visa Palonen, vice president of SOKs e-Business division, mentioned in an interview another bottleneck for human resource. He argues that old and new processes are usually running parallel during the implementation phase of new IT systems, which increases the workload for employees and cause disruption in the organization. An interview with Henrik Lares and Maria Santavuo from Accenture, the consultancy firm also provided the view that many companies are restructuring or implementing IT processes without considering the human resource aspect beforehand, which takes their employees sometimes by surprise when the change arrives. Palonen also mentioned that in some cases, the implementation of IT solutions does save companies already costs but these cost savings are usually reinvested in analyzing data and increase their activities in the CRM business operations. Further, Jouko Nieminen, Managing Director of Intrade Partners has argued that firms tend to rush into e-Business ventures and projects before they have established well functioning underlying business processes, for example in the case of joining emarketplaces or opening online grocery shopping channels. For example, Tesco has been rather careful with its online grocery channel when it decided not to build warehouses but to pick the orders from the store shelves. Warehouses were believed to be justified after the channel has proofed successful and demand has picked up. For more details please see the paragraph about online shopping in this chapter. Figure 5.2 provides a view of the experimental stages of deriving individual customer information (ICI). The research in this study was conducted during 1999 and 2000 and analyzed only UK retailers. Many companies, especially the UK food retailers have engaged earlier than other European market players in developing and implementing CRM technologies. However, most processes are in a rather experimental phase.
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Selective examples for the use of ICI Mass/Aggregate level analysis Segmentation based on "What you eat" Single view of a customer across channels Increase spend by spotting "wholes in the basket" Increase customer spend measuring campaigns Cross Selling across channels

Mainstream

Experimental

Figure 5-2 Use of Individual Customer Information (ICI) Source: based on Laine, A. (2000). Information from the Masses. The Oxford Institute of Retail Management (OXIRM), Oxford, p.43. Figure 5.2 also shows that developing the customer on an aggregated segment level for example by spotting wholes in the basket and therefore trying to increase customer spend is already quite common practice among UK retailers. However, especially the tasks, which demand integrated e-Business architecture such as cross selling across channels or single view of a customer across channels are rather experimental. According the interview with Visa Palonen, the integration of the business processes needed in order to identify the customer across all channels is one of the biggest data projects for a retailer (2001). So far in this chapter, the business to consumer part of the value chain has been discussed through explaining the basic principles of CRM and the role of individual customer information (ICI). Referring to this studys definition of CRM, this paragraph has focused on collecting and understanding these customer needs, whereby the anticipation of the customers needs should be the result of a successful analysis of the customer perceived value. The definition of CRM also says, that the essence [] is a customer-centric business philosophy involving the seamless integration of marketing, sales, service and support processes, which has been explained in chapter four in context of supply chain management. However, the following paragraphs should clarify the task of e-Commerce within the supply network and its seamless integration, and how e-Commerce contributes to CRMs task of managing customer needs. This is achieved for example through new channels of interaction between the retailer and the consumer such as online shopping, mobile commerce and Internet portals.

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Electronic Commerce Introduction Chapter two has provided the following definition of e-Commerce: Electronic commerce (e-Commerce) is the transaction and interaction of commerce related information which is conducted through the Internet or web-based technologies. Figure 2.4 has shown mainly two environments where e-Commerce transactions are conducted, which is either the B2B part, such as between the retailer and the wholesaler, and there is the B2C part of the supply chain, where products or services are sold to consumers through the customer interface. The following section is focusing first on the supplier retailer relations. In this context, significant investments are made to increase the efficiency of the supply chain process in order to gain competitive advantage as has it been described in chapter three. 5.6 B2B e-Commerce Procurement Platforms

Especially the move from the closed EDI system to open Internet protocols represents a logical step not just to integrate supply chains, but to build networks among suppliers, vendors and retailers. Electronic procurement platforms have been argued in this context as the future of B2B buying and sourcing, with more than 750 exchange platforms on the Internet already in early 2000. However the cannibalization among platforms with similar concepts and the immaturity of the technology and business concepts has caused many exchanges to fail. Finally, the Dot.com crisis in spring 2000 lead to a shake out among eMarketplaces (Accenture, 2000a). Accenture further reported that many eMarketplaces also failed because of higher integration costs than members of eMarketplaces anticipated. In addition, too high transaction fees for buyers were charged. Further, the content management costs for suppliers compared to trading volume were too high as well. Therefore, the overall costs were higher and benefits were much lower than originally anticipated. However, Accenture argues the principle concept will continue to exist because of the significant improvements which can be achieved for example in sourcing and process efficiency. For example, according to a market forecast of IDC65, e-Marketplace revenues will reach $1.2 trillion in 2004 of the global B2B e-commerce market, which will have risen by then from $280 billion of revenues in 2000 to $2.6 trillion (as cited in: Shop.org, 2001).

65 IDC (International Data Corporation) is a market research company and is a unit of International Data Group, the IDG News Service's parent company.

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Accenture defines B2B e-Marketplaces as platforms supporting B2B e-Procurement transactions in a many-to-many environment. The purpose of the B2B marketplace is to offer services to its members and customers (Accenture, 2000a). Several models of e-Procurement platforms exist but they all have in common to seek to derive benefits from more efficient business operations concerning product sourcing, price visibility, product tracking, logistics, product development, procurement, supply chain planning and collaboration and service management. Besides the many-to-many business model of e-Marketplaces, there are also buyer centric models where one buyer (or a few buyers) is connected to many suppliers. Further, supplier centric models exist with the opposite situation where many suppliers are connected to a few buyers; and there is the traditional model of having the single buyer and single supplier connected to each other for example via EDI or a web based technology. The constellation of each platform has been designed for creating either mutual beneficiary relations between buyer and supplier parties or that either one of the groups can exert more power over the other because the platform is biased in their direction (e.g. Ordanini and Pol, 2001). For example, a small number of buyers can invite a large number of suppliers to join a platform. The buyers motivation is to increase competition among the suppliers and therefore to gain negotiating advantages. In fact, the constellation of purchasing platforms is a good example for gaining purchasing power, as it has been described in chapter three in the context of sources of cost efficiency. Models of e-Marketplaces The paragraphs below follow Accentures distinction between public independent trading exchanges, industry sponsored e-Marketplaces and private exchanges (Accenture, 2000a).

5.6.1

Public independent trading exchanges

Public independent trading exchanges were created to serve a particular industry or product group and to deliver value by discovering business partners worldwide, making prices more visible and managing business relations virtually. There was less consideration paid to what kind of products can be traded through this medium. Low entrance barriers created fierce competition among the few exchanges, which could have been trading successfully otherwise. For example for trading chemicals, more than 30 e-Marketplaces emerged but no single exchange was able to capture a dominant market share. Mergers and business repositioning was the result and e-Marketplaces have been seeking for more unique competencies which would be harder to replicate by competitors (Accenture, 2000a).

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5.6.2

Industry sponsored e-Marketplaces

Industry sponsored marketplaces are set up by major industry players to gain direct advantages from trading with existing and potential supply partners online. These exchanges are strongly biased to the industry group, which established the eMarketplace. These groups can be suppliers, manufacturers or distributors. For example, the 21 founding members of Quadrem, an e-Marketplace for mining, minerals and metals represent almost two thirds of the total market capitalization. Therefore, they are highly enabled to realize purchasing power, supply chain integration and exert this accumulated power over their suppliers (Accenture, 2000a). Figure 5.3 shows a comparison of the purchasing platforms, which have emerged in the food and non-food industry. The first large industry sponsored e-Marketplace in grocery retailing was established in 2000, called GlobalNetXchange (GNX), with its founding members Carrefour-Promods (Fra) and Sears (US). They were joined later by Metro (Ger), Sainsbury (UK), Kroger (US) and Coles-Myer (US). GNX is a global, closed platform (does not take any equity partners anymore) and is strongly biased to retailers. The annual sales volume of the GNX members accounted for roughly $250 billion in 2000 (Reynolds, 2000). GNX has had until the end of 2001 roughly 15 retailers as members and traded from the beginning of its activities in February 2000 to October 2001 approximately $1.5 billion in sales transactions (GNX, 2001a). The GNX alliance was followed soon by the decision of other industry rivals to establish the World Wide Retail Exchange (WWRE), which consists of numerous retailers (figure 5.4), such as Kmart (US), Safeway (UK), Ahold (Hol), Casino (Fra), Marks & Spencer (UK), Tesco (UK), JC Penney (UK), and Gap (US). The cumulative annual sales volume for the group accounted in 2000 for roughly $400 billion. The platform is much more open than GNX, and each member holds a 5% stake in the venture (Reynolds, 2000). As figure 5.3 shows, WWRE is a global platform, open to new members and it argues to have a neutral stance between suppliers and buyers. The WWRE has had in October 2001 fifty-nine members from the retail industry, which own combined sales of $845 billion. WWRE has argued to have saved its members already $180 million as a direct result of trading over $1 billion in transactions through online negotiation tools, such as reverse auctions, which has been the exchanges first product offering (WWRE, 2001a). GNX and WWRE are representing two different constellations of members, whereby the amount of members and their motives for joining the platform influences the potential benefits significantly. In the case of GNX, where the retail members pursue the same goals as a group, as for example to build an alliance against their remaining competitors, the group is sticking together and it becomes easier to serve the interest of all members, as well as to share critical information (e.g. Reynolds, 2000).

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Wal-Mart (private exchange between Wal-Mart and its suppliers and customers)

Transora (global, open, slightly biased to manufacturers) CPG (European, open, biased to manufactureres, plans to go downstream in 2001) WWRE (global, open, neutral)

GlobalNetXchange (global, closed, strongly biased to invited retailers)

Supplier Platform

Manufacturer Platform

Retailer Platform

Consumer Platform

Raw materials Consumer products Packaging manufacturers Indirect goods and services

Figure 5-3 e-Marketplaces in Food and Non-Food Retailing Source: Accenture (2000), Creating Retail Market Exchange Value discussion of Commerce One Market Exchange Technology, Internal Paper, p.3 Accenture Helsinki, April 26th However, many platforms such as WWRE do have a larger amount of members, whose interests are rather diverse, and who might compete against each other. This constellation can make them reluctant to share critical information and can therefore represent a hindrance to rapid integration of the platform and the establishment of a large supplier base. Especially the establishment of a large supplier base is crucial to provide the members with choice though, many suppliers (e.g. low cost private label manufacturers in developing countries) seem to be reluctant to adapt to these IT-platform standards. This reluctance is also a result of their lower sophistication of business and IT processes and higher fragmentation (Accenture, 200a). In general, building the supplier base has taken industry sponsored platforms longer than expected, which is also a result of the complexity of certain products and missing trust, which is difficult to establish online particularly when the parties have never conducted business before. In addition, some products are more suitable for online trade than others. For example, the routine purchase of a standard product from a trusted supplier fits very well into the e-Marketplace exchange, but when a physical touch is decisive for the purchase, as for example in the case of garments, a physical interaction between the buyer and the seller is still required.

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The potential benefits of purchasing platforms are in general gaining supply chain efficiency through decreasing order cycle times and improved access to alternative suppliers for product sourcing and development. Further, the role of the intermediary such as of wholesalers is reduced which saves costs as well. The platform is also supposed to improve price transparency and to enable the parties to interact in realtime, for example in purchasing from dynamic catalogues, or to sell excess supply on the e-Marketplace. Reverse Auctions Several types of order matching are used in e-Marketplaces, such as catalogues, reverse auctions, requests and proposals. Most deals are expected to be made through catalogues, but reverse auctions have created some interest as well, especially for retailers with private labels. Reynolds describes the process of a reverse auction in the GNX platform as [] the companies which are invited to take part in a closed auction are sent a training package explaining how to take part; they are given a password to the system and specifications for the products as well as the purchasing companys business terms and conditions. The auction typically lasts for a few hours on the Internet and bidders will be able to see the lowest bid amount all the times (although not the identity of the bidder). At the end of the auction the final bid will be known but again the other bidders will not know the name of the successful bidder (Reynolds, 2000:428). 5.6.3 Private Exchanges

Private exchanges are usually established by major single industry players which have a lead in supply chain integration already, such as Cisco Systems or Wal-Mart. In order to establish a private exchange platform, the company must own the necessary resources to build and maintain such a platform and have the critical mass to attract suppliers on its own. The main motive is similar to other platforms, which is to foster supply chain integration and derive benefits from closer cooperation and increased visibility with their supply chain partners. Private exchanges enable the owner to concentrate on the integration process without having to consider competitive interests of other members as it is the case for industry sponsored platforms with a whole group of members. Information is shared among the members, depending on the form of collaboration. The collaboration can be - in addition to buying and selling - in the form of working mutually on forecasts, planning supply demand, product design and other functions. For example Cisco Systems private exchange receives over 90% of total orders, which reduced order cycle time from up to eight weeks to as short as one week. Exchange partners are able to configure, place and check the status of orders independently and online. Demand changes are registered automatically and procurement processes adjusted. Inventory levels have decreased by 50%, order cycle times reduced by up to 7 weeks, material costs of $170 million have been saved, and labor costs are down $108 million (Accenture, 2000a).

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Figure 5.3 shows that Wal-Mart (the worlds largest retailer with 199 billion sales in 2001) owns the most integrated platform by spanning its linkages from raw material manufacturers even to consumers. Wal-Mart also provides for its supply partners a two-year history of customer transaction data and gets in exchange sales-trend data and recommendations about store assortment, market segmentation and inventory management. Wal-Marts strong position as the worlds largest retailer66 provides a competitive advantage and makes it rather unnecessary to join any other exchange platform.

Table 5-2 E-Marketplaces and European Purchasing Alliances in 2000

Marketplace/ Alliance No Alliance/Buying Group Involvement Eurogroup No B2B marketplace involvement GNX Metro (ger.), Carrefour (fra) WWRE Tesco (uk), Auchan (fra), El corte ingles (esp), Cora (bel) Coop Schweiz, Rewe/BML (ger/aut), Laurus (hol) Ahold (hol), ICAHakon(swe), Kesko (Fin), Dansk (den), Safeway (uk), M&S (uk), EDEKA (ger)

AMS

Super Quinn (ire), Jeronimo (por), Mercadona (esp.), Opera/Casino (fra) D&D (swe), ZEV (aut), Euromadi (esp), Ora (gre), Selex (ita), Unil (nor), Markant (ger), Nisa (uk), Musgrave (ire), Leclerc (fra) Esselunga (ita) Inex (fin), KF (swe), NKL (nor), FDB (den), CWS (uk) Tradeka (fin), NKL (nor), KF (swe), COOP Eroski (esp), COOP ungarn (Hungary) Spar (fin,uk,aut,sch), Veropolous (gre), Despar (ita), Dagrofa (den), BWG (ire), Unigro (hol), Unidis (bel) Leclerc (fra), Systme U (fra) Superunie (hol.), Somerfield (uk)

EMD SED Opera N.A.F. International Intercoop BIGS Luci Euro partners

Sainsbury's (uk)

Lion (bel) Casino (fra) CO-OP Italia COOP Italia

Source: Accenture, B2B Marketplace Strategy, Internal Report, Nov. 17th, 2000 Accenture Helsinki

66 For example, Wal-Marts gross sales in 2001 accounted for 199 billion, with 80 billion in food sales. Carrefour, Ahold and Kroger, which are the three next biggest retailers own cumulative gross sales of just 168 billion, though their food sales are higher than Wal-Marts, with 139 billion because their food-share is higher (M+M Eurodata, 2001).

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The attitude towards e-Marketplaces among the European food and non-food retailers is rather mixed. As table 5.1 shows, several purchasing alliances have decided not to join GNX or WWRE, whereby this decision has several reasons. First, GNX is designed as closed platform, and therefore it is not up to retailers outside the alliance if they join or not. Second, the membership to a purchasing alliance excludes in some cases the membership to another group or platform. For example, while all members of Eurogroup and half of AMS have joined the WWRE, EMD and BIGS seem to exclude membership to either GNX or WWRE. Third, some retailers, such as S Group, which is represented through INEX in NAF International (table 5.1), do not believe yet that e-Marketplaces are able to deliver the expected benefits. These retailers tend to emphasize the importance of underlying processes before shifting their purchasing processes to a virtual platform. For example, Intrade Partners (the purchasing and logistics management partner for S Groups Specialty goods) seeks to build the underlying processes first by establishing relationships with suppliers based on trust, reliability and process control as Jouko Nieminen, managing director of Intrade Partners has explained. Subsequently, they plan to establish a hybrid form of purchasing platform, which can be described as a mixture between an industry sponsored e-Marketplace and a private purchasing platform, which is further explained in the illustration below. Illustration 4: S Groups Strategy for e-Purchasing Platforms The S Group has not joined one of the e-Marketplaces, as has been shown in table 5.1 in chapter five about e-Marketplaces. It belongs to the purchasing alliance N.A.F. International, where it seems like no member of N.A.F. alliance has joined an eMarketplace yet. According to Jouko Nieminen, one major reason why the S Group and its sourcing services are not convinced in e-Marketplaces is the importance of process control between supplier and retailer for reliable processes. To build well functioning supplier retailer relationships we must establish reliable processes which are based on trust, performance, quality and efficiency before joining a many-to-many environment like an E-Marketplace, Mr. Nieminen said. S Group has focused in recent years to build the processes from its stores to the wholesaler. It has created an automated order and information system that transmits 95% of orders between the stores and Intrade. The next step is to build automated transmission processes between the manufacturer and what Intrade called a trusted information vendor, which should function as a private marketplace, for a few to few exchange environment. This concept shall ensure that partners who join this closed platform have well functioning business process. It becomes quite clear that process control plays a big role for Intrade Partners and the S Group.

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According to Jouko Nieminen, in the future, when these processes have been established and the parties have been linked via the information vendor (a platform which hosts the transactions between demand and supply side), cross docking should become the dominant shipping method. This should ensure that the distribution mix (right product at the right time in the right quality at the right place) is fulfilled on a satisfactory level, with keeping costs and errors low while improving efficiency, quality and product sourcing.

Summarizing, one can say that low conversion rate & low product complexity combined with high transaction frequency & high transaction volume are promising the highest benefits from virtual exchange platforms from a product point of view. Therefore, not all products are suitable for being traded on e-Procurement platforms, which is supported by Sainsburys statement to ultimately trade only 75% of its purchases through the platform. Further, the size of suppliers also plays a role in this figure, assuming that 20% of suppliers are accounting for 80% of purchases in a retailing firm (Pareto rule), which suggests that with an increasing percentage of products being traded on the platform, the size of manufacturers becomes smaller, which finally leads to a size where the integration in the platform becomes unreasonable. However, the long-term value proposition of such virtual trading platforms is that once most companies have implemented proper information systems disregarding the size of the company, it becomes especially for smaller firms interesting to market themselves via the platform and take advantage of the Internet as a network of networks. Purchasing alliances and the bias of their purchasing platforms to the expense of manufacturers could have a disruptive effect on trust in the supply network, if manufacturers would be constantly set under pressure through competitive trading tools such as reverse auctions. Some Final Remarks about Purchasing Platforms The purchasing platform, which delivers the highest competitive advantage, seems to be the private exchange (figure 5.3) as in the case of Wal-Mart. It represents an ownership structure which pays full tribute to the firms strategy and interests and it emphasizes close collaboration and information sharing, which is spanned over the entire supply chain from the raw material manufacturer to the consumer. But though this platform provides the firm and its partners with sufficient possibilities to increase cost and process efficiency, only few large market players own the resources and critical mass to establish such platforms and convince suppliers to join.

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It might be the case that with decreasing homogeneity of the platform members interests, the competitive advantage declines because information sharing, vertical integration and collaboration declines, which puts closed industry sponsored marketplaces (e.g. GNX) in favor of open ones (e.g. WWRE). However, the vision of an entirely connected business community where connections are established flexible and for short term relations because of small switching costs will finally resemble more the model of an open exchange platform such as WWRE. However, one of the most important issues has been to establish common technology standards, which decrease integration costs and therefore switching costs for suppliers. These issues have been addressed by the retail exchanges already. Cooperation considering industry data standards has begun with the agreement between GNX and the strongly Europe biased Transora exchange, which announced in January 2001 to form a joint enterprise which should enable inter-exchange of information. GNX and WWRE have agreed in November 2001 to establish a common standard, proposed under the Global Commerce Initiative (GCI), a powerful group of manufacturers and retailers. The two platforms have urged content providers to join them to develop and implement a common standard which was supposed to make IT implementation at platform members easier and decrease switching costs for suppliers and retailers (GNX, 2001b; 2001c; Europemedia.net, 2001).

So far, the focus of e-Commerce in this chapter has been to describe the solutions for business-to-business processes in the retailers supply chain. The following paragraphs will focus on the retailers customer interface, which is the most obvious difference between a customer centric and a pure cost efficient retailer. Customer centric retailers are serving different customers with different methods through portfolios of distribution channels and with diversified services, while cost efficient retailers (e.g. hard discounters) have a much less complex customer interface (see chapters three and four).

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5.7 5.7.1

Business-to-Consumer e-Commerce Channels Introduction

During the past several years, three e-Commerce channels have been argued as promising, whereby the Internet sales via PC are by far the strongest, followed by interactive TV and mobile commerce. For example, US forecasts for 2001 estimate revenue for online shopping67 via PC at $62 billion, mobile commerce at $128 million and $107 million for television-based e-commerce (PC World.com, 2001)68. This study focuses on online shopping via PC and on mobile commerce and does not tackle Interactive TV. However, Interactive TV (iTV) might also have a promising future. The market research firm Pyramid Research had forecasted iTV to reach a European household penetration of 40% in 2003, which might be rather optimistic, but this technology could eventually turn into a mass application once the service has overcome technological immaturity69. The number of worldwide Internet users has been estimated at 400 million in 2000 and is expected to triple until 200570. According to the European Commission, in the half year between March and October 2000, household Internet access in the EC increased by 55% from 18% to 28%, while 40% of Europes 375 million citizens had access to the Internet at that time71. European Internet revenues are expected to reach $64.4 billion in 2001, whereby consumer retail (B2C) will account for only $4.6 billion, compared to business trade (B2B) with $56.7 billion72. 5.7.2 European Online Shopping, Market characteristics and Consumer Behavior

According to the Boston Consulting Group (2001), six EC countries account for 85% of European online sales revenues, where about 50 million consumers are purchasing online. These countries can be divided into three different groups. Germany and the UK have a high Internet penetration and high proportion of Internet users who purchase from the web. France and Italy belong to the second group, which has lower penetration and lower purchases. The third group, including Sweden and the Netherlands has a high penetration but low rate of Internet users who purchase on the web.

Online shopping is defined in this study as a process in which images or listings of goods and services are viewed remotely via electronic means, e.g., a vendor's Web site, items are selected for purchase, and the transaction is completed electronically with a credit card or an established credit account. (National Telecommunications System and Standard Division 1996) 68 US American PC and iTV based sales figures are predicted by Gartner in 2001; the mobile commerce figure has been predicted by IDC and Jupiter Media Matrix in 2001. As cited in: Shop.org, (2001). 69 Forecast by Pyramid research, as cited in: Shop.org, (2001). 70 Forecast by eMarketer, as cited in: Shop.org, (2001). 71 Shop.org, 2001. 72 Forrester research, as cited in: Shop.org, 2001. The forecasts about Europes online population varies greatly from eMarketer and is estimated at 53.2 million, which is an Internet penetration of 13% (compared to US with 34%). In general, this study regards forecasts rather as marketing tools and therefore does not place much weight on them. They are used to show a trend, but more.

67

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According to International Data Corp. (IDC), the UK has had the highest internet penetration (compared to France and Germany) in 2000 with 42% of households owning a PC and 33% of them being connected to the Internet. Germany follows with 35% of PCs in households where 22% have Internet access; while in France 33% of households are with PC and 17% connected to the Internet. Online shopping enthusiasm is highest in Britain where 11% of Internet users have purchased from the Internet, followed by Germany with 7% and France with 4% (Ernst and Young, 2001). 5.7.2.1 What Europeans buy on the Internet Consumers are mainly buying commodity products, whereby the ten most popular categories are books, CDs and recorded music, computer and related products, videos, entertainment, beauty and health, electronic products, clothing, food and drink products and toys. In Europe, the most popular item for purchasing on the Internet is books. Germany is leading with 40% per 100 Internet users having purchased a book over a twelvemonth period in 2000/2001, compared to the UK with 35% and France with only 9%. In Germany, even 70% of all online shoppers purchase books, while in the EC the average is 60%. The second most popular category is computer hardware with 32% in the UK, 31% in Germany and 10% in France (Boston Consulting Group, 2001). The share of groceries (food and drink) purchases has been highest in the UK where 23% of online shoppers have purchased groceries online, followed by France with 18%, while in Germany they amount for only 10%. In clothing, the UK leads with 28% followed by Germany with 22%, while in France clothing accounts for 17% of purchases. However, the high-touch products, such as clothing become continuously stronger, which indicates that retailers are improving product display, description and return policies while consumers also become more used to buy these products on the Internet (Ernst&Young, 2001).

5.7.2.2 Online population starts to Resemble Offline Population In Europe, the Internet has bridged the chasm of the technology adoption life cycle and has become a means of mass communication, which is supported by the fact that the European online population is starting to resemble the offline population according to income, education and age. However, a gender gap remains in Germany and France with more than 80% male purchasers on the Internet, though the trend is decreasing (Boston Consulting Group, 2001). In the UK, the share of female online population is already close to 50%73, while the UK online population in general is fastest in resembling its offline population (Ernst&Young, 2001).

73

In general, the share of women among the online population tends to be higher in Anglo-Saxon countries, such as in Canada and Australia, where they account for 50% of online population already, while in the US, even 60% of the online population is female (Boston Consulting Group, 2001).

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While some sources suggest that women dominate the click and mortar shoppers (view online and buy offline) and men belong to the hooked and hunter-gatherer types (Harris Interactive, 2000), other sources argue that these differences seem to blur. For example, Dholakia and Uusitalo (2001) suggest in their research that gender differences as they exist in offline shopping might not exist in online shopping74. They also argue that genders perceive utilitarian benefits (usefulness, efficiency, convenience) rather similar while hedonic benefits (shopping as joyful activity) are more important for women. 5.7.2.3 Online Spending In online retailing the UK shows the same advanced picture as in brick-and-mortar retailing. UK retailers are moving strongly from pure play to multi-channel retailing, as for example Tesco, which is dominating the online groceries market globally, with 60,000 orders a week in the UK and an average value of 120$ per order (Ernst& Young, 2001). Tescos UK online market share in groceries retailing is 70% compared to its offline share of 20% (Boston Consulting Group, 2001). According to a study by Ernst&Young, the consulting firm, the UK is also the most advanced market concerning transaction frequency and volume. The average number of purchases per online shopper varies in the three countries from 14 in the UK, 12 in Germany and 10 in France. Average spending per customer in 2000 has been highest in the UK with $778, followed by France with $709 and Germany with $656. The study also said that the share of customers that plan to increase their purchases significantly accounted for 70% among the respondents (Ernst and Young, 2001). 5.7.2.4 Profitability of Customers Also the profitability of customers, which had been mentioned in context of CRM and deriving individual customer information, plays a great role in online shopping, whereby it is strongest in groceries. In groceries, 20% of customers account for 78% of sales, while in the event ticket category the number is lowest with 51%. Clothing, travel and books are in the middle, with 60% of sales coming from the best 20% of customers (Boston Consulting Group, 2001).

74 For a more detailed discussion of consumer characteristics in online shopping see for example Dholakia and Uusitalo (2001).

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5.7.2.5 Effects of Online Shopping on Brick-and-Mortar Stores According to the Ernst&Young study, online shopping is affecting store traffic already. More than half of all online shoppers has said they shop less in the store because they shop online. However, also 4% said they shop more often in the store because they shop online as well. Further, more than half of respondents said their online purchase would have been made offline as well. Online shoppers seem not to have a clear preference whether to shop online or in brick-and-mortar stores. The study also found that 30% of online shoppers prefer to shop at web sites that have physical stores (Ernst&Young, 2001). The Boston Consulting Group argues that 88% of European Internet users look online for products they purchase offline (so-called browsers), while 42% also purchase online. However, 48% of Internet users do not purchase online but their offline purchases might be influenced by online information. In addition, brand loyalty is rather high, with 54% of browsers purchasing the same brand or product offline they checked online and 31% at least stayed with the same merchant. Internet users are browsing (accessing the Internet to check out prices) most often for computers, travel and consumer electrics. For groceries, toys, auctions, apparel, automobiles and financial services consumers use the Internet least often to check prices (BCG, 2001). 5.7.2.6 Reasons for customers to shop online and what customer demand The three main reasons for consumers to shop online have been argued to be good selection of products, competitive prices and convenience. In general, customers expect to see lower prices on the Internet than in stores in every category, though in online grocery shopping only roughly 50% expect that, while for health/beauty and consumer electrics roughly 70% of customers expect lower prices, with other categories such as apparel ranking in the middle (Ernst and Young, 2001). Consumers demand save transactions and confidentiality of their personal sales data, which calls for retailers to build trust. In fact, though many consumers have expressed concern about the safety of their credit card data while it is transmitted, 38% of online visitors in the UK and 58% in Germany have stated the lack of a credit card keeps them from purchasing through the web (Ernst and Young, 2001). According to Boston Consulting Group (BCG), consumers as predetermining for their satisfaction consider excellent operational performance and well-designed web pages. Operational excellence is hard to meet, which is supported by the fact that 70% of European online customers have reported they had at least one purchase, which did not succeed. As a consequence, 35% stopped visiting the web site and 32% stopped purchasing from the particular web site, while 6% even stopped purchasing from the retailers physical store.

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Also Dixon (2001) describes in his research about UK e-Commerce that customer fulfillment and security is seen by retailers, investors/developers and their advisors as the main barriers to online retailing. Customer satisfaction is crucial for increasing the purchasing volume and transaction frequency per shopper. BCG further argues that satisfied consumers spent during a 12 month period 71% more money and conducted 2.5 times more transactions than dissatisfied customers (Boston Consulting Group, 2001). 5.7.3 Electronic Grocery Shopping (EGS)

Online grocery shopping, or also called electronic groceries shopping (EGS) has experienced in the first years of its emergence numerous setbacks, accompanied by the failure of pioneers such as the US online grocer Web Van who went bankrupt in 2001 (e.g. Gartner, 2001a). However, especially the French and British online grocery business has experienced moderate success in the past two years, which has also contributed to the countries rather high share of online food and drink retailing mentioned earlier in this report.

5.7.3.1 The French Online Grocery Market In France, all five online grocers, which are active now, are subsidiaries of French hypermarket chains, such as Carrefour, Casino, Cora, Auchan and Galeries Lafayette, whereby most of them have been established in 2000. Carrefour owns Ooshop, CMescourses belongs to Casino, Houra to Cora, Auchan Direct to Auchan and Telemarket is a subsidiary of Galeries Lafayette (Business Week, 2001a). According to a forecast from April 2001, Forrester Research predicted that French online grocery retailing will make up to 3% of total food retailing sales in the year 2005 (as cited in: Business Week, 2001). In fact, one main driver for French retailing firms to engage in online grocery has been the restriction on opening new hypermarkets and supermarkets but also the growth potential of this new distribution channel. The market strategies vary from delivering only in one dense populated urban area such as Paris and on a limited range of products (around 6000), up to delivering throughout France by offering up to 65.000 different products as in the case of Houra. The average order size of French retailers is rather high, and ranges from roughly 90 (Telemarket) to around 120 (Houra) while 50% to 90% of their customers place an order once every two months (Business Week, 2001a). Besides average order size and frequency, the logistics and operational strategy has been crucial for online grocery retailing. Especially during the emergence of the business, brick-and-mortar retailers were more likely to succeed than pure online grocers. The major competitive advantages retailers enjoy when they engage in online grocery are their store infrastructure and their knowledge of the retailing business. Especially store infrastructure helps the company in the start-up phase because it does not have to invest in building warehouses (figure 5.5).
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Further, the large retailers own the financial resources, which are needed for the phase of emergence, and they own the purchasing power, which enables them to buy at more competitive prices. Two main distribution strategies have emerged, with either keeping investments in logistics to a minimum by completing the online order through picking the items from existing supermarket stock, or some players, such as Telemarket has invested heavily in a mechanized item sorting and order completion systems.

5.7.3.2 The British Online Grocery Market and Tesco In the UK, all major retailers have established online shopping, motivated through the saturation in the brick-and-mortar market and because several forecasts have predicted that online grocery shopping will take market share from the offline business, which meant for these retailers to act quickly. Tesco was the first retailer to engage in online grocery in 1996 and is dominating the UK online grocery market with a share of 70% while its offline share is 20% (Ernst and Young, 2001). Its main competitors in the online market are the same as offline, with Sainsburys, Asda and Safeway. Tesco started with offering its customers both to choose from a CD catalogue offline and then go online to transmit the order, or to order directly from the web site tescodirect.com or tesco.com. The decision to provide a CD has been made because of the high Internet fees when online shopping started. Tesco also owned its own Internet service provider (ISP) and offered its customers free Internet services (Ramaswamy and Dikalov, 2001). Tesco also launched intensely its non-food products, which allowed delivery to be more flexible and throughout the country, whereby online grocery delivery was restricted to certain areas where Tesco had stores. It aimed to sell 40% to 50% of nonfood products, such as textiles, or household products also because textiles and other consumer goods have higher margins and are cheaper to deliver than for example fresh products (McKinsey Quarterly, 2000c). Tesco decided to start with in-store-picking, because it did not require investing in building warehouses. However, the efficiency of in-store picking is lower because pickers have to compete with regular customers, which is even more difficult during rush hour times. As a result, Pickers in the store pick 100 items per hour while in a warehouse it can be from 300 up to 600 items (Ramaswamy and Dikalov, 2001).

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Ramaswamy and Dikalov (2001) have described the picking process at Tesco as following. When an order was received at Tesco Direct, it was routed to a computer located in the store that was nearest to the physical location of the customer. The incoming order was assigned to a delivery van at the local store and then forwarded to a picking trolley manned by store personnel. This trolley, a modified version of a shopping cart, was equipped with a price scanner and a shelf identifier screen. The layout of the store was pre-coded into the system, and hence the person doing the shopping was directed to the aisles where the product was to be picked. Since the entire process was controlled electronically, there was little room for human error. For example, once the product was picked, it had to be scanned to ensure a match with the order and for capturing pricing information before it went into the trolley. Tescos over one million of UK online registered customers can choose nowadays from almost the same product range as in the store, at same prices plus 7.5o for delivery. Tesco receives approximately 60,000 to 70,000 orders per week (Ernst and Young, 2001). Tesco has diversified its product and service range significantly through pursuing a multi channel strategy. Customers can buy via the companys Internet portal books, CDs, videos, digital videodiscs, clothing, gifts, home furnishings, electrical products, and banking services (Ernst and Young, 2001). Tesco claims that online customers purchase with roughly 50 per transaction the double amount than store customers, with 25 on average. Tesco also claimed that 50% of its online customers is cannibalization, meaning these customers do shop less in the Tesco stores because they shop online at Tesco, while 25% are new customers, and 25% are purchasing even more offline, since they purchase also online (The Economist, 2000). Table 5.2 compares the costs of a pure online shopper to the in-store-picking model and a traditional grocery store. In-store-picking requires the smallest investment since it uses existing infrastructure, and mainly invests into the distribution from the store to the customer. In addition, the retailer can leverage its brand and direct store traffic to the Internet, while the online shopper has to invest significantly more into marketing. However, economies of scale are limiting the in-store-picking model, once orders have picked up because productivity is much lower in the store-picking model (100 items/hour) than in the warehouse (300 items/hour). However, it proved a smart strategy for Tesco to first operate through in-store-picking and wait how customer demand will turn out, before investing in warehouses, which might cost an estimated 4 million75 each.

75 The 4 million cost of a warehouse have been estimated by Asda (the Wal-Mart owned, 4th largest UK grocer) (Ramaswamy and Dikalov, 2001).

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Table 5-3 Comparison of Grocery Distribution Models Projected costs as % of sales revenues for alternative grocery models Pure online In-store Traditional Cost Element shopper picking supermarket Gross margin 23.00 23.00 23.00 Labor cost 3.33 5.00 9.50 Administrative costs 1.50 1.50 2.00 Advertising 10.00 2.50 1.50 Depreciation 0.75 0.40 1.40 Other expenses 1.00 1.70 7.00 Delivery cost 10.80 5.40 0.00 Total operating costs 27.35 16.50 21.40 Net margin -4.35 6.50 1.60 Capital expenditure 201m 79m 280m Assumes sales of $1 billion each, and that pure play delivery costs are not shared with customer. Ramaswamy, K. and Dikalov, G. (2001), Tesco, PLC: From Mouse to House in Online Grocery retailing, Case No. A07-01-0011, Thunderbird American Graduate School for Management, US

Tescos competitors have chosen different strategies for assortment and logistics operations. Sainsburys has launched a quite similar web site as Tesco but focuses more on food products, and it has engaged in building warehouses though it is also using the in-store-picking method. Asda is offering a rather narrow product line which contents 5000 food and non-food products, which are distributed exclusively from warehouses, also because the firms store network is less dense than Tescos or Sainsburys. Safeway has pursued a different approach by offering its services through fax and telephone. Customers can order ahead but pick up their prepared purchases from the nearest store to their location (Ramaswamy and Dikalov, 2001).

5.7.3.3 The Distribution Model of Sears Canada Sears Canada, the Daughter Company of the US textile retailer, which has established for its Canada online business a distribution system with contracting agents, has designed an interesting distribution model for non-food products. Sears hired 2100 agents like dry cleanings and flower shops where it delivers every second day ordered items and picks up returned items. The customer has to pick up the orders from the agent, which is in 90% in close driving distance from the customers home. The agents are paid a small nominal fee and benefit from the increased in-store traffic they experience.
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Sears has argued to deliver in future also from the contracting agent to the customers door and intends to charge due to its high market penetration only $2 USD for this service. The delivery is expected to be executed by small local firms (eCompany, 2001).

5.7.4

Mobile Commerce 5.7.4.1 Introduction

For the purpose of this study, mobile commerce is defined as the transmission of information to mobile, handheld devices for commercial purposes. These devices usually include mobile phones and personal digital assistants (PDAs). The information can be transmitted through different technological standards, such as SMS (short message service), WAP (wireless application protocol) or 3G (third generation) standards. The consumers enthusiasm to use m-Commerce has sharply declined according to a survey by the Marketing Information Company A.T. Kearney. In June 2000, 29% of European mobile phone users said they are planning to use mobile phones for Internet purchasing but since then, the number declined gradually and reached a discouraging 7% in June 2001 (A.T. Kearney, as cited in: eMarketer, 2001). The decline in consumer demand for m-Commerce services is connected to the phones slow performance of services, which have been provided yet. Only few mCommerce services had been a success so far, for example the downloading of ring tones to the mobile phone, whereby the technology is not the Internet but SMS (eCommerce Times, 2002).

5.7.4.2 Key Characteristics of Mobile Commerce Despite the delayed take-off, certain key characteristics of m-Commerce especially compared to the Internet remain promising. For example, on the contrary to the Internet, consumers have been argued to accept that mobile services are not cost free and therefore expect that any service provided on the mobile phone is charged for. Further, the mobile phone is a more personal device as the personal computer, which allows determining the identity and location of the consumer. However, through the mobility and small size of the mobile phone or PDA, several technical and consumer behavioral key issues arise. For example, consumers feel the waiting time until a page is built up on the mobile screen longer than on the PC because the mobility makes consumers more impatient. But mobile phones have more limited screens than PCs and display the information slower than on the Internet (Economist, 2001).

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Therefore, trying to shift the Internet one-to-one to mobile devices has been argued as unreasonable, because the technological trade-off between the consumers high expectations and the phones slow performance and small display cant be resolved. In fact, several sources have argued that consumers might not even demand the same service than on the Internet, because the main emphasis lies on an urgent need of a service, which has to be accessed in a mobile way. These services could be for example receiving information about locations, reading e-mails, accessing data banks, or receiving alerts. 5.7.4.3 Technological Issues WAP (wireless application protocol) As mentioned, demand for mobile commerce has flattened during the past years, since consumers became disappointed about the low quality of existing services, such as WAP (wireless application protocol) in Europe. However, the problem is that mobile operators are reluctant to engage in building new infrastructure which enables better services, since the customer demand has been at unexpected low levels (eCommerce Times, 2002). For example, WAP is used in Europe by less than 10% of mobile phone subscribers and accounts for less than 0.5% of operator revenue, which has a discouraging effect on future investments in higher standards (The Economist, 2001b). Several sources argue that WAP also failed, because telecom providers have tried to use it for accessing the Internet while they should have created more realistic services for WAP instead, since it has such a low visibility quality and slow connection which makes Internet surfing rather unpleasant (Mobile Business Daily, 2002). Third generation (3G) technology The 3G technology has been thoroughly argued as the ultimate standard and is expected to provide the mobile phone with the necessary information richness, because it is designed to handle data quickly and efficiently alongside voice calls. The worlds first 3G-network has been launched in Japan in October 2001 by NTT DoCoMo, which has also become the world leader in mobile services (Economist, 2001a). European operators have started to launch 2.5G-networks, which offer fewer benefits than 3G but are also less cost intensive since they require only the upgrading of the existing networks (The Economist, 2001b). The Economist argued that despite the Japaneses enthusiasm for miniaturizing (e.g. Sony) and technology in general, Japans telecom operators and mobile phone companies have benefited from the incompatibility of their phones and services. Because Japanese operators were concentrating separately on product development they were enabled to develop a technology for their phones quicker than the Europeans who tried to agree on a common standard in the early phase of development76 (The Economist, 2001a).
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However, it is important to recognize that in many other cases the agreement on common standards usually causes a competitive advantage.

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NTT DoCoMo is Japans most successful mobile phone operator with 60% market share. Two thirds of its 37 million customers are using the firms i-mode service, which has been launched in February 1999 and which is based since October 2001 on the 3G technology. I-mode phones are used for mobile banking services, stock trading and reserving airline tickets, while the most advanced phones can also download small pieces of software, music and games. DoCoMo argues that its 27 million imode users also spend 15% more on their telephone bills than regular customers and generate 25% to 30% more overall profit. Other Japanese operators are providing similar services as well, such as J-Phone (partly owned by Vodafone), which has launched a phone with an integrated camera. The firm has also been working on developing location based services that allow users to call a certain number and receive information about their own location including a map, or a location of a restaurant (The Economist, 2001b). MMS (Multimedia Messaging) For Europe, MMS (multimedia messaging) is one of the most promising standards, which enable phones to send pictures and sound clips. The standard is widely supported and has been applied for example in Japan by J-Phone with its built-in cameras in handsets that can also send messages between computers and phones, because the technology is based on the Internet e-mail standards. The combination of MMS and the progressing upgrading of the telephone network from 2G to 2.5G and 3G are offering the highest potential for establishing a network which enables for example location based services and picture messaging to be launched rather soon (The Economist, 2001c). 5.7.4.4 Applications for m-Commerce Mobile commerce for business-to-consumer solutions is planned in the present stage mostly for instant messaging and e-mail services. However, mobile commerce also enables instant access to data, which can be applied in customer relationship management (CRM) and sales force automation (Internet World, 2002). Mobile marketing and advertising In addition, mobile advertising, which means sending for example direct marketing text messages to the consumers phone, has been argued as a marketing tool for companies to attract customers with offers or discounts. The larger concept of mobile advertising is mobile marketing, which is offering a wider range of marketing services. Especially since the mobile phone is a very personal device compared to for example the PC, marketing messages have been argued to need to be more personalized. Mobile marketing has been successful so far in areas where the customers had a personal interest or affection which motivated them to establish the contact with the information provider, for example in the field of marketing films or music (Clickz.com, 2001).

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The consultancy Frost and Sullivan has predicted that sending marketing messages and advertising such as coupons and offers to the users phone can reach 37 billion in 2005 with 65% of users prepared to receive such messages (The Economist, 2001c). A research conducted by Mobile Channel, a British advertising company, found that the average response rate of advertising to the mobile phone was 10-20% compared to direct mail with 3%. This result is a rather positive statement of consumer behavior because it shows a curious attitude of phone users towards marketing messages, though this attitude could flatten rather quickly. However, to reach an impressive result like this, mobile advertising must not spam the users phones but must improve its quality and user friendliness. For example, in Japan, J-Phone is avoiding the obtrusive character of mobile advertising by sending location-based advertising silently into a special folder on the users phone, which leaves the user the choice to open the message or not (The Economist, 2001c). Several sources argue that mobile commerce might find its broadest application in the mid-term in direct marketing. For example, a global research conducted by Nokia showed that 88% of consumers would accept to receive electronic coupons from brick-and-mortar stores on their phones. However, the study also showed that consumers expect a discount on their telephone bill in return (eCRMguide.com, 2002). Alerting and Intelligent Alerting Another service, which is offered via mobile phone, is called alerting, which is applied for example to banking or brokerage services. For example Citibank offers its customers alerts on balances, bill payments and checks since fall 2001. Especially intelligent alerting, which allows the customer also to react based on the message has been argued as a promising service. Wireless banking services also include accessing the bank account via phone or PDA and transferring money (Mobile Business News, 2002). Location-based Services Location-based services have been argued by another study of Nokia to provide the mobile phone with the features customers demand. The result showed that mobile phone users expect the purchases on the mobile phone to depend on rather where they are than what they desire to buy. In fact, positioning technology is already used by US telecom operators, which are required by law to be able to identify a customers position in case of emergency (The Economist, 2001c). Payment Systems for Automatic Check-out and Reverse Billing For retailers, especially payment systems for automatic checkout in the supermarket offer an interesting perspective on m-Commerce. Bluetooth technology can be implanted in mobile phones through a micro chip, which then would enable the phone to transmit information to the check-out systems at the point of sale (The Economist, 2001c). In this context, reverse billing, which charges the purchase of a product or service directly to the consumers phone bill, provides an opportunity to retailers and
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to telecommunication providers. Since retailers are diversifying their businesses and some are moving into telecommunications as well, the reverse billing from customer loyalty cardholders directly to their phone bills would be possible. Also joint projects between retailers and telecommunication providers offer an opportunity. The advantage for the retailer or telecom provider is to handle transactions cheaper than banks or credit card organizations because they are used to micro payments because of the nature of their business. In addition, the telecom operator knows the users name, address, and financial data and is billing already from the user. The operator even knows where the user is and when the phone is switched on, which creates the possibility to send information according to the users location. Further, the telecom provider has the control over the entrance portal on the users phone display, which allows determining the content of the portal for example in order to make advertising (Economist, 2001). Mobile Access to Data and Sales Force Automation Mobile Commerce offers possibilities to sales personnel for improved access to data, for example through PDAs (personal digital assistants). This connection represents especially for sales personnel or technicians in the field the possibility to work more efficient through real-time access and to update relevant customer, logistics, product and sales data. According to the consulting firm The Yankee Group, about 20% of US companies with more than 5000 employees have been using mobile devices in 1999, and the number is expected to double until 2004, with most applications argued in the financial services, manufacturing, retail, transportation and travel industry (BusinessFinanceMag.com, 2001). 5.7.4.5 Projects in m-Commerce Since m-Commerce is still far away from being a mass application, only a few mobile commerce projects have been initiated already. The following examples should provide a brief overview of what has been done so far, and what kind of projects are the most popular for the present stage of m-Commerce. Vending machines from Coca-Cola and NTT DoCoMo in Japan In the vending machine business, mobile commerce is applied for example in Japan, where Coca-Cola and NTT DoCoMo are co-operating on a project. Customers are offered beverages through a new vending machine which contains besides a coin slot and change dispenser also a keypad, a sensor, a printer (for coupons, maps, tickets) a speaker and a small LCD display. The machine is enabled to show movie clips for example to promote products. The customer can also buy concert tickets, or print out location maps. Pressing a button on the machine and holding the i-mode telephone to a sensor bills the customer. The companies have argued that the new machines generate 10% more traffic than regular machines (Mobile Business Daily, April 2002).

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Direct Marketing at Dunkins Donuts in Italy A mobile commerce project for the US has initiated direct advertising based donut chain Dunkins Donuts, in Italy. The campaign was called Dial a donut which was promoted through traditional advertising (e.g. radio, posters) that encouraged users to dial a telephone number and receive a coupon as SMS for a local donut shop. The firm has claimed the project to be a success (clickz.com, 2002). Mobile advertising in a Swedish community project and McDonalds McDonalds has been involved in a community pilot project called e-street, in Lulea (Swe) where 2,000 residents were taking part. Businesses were sending SMS text messages to the participants offering specials and other advertising. The local McDonalds has increased its turnover by 25% though an application in the real world might turn out less effective (clickz.com, 2002). Project for Mobile marketing at McDonalds in Britain Another mobile commerce pilot project for mobile marketing at McDonalds UK involved 1,200 restaurants. Clickz.com describes the project where all large and super-size boxes were emblazoned with a Monsters Inc peel-off window, revealing one of six characters, a code number, and a text-in number. Customers used their phones to send the code to the text-in number and instantly received a message telling them if they won a prize (Clickz.com, 2002). Location services and mobile advertising at a Shopping Mall in London Especially location services enable firms to pinpoint customers and send them according to their segment for example messages or coupons for direct marketing. ZagMe has tested this service already for example, a company that offered customers who entered a London shopping mall to call a number and receive marketing messages within a certain period of time. However, the company has been reported to have gone out of business (Mobile Business Daily, 2002).

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5.8

Internet Portals

Numerous retailers are creating branded Internet portals, which serve as a multi-party interface by serving different kinds of stakeholders. For example, the Internet portal of Tesco (Tesco.com) allows customers to enter with their access code and order through their accounts products and services. Additionally, information services are provided at Tescos web site, such as a help line, career services, discussion forums, and clubs for customers with same interests and high affection (e.g. wine club, clubs for parents). The portal also offers information about products, nutrition or cooking recipes. Other stakeholders, such as financial investors or parties who are interested in the companys performance can download management and financial information. Another integrative aspect of Internet portals is the connection to employees. They can access the firms Intranet from any location with Internet access through entering a password on the web site in order to manage administrative issues or getting relevant information. Further, other stakeholders, such as suppliers can be logged on to the portal, whereby the web site can function as the interface for the companys eBusiness application. This means that all parties log on through the same web site but with different access codes which provides them with different content according to their access authorization. Tesco tries to leverage its online customer base through offering a portfolio of different product categories and services to its more than one million registered online customers (Tesco, 2001). Internet portals are therefore used to leverage the retailers customer base, but also to build a connection between the retailer and the consumer. For example, Tesco offers financial services that can be seen as value added service, where registered customers can apply rather uncomplicated for loans. Sainsburys77 is using its Internet portal also not just for customer services but to provide services to its supply network partners. The service, which is called Sainsbury's Information Direct (SID), was launched in 1998 by the Supply Chain to act as a portal for electronic business to business between Sainsburys and its suppliers. Primarily, SID is used to support the food supply chain but additional processes are expected to be added continuously. Suppliers can access performance data measures such as sales, availability and stock holding, and the Collaborative Planning System (CPS), where promotions and events can be managed collaboratively. The service allows also accessing and sharing data about customer product complaints and storing analysis reporting. In fact, an Internet Portal is adding value to all stakeholders because it improves the parties ability to manage their relation with the retailer. The retailer also has the choice to act as an intermediary through creating a network among customers for example as in the case of discussion groups, but also between different groups of stakeholders. For example, since suppliers are looking for direct contact to customers for feedback and market research, the retailers can place a banner on the web site, which takes the consumer directly to the manufacturer.

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Sainsburys Internet Portal: www.sainsburys.com

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However, in most cases the retailer might act as an intermediary where the customer access and personal data is not submitted to a third party. Establishing a network and linking customers and interest groups with each other is rather close to what Stabell and Fjeldstad (1998) have argued as value networks (see chapter four, paragraph three). By moving a customer centric retailer which tries to solve its customers problems (value shop idea) to the value network (connecting its customers and stakeholders), the firm functions as an intermediary and can provide its customers with additional value. In addition, the retailer is creating a value network for its business partners, for example through alliances that enable the retailer to offer more services through the Internet portal to the retailers customers78. Illustration 5: S Groups Web Portal S Group has established a web portal, which should provide a platform for suppliers, employees and customers in the future. Each group of stakeholders should have access to its contents, depending on the interests of the participating group and depending on its authorization (content managed by S Group). As shown in figure 5.4, S Group should be deriving customer information from its platform for example through online registry when a customer logs on to the portal to purchase items or to retrieve information. The technical processes for analyzing the customer data for CRM purposes happens inside the S Group. E-Commerce is conducted in-between every interaction of the stakeholders and the web portal whereby the kind of information exchange depends on the role and interest of the relationship. The employees of S Group are currently using the S Intranet, which will be connected to the Internet portal. The same process is planned for suppliers, which will be enabled to connect to S Group through the web browser and a password. S Group is developing its Internet portal to become a multi-channel platform for its customers. This project, which means to connect the data from all business channels in order to identify the customer across all these channels, will become reality in a few years, as argued by Visa Palonen, Vice President of SOK e-Business division. For the moment, S Group is focusing on connecting services to the platform, such as in the project Netista.com, an online channel, which is an experiment between S Group and Sonera, the leading Finnish telecom operator. An analysis by S Group showed that its customer loyalty card holders who use the firms online services spend twice as much in their annual gross purchases (offline plus online) than the other card holders, as stated by Visa Palonen, Vice President of SOKs e-Business division.

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To see some internet portals, try for example www.tesco.com, www.s-kanava.net, www.kesko.com, www.sainsburys.com

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S Group

Content Managed Information and Services Retailer/Supplier Data Linkage Value Added Services WEB Portal Value Added Services
iers ppl Su

Individual Customer Information

Individual Customer Information

Customers

Figure 5-4 SOK Internet Portal as Stakeholder Portal

The main focus for S Group lies in creating demand and satisfied customers first, before building the entire platform. In this context, the strategy is to have customers first, and then starting to invest in seamless processes, which reminds of Tescos strategy. S Group is a diversified retailing corporation which owns despite its food retailing business also hotels chains, car retailing chains, restaurant chains and agricultural businesses. The Internet portal will give the Group the chance to provide a platform for its businesses and diversify even more, for example by providing financial services. The aim is to leverage S Groups customer base. One possible role model could be the Internet portal of Tesco, the leading UK retailer (www.tesco.com). The S Group Internet portal can be found under the address www.s-kanava.net.

Em plo yee s

Employer/Employee Communication

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Suggestions for further research

Value Creation in e-Commerce Customer Interface Customer centric retailers are engaging in building e-commerce channels as part of their multi-channel strategy. Online shopping is regarded as the most promising B2C e-Commerce channel, since the development of mobile commerce has been disappointing. Whether the retailer can create better services with combining mobile commerce and online shopping should be investigated. For instance, customer loyalty schemes could be supported by a virtual customer account that can be accessed on the Internet and through m-Commerce applications. The customer could check and receive information about bonus points and special offers. Whether m-Commerce can also be used to conduct transactions for purchasing should be investigated as well. Further, it might be interesting how successful these two technologies can be deployed in winning new customers, especially when thinking about how online shopping is influencing brick-and-mortar shopping and if new customers outweigh the business that is going from physical stores to the online channel (cannibalization). The Role of Interactive TV (iTV) for Retailing According to several sources, Interactive TV is expected to reach a significant household penetration of roughly 50% within the next years. The question is, whether this turns home shopping and TV shopping into a hybrid form of computer online shopping. If Interactive TV becomes a user-friendly application than runs smoothly via TV, it would have a real chance to become a successful online channel. One question is how easy households can be connected to iTV and in what time frame a significant amount of households can be reached. Further, one question is what kind of customers are likely to use this application, and if they are different from PC online shoppers. One could assume that especially older generations might accept iTV better, because they do not have to switch from their TV to a computer. However, in case an Internet-like application is developed that is easy to use for everybody, easily accessible and runs smoothly on the TV, quite a lot could be expected from this new channel. Turning Costs into Services through e-Business and Creating Stakeholder Value Adding value to investors and customers at the same time means to manage costs effectively and to create new value adding services for customers. E-Business can help to get to know the customer better in order to offer better services. The creation of new services and tools, such as mobile commerce and supportive mechanisms such as company portals will improve the customer value equation. One question is what services make sense for the retailer to offer and for the customer to buy. The aim for the retailer is to bond the customer to the company and lock out competitors while at the same time improving also its cost structure. E-Business might offer possibilities to turn transaction costs into services, which mean a transformation of operating costs into value-added services and revenues.

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Customer Relationship Management Creating a Relationship While retailers think about the customer perceived value and improving the value equation through creating new value added services, it remains unclear under what circumstances the customer wants to have a relationship with the retailer. CRM in its technical meaning is speaking about database management, deriving Individual Customer Information and using it to develop existing customers. However, in this process the retailer is approaching the customer, while the customer is rather passive and therefore a more marketing-based view of a customer relationship is necessary. One can argue that a relationship with one passive and one active party is not sustainable because only the active party, in our case keeps the retailer the relationship alive the retailer. Therefore, active and passive behavior leads to the conclusion that both parties must have different interests, meaning that the retailers interests are known, but the customers interests maybe not. This topic leads to the ultimate question if customers want to have a relationship with their retailer and how it can be created. The context to e-Business is if it can help to create this relationship, and how. M&A and Cross-border Transactions Europes retailing concentration (in trans-national respect) and the risk in these acquisitions demands further research. Knowledge of the foreign market, transfers of know-how and other aspects are crucial for the merger integration process and the success of the acquisition. Indeed, this is a fairly researched issue, but still many M&As fail. The market concentration is increasing, which makes it even more important to know what to do on the acquisition trail. Retailing Alliances and Network Management Retailers have engaged in alliances concerning purchasing, cross selling and cooperation on different levels of competition and markets. These alliances tend to become more complex because of increasing internationalization and diversification of alliance partners. These partnerships and networks of cooperation that arise need to be managed. In order to make alliances and networks work better together, network management is a puzzling question for further research. E-Business Experiments and Best Practices Since e-Business and its processes especially concerning individual customer information are still in a rather experimental stage, and many new developments are to come in this young business field, it would be interesting to collect and investigate e-Business experiments which are implemented by innovative retailers. These cases might provide us with more insight why the implementation of e-Business solutions remains so difficult for companies, what competencies have to be built and what firms represent the best practices in order to learn from them.

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Cost Efficiency and e-Business E-Business as a source for cost efficiency represents a big hope for retailing firms that are operating on rather low margins and in saturated markets. Decreasing costs is besides increasing revenues - the major factor to increase the return on investment (ROI). However, the question is how e-Business can help to decrease costs and at the same time add value to customers and increase revenues. Business redefinition for wholesalers The increasing supply chain integration and transformation of sourcing processes will change the role of the wholesaler. In order to survive as organizations (assuming that every organization wants to continue to exist), wholesalers must explore new business activities to be still valuable for retailers and suppliers. They could become information vendors and use their worldwide contacts to provide services to retailers, suppliers and other groups. Business Redefinition for Market Research Firms The same business redefinition as for wholesalers might await the market research companies. Retailers and suppliers are trying to conduct their own market research, based on facts and by deploying e-Business solutions such as data mining. Especially when the suppliers and retailers are working closer together, and the retailer provides information about the customer interface to the supplier for exchange of other valuable information, the market research firms will loose business. How do they have to transform and build new capabilities to be valuable partners for retailers and suppliers in the future? Employee Retention and Recruitment for Retailing Besides the hype for the potential benefits of e-Business for improving productivity, it should not be overlooked that managerial improvements are the second major source of productivity improvement. Considering that more than half of Wal-Marts productivity improvements in the 1980s and 1990s were created through managerial improvements, organizational and human resource issues gain in importance as well. The situation becomes even dramatic, considering that recruiting and retaining employees has been stated as the two major problems in UK retailing, which makes it crucial to pay more attention to this issue. Further, it should be investigated how eBusiness can help retailers to hire and retain good employees.

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7 7.1

Appendix Store Formats

Store formats play a crucial role in the positioning of a retailer because as the customer interface, they are designed according to the companys generic strategy and customer value equation. For example, serving mainly price conscious customers could mean to establish discount stores while serving convenience-oriented customers in department stores79. All four factors of the retailing matrix (place, price, product and promotion) (e.g. Davies and Brooks, 1989) are influenced by the kind of retail outlet which has been chosen. In addition, certain store formats, such as hypermarkets (because of high volume) and discounters (consequent standardization and niche player) have been argued to be more efficient than e.g. department stores or supermarkets (e.g. Wileman and Jary, 1997). However, retailers have been more or less engaging in building portfolios of store formats while opinions whether a specialist strategy is preferable do exist as well (PriceWaterhouseCoopers, 1998).
Share of Food Retailing

1 Small Scale Food Stores 2/3 Discount Store

Supermarkets Hypermarkets Traditional Grocers Department Stores Variety Stores Specialized Stores, Category Killers 0 400 2500 Size (m2)

Food Retailing

Non-Food Retailing

1/3

Figure 7-1 Different Store Formats in Retailing Source: based on Accenture (2001), Overview of the French Retail Scene. Internal Paper, p 31, June, Accenture, Helsinki.
Store formats can be classified for example according to their form of ownership, level of service and merchandise line, which indirectly influences the store size. For example, Tesco is according to ownership structure a corporate chain, while the S Group represents a retailer-sponsored cooperative. The level of service can be distinguished in self-service, limited service and full service. For example, hard discounters represent self service while department stores offer limited service and a tailor offers full service. Merchandise line is classified into depth and breadth. For example, a category killer is offering of one product group (e.g. office supplies) a large depth because the customer can choose among several brands of one product, while breadth is large as well since one can buy there almost anything - from staples to a copy machine.
79

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Figure 7.1 shows the existing retail store formats in context of their size and share of food and non-food merchandise. Hypermarkets and department stores represent large store formats with a wide range of products, while category killers are specialized on one product group, such as sports or home supplies (a more thorough description of these store formats follows in the paragraphs beyond.) The size in which these store formats are categorized varies for most European countries and most retailers. For example, the average store size of S Groups outlets is for Supermarkets from 600 m to 3000 m, hypermarkets from 4000 m to 12000 m and discounters from 200 m to 400 m (S Group, 2000). Table 7.1 shows the distribution of store formats in the European main markets. Hypermarkets are rather dominant in France, while in Germany discounters are exceptionally strong and in the United Kingdom, the traditional supermarkets dominate. Italy and Spain still show a high number of traditional stores, which is a result of the markets high fragmentation. However, Spain also has a high number of hypermarkets because French retailers were moving into the Spanish market as a result of regulations in their French home markets. Table 7-1 Market Share in Food Retailing by Store Format, 1996 Hypermarkets Supermarkets Discounters Traditional Stores 48 % 36 % 8% 8% 26 % 40 % 7% 27 % 25 % 63 % 12 % 0% 12 % 56 % 31 % 1% 7% 55 % 6% 32 %

France Spain UK Germany Italy

Source: Castrillo et al., (1998), Have Hypermarkets had their day? McKinsey Quarterly, Issue 4, pp. 80-88. 7.1.1 Convenience Stores

The number of private small-scale food stores has been decreasing during the boom years of large-scale retailers. However, the same retailers are now increasingly launching their own convenience store formats in order to exploit niches in mature markets and to satisfy the growing consumers appetite for snacking and fast foods. According to the industry market research firm M+M Planet Retail, the number of convenience stores has increased by 22% from 1997 to 2002 (M+M Planet Retail, 2002). 7.1.2 Department Stores

Department Stores represent the oldest large-scale retail concept (e.g. Hollander, 1960; Samli, 1989), and it remains one of the most traditional and well-established concepts. Department stores can be rather famous, special attractions, which are even internationally known, such as Harrods in London. The main focus for department stores is to offer a wide range of high-quality merchandise in an entertaining way to serious shoppers, while providing good service (PriceWaterhouseCoopers, 1998).
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Department stores are located downtown, which has been in recent decades troublesome since large shopping malls were drawing customers to their out-of-town sites. However, in recent years town centers have become revitalized in many cases, which is facilitated by increasing attractiveness of city center retailing and high street Specialty stores (PriceWaterhouseCoopers, 1998). Most department stores have abandoned certain product categories (e.g. furniture, hardware, auto supplies) to larger and newer store formats which are located out of town, such as category killers, and concentrate nowadays on fashion and home life style categories and usually offer top brands (Wileman and Jary, 1997). Department stores have engaged especially in brand building as providers for an exclusive shopping experience. Therefore, service consistency and differentiated high-end brands are a crucial part for the strategy of department stores.

7.1.3

Supermarkets

Supermarkets are the oldest store format considering the transformation from local private owned groceries to larger store chains with self-service. Supermarkets emerged in Europe in the beginning of the 1950s but the real take-off of the supermarket era happened during the 1970s (Wileman and Jary, 1997). While in 1953 only 150 supermarkets existed in Europe, the figure increased to 1,200 in 1963 and 12,000 outlets in 1971 and almost doubled until 1981 (Knee and Walters, 1985:43). From selling mainly fresh food, the store range moved to mainly processed food though fresh products are still offered in supermarkets. First, brand producers have seized the emergence of this concept to create world spanning brands, such as Coca Cola, that could be distributed and promoted more effectively through larger store networks than through small individually owned stores. Nowadays, the change of power in the supply chain has strengthened the retailers marketing position significantly (Wileman and Jary, 1997). The selling space and product range of supermarkets has been increasing constantly, which puts them into competition with the larger hypermarkets (e.g. Castrillo et al. 1998). 7.1.4 Hard Discounters

Hard discounters, which have a special tradition is Germany, offer a narrow range of products (from 600 to 1800) and therefore, discounters do not attempt to satisfy all the customers needs (EHI, 2001). The goods, which are mostly basic dry packaged goods with long storage life, are partly sold under the discounters private label or proprietary label (from 50% up to 95% private labels). The consumers, (which can be in some discount outlets from all income ranges) shop to stock up their need of basic packaged products. According to Wileman and Jary, hard discounters such as the German Aldi outperform mainstream supermarket private labels by up to 20% on price and producer brands by 40% or more (Wileman and Jary, 1997). The concept of a hard discounter is to provide the lowest price by pursuing a pure efficiency strategy combined with a reputation for good price/value ratio of the very limited product range.
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Especially in recent years, German hard discounters are pushing their expansion plans whereby their competitive advantage is drawn from a highly efficient and standardized business model, which operates on a narrow product range. PriceWaterhouseCoopers (1998) argues that specialized retailers will have the biggest advantage in the future retailing consolidation and expansion to foreign markets. The gains in efficiency caused through repetition and standardization create advantageous learning curve effects in their core business model, which puts hard discounters in a better place for expansion than non-specialist retailers. The fast expansion of hard discounters can be seen for example at Lidl, which has entered most EU countries in recent years such as France, where Lidl has been operating more than 800 stores (more than double as Aldi) in 2000 (EHI, 2001). 7.1.5 Hypermarkets

The hypermarket is a rather successful store format, which has been originally developed in France and introduced in the 1970s. The concept of hypermarkets is to sell food and frequent non-food products to frequent customers and to provide onestop-shopping for price conscious customers by offering every-day-low-prices (EDLP) (Castrillo et al., 1998; Wileman and Jary, 1997). The outlets are located in out-of-town areas and provide convenient and large parking facilities for their customers. Hypermarkets offer a wide range of food and non-food products (up to 20,000 or 30,000) on a floor space of roughly 2500 square meters or more. The share of food products can vary between 30% and 70% of the product range (Castrillo et al. 1998; ILO, 1999). The hypermarket concept has actually grown by adding to the groceries category other categories in order to connect the frequent visits of a grocery shopper with purchases for clothes and other product groups (Wileman and Jary, 1997). In recent years, these markets also target planned shopping visits, such as the purchase of large-ticket-items, such as stereo sets. According to Castrillo et al. (1998), this diversification and building of destination categories, such as consumer electrics, sports equipment, garden furniture and clothing is a result of trying to remain competitive to larger supermarkets and emerging category killers. In addition, hypermarkets have been expanding their breadth of services by offering on their premises for example retail banking, show repair, postal services or haircutting that is usually operated by separate owners. These services should enable the customers one-stop-shopping trip even better. 7.1.6 Category Killers

Category Killers have been one of the biggest growth phenomenon in the past 15 years in retailing, especially in the US and Europe. The concept is to establish a large out-of-town shopping outlet, which serves a wide range of products of one product category (Wileman and Jary, 1997). The chosen category usually has been originally served in the concerned region by diversified small businesses, such as small stores for office supply or variety stores.

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Category killers benefit from their large scale and offer a price, which is about 10% to 15% under the price of smaller stores or generalist stores. Well-known category killers are for example IKEA (Swe), Toys R Us (US), Decathlon (France, Sports), and Office Depot (US, Office Supplies) (Walters and Hanrahan, 2000). Though category killers do not operate in food retailing, they represent a competitive threat through their specialization to the hypermarket destination categories (Castrillo et al. 1998). According to PriceWaterhouseCoopers (1998), category killers have one of the highest growth potentials besides hard discounters because they provide a wide range of products of a certain category to a low price.

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7.2

The S Group

The S Group is Finlands second biggest retailing corporation. Founded in 1904, it consists today of the 23 co-operative societies and SOK corporation with its subsidiaries. SOK Corporation is responsible for the S Groups strategy and business activities on the national level while the 23 co-operative societies manage their chains on a regional level (figure 7.3).

SOK
Executive Board Support Services Commercial Services Chain Boards Chain Management
Sourcing Services e.g. -Inex Partners ( owned 50/50 by S Group and Tradeka/Elanta) -Intrade Partners (owned by S Group)

20% of Turnover of S Group

Nationally managed chains (e.g. Specialty stores, Hotels, Auto Dealerships, Agri Business, Projects in the Baltic)

Supervisory Board

Customer Owners Customers

80% of Turnover of S Group

Regionally managed chains The 23 Regional Cooperative Societies own SOK and manage regionally their chains e.g. Prisma, S Market, Alepa/Sale, Sokos Department Stores, Restaurants, Service Stations, Auto Dealerships

23 Regional Cooperative Societies

Local Co-Ops (20)

Figure 7-2 Organizational Structure of S Group Source: adopted from S Group, (2000), Annual Report, Helsinki.

Mission of S Group The mission of S Group is to provide services and benefits for committed customer owners (S Group, 2000a). S Group has an extrinsic mission statement that announces strong commitment to its customer owners. This statement gives the impression that S Group regards serving its customer owners as the overall goal though the underlying intrinsic business activities are not mentioned80.

80

Another version of a mission statement comes from Tesco, which is describing its intrinsic activities rather detailed, but is lacking to mention the customer. TESCO is a team dedicated to professional management of both people and property. We are committed to each other through mutual respect and support. We realise the importance of individual growth in order to strengthen the whole. We invest in the development of the individual through training, education and reward. TESCO is committed to serve our owners, our residents, agencies and each other with integrity, fairness and honesty. We seek a balance between preservation of our resources and

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Table 7-2 S Group in figures Year 2000 36 167 28 481 43 854043 401 5 062 16 817 21 879 Year 1999 33 946 26 684 44 763282 406 5 047 16 228 21 275

S Group Retail sales, FIM mn Sales by cooperative societies, FIM mn Cooperative societies (incl. local Coops) Membership (Customer Owners) Personnel SOK SOK Corporation CO-ops and subsidiaries S Group total

Source: adapted from S Group, (2000a), Annual report, Helsinki; S Group (2000b), S Group today. Brochure, Helsinki.

Table 7-3 SOK Corporation in figures Year 2000 Year 1999 16 375 15 102 339 319 323 361 7 890 9,2 30,9 5 062 292 380 7 414 8,9 29,4 5 047

Net turnover, FIM mn Operating Profit, FIM mn Profit before extraordinary items, FIM mn Investments, FIM mn Total Assets, FIM mn ROI % Equity ratio % SOK Corporation Personnel

Source: adapted from S Group, (2000a), Annual report, Helsinki; S Group (2000b), S Group today. Brochure, Helsinki.

realisation of profit. We strive to combine accuracy and reliability with accountability. TESCO is a caring organisation that endeavours to exhibit pride in excellence. (www.tesco.com, 2001). Also Keskos mission statement shall be provided: Kesko supplies its customers with the best possible products and services. Kesko is esteemed highly as an employer, business partner and investment target. (www.kesko.com, 2001)

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Business Activities The group is active nowadays in food and groceries, Specialty goods, hotels and restaurants. Further, S Group owns businesses for hardware and agriculture, automobiles and service stations. The total retail trade in the year 2000 has been FIM 36.2 billion, where 47.1% came from food and grocery, 12.7% from agriculture, 9.1% from hotels/restaurants, 9.8% from car dealerships, 8.4% from service stations and 5.8% from clothing, to name the most important businesses. The S Group is a diversified retail corporation with several well established brands in the Finnish and Scandinavian market, such as the food and grocery chains S-Market (supermarkets) and Prisma (hypermarkets), Alepa (discounter) and the hotel chain SOKOS Hotels and SOKOS department stores. Some of the different business divisions are rather unconnected in the eye of the customer in terms of branding as for example the firms restaurant chains. However, it is important to recognize that S Group is managing its diverse businesses as individual product brands. Therefore, though the firm owns for example the restaurant brands, they are managed independent from the rest of the group. The customer loyalty card (the S card) can be used in all businesses of the S Group and therefore can be seen as the umbrella for the corporations activities in a marketing sense. However, the marketing for the S Bonus Card is directed to present and future customer owners by showing where the card can be used, which connects these businesses to the S Group in some sense.

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