11 E-commerce Online Retailing and Services


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11 E-commerce Online Retailing and Services

  1. 1. 1e-commerceKenneth C. LaudonCarol Guercio Traverbusiness. technology. society.eighth editionCopyright © 2012 Pearson EducationChapter 11E-commerce Online Retailing andServices
  2. 2. 2Class DiscussionCopyright © 2012 Pearson Education Slide 11-3Blue Nile Sparkles for Your CleopatraWhy is selling (or buying) diamonds over theInternet difficult?How has Blue Nile built its supply chain to keepcosts low?How has Blue Nile reduced consumer anxiety overonline diamond purchases?Average high price tags of diamonds, different shopping experience with offline, trustOrdering and paying for diamond after customer ordered it, deals directly with wholesalediamond owners and jewelry manufacturers, eliminated expensive stores, sales clerks,expensive glass casesBy creating trust and knowledge-based environment, providing quality ratings of eachDiamond by GIA, 30-day money-back, no-questions-asked guaranteeClass DiscussionCopyright © 2012 Pearson Education Slide 11-4
  3. 3. 3Copyright © 2012 Pearson Education Slide 11-5Learning objectivesUnderstand the environment in which the online retailsector operates todayExplain how to analyze the economic viability of an onlinefirmIdentify the challenges faced by the different types ofonline retailersDescribe the major features of the online service sectorDiscuss the trends taking place in the online financialservices industryDescribe the major trends in the online travel servicesindustry todayIdentify current trends in the online career servicesindustryCopyright © 2012 Pearson Education Slide 11-6Major Trends in Online Retail,2011–2012Growth in social shoppingOnline retail still fastest growing retail channelBuying online a normal, mainstream experienceSelection of goods increases, includes luxury goodsInformational shopping for big-ticket items expandsSpecialty retail sites show most rapid growthIncreased use of interactive, Web 2.0 marketing
  4. 4. 4Copyright © 2012 Pearson Education Slide 11-7Copyright © 2012 Pearson Education Slide 11-8
  5. 5. 5Copyright © 2012 Pearson Education Slide 11-9The Retail SectorMost important theme in online retailing is effort tointegrate online and offline operationsU.S. retail market accounts for $10.7 trillion (70%) oftotal GDPPersonal consumption:Services (e.g., educational, financial, food, medical) : 65%Nondurable goods (e.g., general merchandise, clothing,music, drugs, groceries) : 25%Durable goods (e.g., automobiles, appliances, furniture) :10%Distinction between “goods” and “services” becomingmore ambiguousCopyright © 2012 Pearson Education Slide 11-10The Retail Industry7 segments (clothing, durable goods, etc.)For each, uses of Internet may differInformational vs. direct purchasing opportunitiesGeneral merchandisers vs. specialty retailersMail order/telephone order (MOTO) sectormost similar to online retail sectorSophisticated order entry, delivery, inventory controlsystems
  6. 6. 6Copyright © 2012 Pearson Education Slide 11-11Composition of the U.S. Retail IndustrySOURCE: Based on data from U.S. Census Bureau, 2011.Figure 11.1, Page 731Copyright © 2012 Pearson Education Slide 11-12E-commerce Retail: The Vision1. Reduced search and transaction costs; customers ableto find lowest prices2. Lowered market entry costs, lower operating costs,higher efficiency3. Traditional physical store merchants forced out ofbusiness4. Some traditional offline industries would bedisintermediatedFew of these assumptions were correct—structureof retail marketplace has not been revolutionizedInternet has created new venues for multi-channelfirms and supported a few pure-play merchants
  7. 7. 7Copyright © 2012 Pearson Education Slide 11-13The Online Retail Sector TodaySmallest segment of total retail industry (5%–6%)Growing at faster rate than offline segmentsRevenues have resumed growth after recession2009 (see next Fig.)Around 73% of Internet users bought online in2011, generated around $188 billion in onlineretail salesPrimary beneficiaries:Established offline retailers with online presence(e.g., Staples. Office Depot, Walmart, Sears)First mover dot-com companies (e.g., Amazon,Newegg)Copyright © 2012 Pearson Education Slide 11-14Online Retail and B2C E-commerce Is Alive and WellFigure 11.2, page 734 SOURCES: Based on data from eMarketer, Inc., 2011a; authors’ estimates.(incl. travel, other services, digital downloads)
  8. 8. 8Copyright © 2012 Pearson Education Slide 11-15Copyright © 2012 Pearson Education Slide 11-16Multi-channel IntegrationIntegrating Web operations with traditional physical storeoperationsProvide integrated shopping experienceLeverage value of physical storeExamples: Wal-Mart, Target , JCPenney, StaplesTypes of integration (see next Fig.)Online order, in-store pickupIn-store kiosk or clerk Web order, home deliveryWeb promotions to drive customers to storesGift cards usable in any channelIncreasing importance of mobile devicesAmazon generated $2 billion in sales via mobile smartphonesSmartphones are used to check prices in stores, search for products,and receive mobile couponsTablets are used to buy online: 20% of mobile e-commerce sales
  9. 9. 9Copyright © 2012 Pearson Education Slide 11-17Copyright © 2012 Pearson Education Slide 11-18Analyzing the Viability ofOnline FirmsEconomic viability:Ability of firms to survive as profitable businessfirms during specified period (i.e., 1–3 years)Two business analysis approaches:Strategic analysisFocuses on both industry as a whole and firm itselfFinancial analysisHow firm is performing
  10. 10. 10Copyright © 2012 Pearson Education Slide 11-19Strategic Analysis FactorsKey industry strategic factorsBarriers to entry – Can new entrants be barred from entering industrythrough high capital costs?Power of suppliers – Can suppliers dictate high prices to the industryor can vendors bargain effectively for lower prices? Have firmsachieved enough scale to bargain for lower prices from suppliers?Power of customers – Can customers choose from many competingsuppliers and thus challenge high prices and high margins?Existence of substitute products – Can functionality of product orservice be obtained from alternative channels or competing productsin different industries?Industry value chain – Is chain of production and distribution inindustry changing in ways that benefit or harm the firm?Nature of intra-industry competition – Is basis of competition withinindustry based on differentiated products and services price scope ofofferings or focusCopyright © 2012 Pearson Education Slide 11-20Strategic Analysis FactorsFirm-specific factorsFirm value chain – Has the firm adopted business processes andmethods of operation that allow it to achieve the most efficientoperations in its industry?Core competencies – Does the firm have unique competencies andskills that can’t be easily duplicated by other firms?Synergies – Does the firm have access to competencies and assets ofrelated firms either owned outright or through strategic partnershipsand alliances?Technology – Has the firm developed proprietary technologies thatallow it to scale with demand? Has the firm developed the operationaltechnologies (CRM, fulfillment, SCM, inventory control) to survive?Social and legal challenges – Has the firm put in place policies toaddress consumer trust issues (privacy and security of personal info)?Is the firm the subject of lawsuits challenging its business model?
  11. 11. 11Copyright © 2012 Pearson Education Slide 11-21Analyzing the Viability of Online Firms:Financial AnalysisStrategic analysis helps us understandthe competitive situation of the firmFinancial analysis helps us understandhow a firm is performingIncludes two main parts:Statement of Operations: Tells us how much incomeor loss a firm is achieving based on current sales andcostsBalance sheet: Provides a financial snapshot of acompany’s assets and liabilitiesCopyright © 2012 Pearson Education Slide 11-22Financial Analysis FactorsStatements of OperationsRevenues : Growing and at what rate?Cost of sales (product costs + related costs): Compared torevenues; the lower the cost of sales, the higher the grossprofitGross margin: tells if the firm is gaining or losing marketpower; (Gross profit)/(net sales revenue)Operating expenses (cost of marketing, technology, adminoverhead, and intangibles like stock compensation &amortization)Operating margin: tells if firm’s current operations arecovering its operating expenses, not incl interest expensesand other non-operating expenses; (operating income orloss)/(net sales revenue)Net margin: tells % of its gross sales revenue firm is able toretain after all expenses are deducted; (Net income orloss)/(net sales revenue)
  12. 12. 12Copyright © 2012 Pearson Education Slide 11-23Financial Analysis FactorsBalance sheetAssets, current assets – cash, securities, accountsreceivable, inventory, other investments able to beconverted to cash within 1 yearLiabilities – outstanding obligations of the firmCurrent liabilities – debts due within 1 yearLong-term debt – debts not due until after 1 year ormoreWorking capital – provides short-term financial health;(current assets – current liabilities)Copyright © 2012 Pearson Education Slide 11-24E-tailing Business Models1. Virtual merchantAmazon2. Bricks and clicksWalmart, J.C. Penney, Sears3. Catalog merchantLands’ End, L.L. Bean, Victoria’s Secret4. Manufacturer-directDell
  13. 13. 13Copyright © 2012 Pearson Education Slide 11-25Virtual merchantSingle channel Web firms that generate almost all revenuesfrom online salese.g. Amazon, Buy.com, Newegg.com, Drugstore.comFace extraordinary strategic challengesMust build business and brand name from scratch quickly in an entirelynew channelConfronts many virtual merchant competitionsNo costs in building and maintaining physical stores, but largecosts in building and maintaining a Web site, order fulfillmentinfrastructure, and developing brand nameHigh customer acquisition costs and steep learning curveGross margins (retail price of goods – cost of goods) are lowHence, must achieve highly effective operations to preserve aprofitCopyright © 2012 Pearson Education Slide 11-26E-commerce in Action: Amazon.comVision:Earth’s biggest selection, most customer-centricBusiness model:Retail, Third Party Merchants, and Amazon Web Services (merchant and developerservices)Financial analysis: (see next Fig.)Continued explosive revenue growth, profitable – revenue increasing from $600 millionin 1998 to $34.2 billion in 2010Strategic analysis/business strategy:Maximize sales volume, cut prices, acquisitions, mobile shopping, KindleStrategic analysis/competition:Online (eBay)Multi-channel retailers, e.g., WalMart, Sears, JCPennyCatalog merchants, e.g., L.L.Bean, Lands’ EndOnline bookseller, e.g., Barnsandnoble.comPortals, e.g., MSN, YahooAudio/Video downloads, e.g., iTunes, Netflix, BlockbusterWeb services (web hosting, shopping cart, fulfillment services)
  14. 14. 14Copyright © 2012 Pearson Education Slide 11-277643/342041406/342041152/342049797-7364Copyright © 2012 Pearson Education Slide 11-28E-commerce in Action: Amazon.comStrategic analysis/technology:Largest, most sophisticated collection of online retailingtechnologies available (transaction-processing systemshandling millions of items, status inquiries, gift-wrapping requests, multiple shipment methods)Strategic analysis/social, legal:Sales tax, patent lawsuits involving KindleFuture prospects:In 2010, net sales grew 40% to $34.2 billion, andsignificant gains thus far in 2011Ranks among top five in customer service, speed,accuracy
  15. 15. 15Copyright © 2012 Pearson Education Slide 11-29Multi-channel Merchants: Bricks-and-clicksCompanies with physical stores as primary retail channel,but also online offeringse.g. Wal-Mart, J.C. Penney, SearsFace high costs of physical buildings and large sales staffsAdvantages: brand name, national customer base,warehouses, large-scale, trained staffLow customer acquisition costsChallenges: coordinating prices across channels andhandling returns of Web purchases at retail outlets,leveraging their strengths and assets to the Web, buildinga credible Web site, hiring new skilled staff, building rapidresponse order entry and fulfillment systemsCopyright © 2012 Pearson Education Slide 11-30Catalog MerchantsEstablished companies that have national offline catalogoperation as largest retail channel, but also have onlinecapabilitiese.g. Lands’ End, L.L. Bean, Victoria’s SecretFace very high costs for printing and mailing millions ofcatalogs each year with 30-second half-life after customerreceived themHighest margins in retail sector due to very efficientoperations with centralized fulfillment and call centers,extraordinary service, excellent partnership with packagedelivery firms (FedEx and UPS)
  16. 16. 16Copyright © 2012 Pearson Education Slide 11-31Manufacturer-directSingle or multi-channel manufacturers who sell directlyonline to consumers without intervention of retailerse.g. Dell, HP, Gateway, IBM, AppleFace channel conflict challenges when physical retailers ofproducts must compete on price and currency ofinventory directly against the manufacturerAdvantages: established national brand name, existinglarge customer base, lower cost structure than catalogmerchants since they are manufacturer of goods anddon’t pay profit to anyone else, therefore, have highermarginsCopyright © 2012 Pearson Education Slide 11-32Common Themes in Online RetailingOnline retail fastest growing channel on revenue basisHowever, profits for startup ventures have been difficult toachieve due to:Lowered prices below cost of goods and operations,Failed to develop efficient business processes,Spent too much on customer acquisitionand marketingDisintermediation has not occurred since first-mover, onlinemerchants failed to achieve profitability and depleted venturecapital funds. Also traditional retailers are fast followers.Established merchants need to create integrated shoppingexperience to succeed onlineGrowth of online specialty merchants selling high-end,fashionable and luxury goods, e.g. Blue Nile, Tiffany, Armani,BestBuy.com, Gap.com, OfficeDepot.com.Extraordinary growth of social, local, and mobile e-commerce
  17. 17. 17Copyright © 2012 Pearson Education Slide 11-34The Service Sector: Offline and OnlineService sector:Largest and most rapidly expanding part ofeconomies of advanced industrial nationsConcerned with performing tasks in and aroundhouseholds, business firms, and institutionsIncludes doctors, lawyers, accountants, businessconsultants, etc.Employs 4 out of 5 U.S. workers75% of all economic activityCopyright © 2012 Pearson Education Slide 11-35Service IndustriesMajor service industry groups:FinanceInsuranceReal estateTravelProfessional services—legal, accountingBusiness services—consulting, advertising,marketing, etc.Health servicesEducational services
  18. 18. 18Copyright © 2012 Pearson Education Slide 11-36Service IndustriesTwo categoriesTransaction brokers – ones who act as intermediary tofacilitate a transaction, e.g., stockbrokers, employmentagenciesHands-on service providers – ones who interact directlyand personally with the “client”, e.g., lawyers,physicians, accountantsFeatures:Knowledge- and information-intenseMakes them uniquely suited to e-commerce applicationsAmount of personalization (legal, medical, accountingservices) and customization (financial services)required differs depending on type of serviceCopyright © 2012 Pearson Education Slide 11-37Online Financial ServicesFinancial services (finance, insurance, real estate) anexample of e-commerce success story, but success issomewhat different from what had been predictedBrokerage industry transformed with innovative,pure-online firms, e.g., E*TradeHowever, e-commerce impacts are less powerful inlarge, powerful banking, insurance, real estate due toconsumer resistance and lack of industry innovationsIn 2010 survey, 44% of ages 18–54 prefer onlinebankingMulti-channel, established financial services firmscontinue to show strong growth
  19. 19. 19Copyright © 2012 Pearson Education Slide 11-38Four generic kinds of financial servicesStorage of and access to fundsbanking, lendingProtection of assets insuranceMeans to grow assets investmentand brokerage firmsMovement of funds banks, creditcard firmsCopyright © 2012 Pearson Education Slide 11-39
  20. 20. 20Copyright © 2012 Pearson Education Slide 11-40Financial Service Industry TrendsTwo important global trendsIndustry consolidationFinancial Reform Act of 1998 amended Glass-Steagall Act of 1934 and allows banks, brokerages,and insurance firms to merge, and allows largebanks to own smaller banks in other statesMovement toward integrated financial servicesFinancial supermarket model: consumers can findany financial product/service at a single physicalcenter or branch bankCopyright © 2012 Pearson Education Slide 11-41Industry Consolidation and Integrated FinancialServicesFigure 11.3, Page 761
  21. 21. 21Copyright © 2012 Pearson Education Slide 11-42Online Financial Consumer BehaviorConsumers attracted to online financial sitesbecause of desire to save time and accessinformation rather than save moneyMost online consumers use financial servicesfirms for mundane financial managementCheck balancesPay billsNumber of people using mobile devices forfinancial services is surgingCopyright © 2012 Pearson Education Slide 11-43Online Banking and BrokerageOnline banking pioneered by NetBank and Wingspan;no longer in existenceEstablished brand-name national banks have takensubstantial lead in market shareIn 2011, 103 million US consumers use onlinebanking; expected to rise to 116 million by 2014Movement toward online banking is globalEarly innovators in online brokerage (E*Trade) havebeen displaced by established brokerages (Fidelity,Charles Schwab)Top trading web site among US users in 2011 isFidelity Investments with 6 million monthly uniquevisitors
  22. 22. 22Copyright © 2012 Pearson Education Slide 11-44Copyright © 2012 Pearson Education Slide 11-45The Growth of Online BankingFigure 11.4, Page 764SOURCE: Based on data from comScore, 2010a,eMarketer, Inc., 2010; authors estimates.
  23. 23. 23Copyright © 2012 Pearson Education Slide 11-46Copyright © 2012 Pearson Education Slide 11-47Multi-channel vs.Pure Online Financial Service FirmsOnline consumers prefer multi-channel firmswith physical presenceMulti-channel firmsGrowing faster than pure online firmsLower online customer acquisition costsPure online firmsRely on Web sites, advertising to acquire customersUsers utilize services more intensivelyUsers shop more, are more price-driven and less loyal
  24. 24. 24Copyright © 2012 Pearson Education Slide 11-48Financial Portals andAccount AggregatorsFinancial portalsComparison shopping services, independent financial advice,financial planningRevenues from advertising, referrals, subscriptionse.g., Yahoo! Finance, Quicken.com, MSN MoneyAccount aggregationPulls together all of a customer’s financial data at a singlepersonalized Web site, incl. brokerage, banking, insurance,loans, frequent flyer miles, news, and moree.g., Yodlee: leader to provide account aggregationtechnology with 30 million users worldwide and 200financial institutionsPrivacy concerns; control of personal data, security, etc.Copyright © 2012 Pearson Education Slide 11-49
  25. 25. 25Copyright © 2012 Pearson Education Slide 11-50Online Mortgage and Lending ServicesEarly entrants hoped to simplify and speed upmortgage value chainDifficulties in branding and simplifying mortgage generation processThree kinds of online mortgage vendor todayEstablished online banks, brokerages, and lending organizations, e.g.,Chase, Wells Fargo, Ameriquest MortgagePure online mortgage bankers, e.g., E-loan, Quicken Loans, E*TradeMortgage; aiming to speed up mortgage shopping and initiationprocess, but still requiring extensive paperworkMortgage brokers (e.g., LendingTree.com) offering access to hundredsof mortgage vendors who bid for their businessOnline mortgage industry has not transformed processof obtaining mortgageComplexity of process requiring physical signatures and documentsCopyright © 2012 Pearson Education Slide 11-51Online Insurance ServicesOnline term life insurance:One of few online insurance with lowered search costs, increased pricecomparison, lower pricesCommodity product but web offers insurance companies newopportunities for product and service differentiation and pricediscriminationOnline use is more for discovering prices and terms ofpolicies than purchasing policies onlineOnline industry geared more towardProduct information, searchPrice discoveryOnline quotesInfluencing the offline purchasing decisionLeading online insurance companies are InsWeb,Insure.com, Insurance.com, QuickQuote, NetQuote
  26. 26. 26Copyright © 2012 Pearson Education Slide 11-52Online Real Estate ServicesEarly vision: Local, complex, and agent-driven realestate industry would transform into disintermediatedmarketplace where buyers and sellers would transactdirectlyHowever, major impact is influencing of purchasesofflineImpossible to complete property transaction onlineMain services are online property listings, loan calculators, researchand reference material, with mobile apps increasingDespite revolution in available information, there hasnot been a revolution in the industry value chainE.g., Realtor.com, HomeGain, RealEstate.com,ZipReality, Move.com, Craiglist.com, ZillowCopyright © 2012 Pearson Education Slide 11-53
  27. 27. 27Copyright © 2012 Pearson Education Slide 11-54Online Travel ServicesOne of the most successful B2C e-commerce segmentsOnline travel bookings declined slightly due torecession but expected to grow to $107.5 billion in 2011For consumers: More convenience than traditionaltravel agentsPopular because they offer more convenience (one-stop content, commerce, community, customer service)than traditional travel agentsFor suppliers: A singular, focused customer pool thatcan be efficiently reached through onsite advertisingCopyright © 2012 Pearson Education Slide 11-55Online Travel Services (cont.)Travel an ideal service/product for InternetInformation-intensive product requiring significantconsumer researchElectronic product—travel arrangements (planning,researching, comparison shopping, reserving and payment)can be accomplished for the most part onlineDoes not require inventory (no physical assets)Does not require physical offices with multiple employeesSuppliers are always looking for customers to fill excesscapacityDoes not require an expensive multi-channel physicalpresence as required by financial services
  28. 28. 28Copyright © 2012 Pearson Education Slide 11-57Online Travel Services RevenuesFigure 11.5, Page 770 SOURCE: Based on data from eMarketer, 2011c.Copyright © 2012 Pearson Education Slide 11-58The Online Travel MarketFour major sectors:Airline ticketsSource of greatest revenuesTickets as a commodityHotel reservationsCar rentalsCruises/tours57% purchase airline tickets from airline’s Website, 22% from travel booking Web site (e.g.,Expedia or Orbitz)Corporate online-booking solutions (COBS)Integrated travel services providing airline, hotel, conferencecenter, auto rental services at a single site
  29. 29. 29Copyright © 2012 Pearson Education Slide 11-59Online Travel Industry DynamicsIntense competition among online providersPrice competition difficultIndustry consolidation stronger, offline established firmspurchasing weaker online firms to create multi-channel travelsitesIndustry impacted by meta-search engines searching Web for bestprices and collect affiliate fees for providing consumer lowestprice sites, e.g., TripAdvisor, Kayak.comCommoditize online travel causing excessive price competition and divertrevenues from leading, branded firms investing heavily in inventory andsystemsMobile applications are also transforming industry; used forplanning, booking, check-in, and context and location-baseddestination informationSocial media content, reviews have an increasing influence ontravel purchasesCopyright © 2012 Pearson Education Slide 11-60
  30. 30. 30Copyright © 2012 Pearson Education Slide 11-61Copyright © 2012 Pearson Education Slide 11-63Online Career ServicesNext to travel services Top sites generate over $1billion annuallyTwo main players: CareerBuilder, MonsterTraditional recruitment:Classified, print ads, career expos, on-campus recruitment,staffing firms, internal referral programsOnline recruitingMore efficient, cost-effective, reduces total time-to-hireEnables job hunters to more easily distribute resumes whileconducting job searchesIdeally suited for Web due to information-intense nature ofprocess
  31. 31. 31Copyright © 2012 Pearson Education Slide 11-64It’s Just Information:The Ideal Web Business?Recruitment ideally suited for the WebInformation-intense processInitial match-up doesn’t require much personalizationSaves time and money for both job hunters and employersFor employers:Expand geographic reach of search, lower cost, and result in fasterhiring decisionsFor job seekers:Make resumes more widely available, and provides a variety ofrelated job-hunting servicesOne of most important functions:Ability to establish market prices and terms (online nationalmarketplace)Copyright © 2012 Pearson Education Slide 11-65
  32. 32. 32Copyright © 2012 Pearson Education Slide 11-66Online Recruitment Industry TrendsConsolidation: CareerBuilder and Monster together dominate themarketDiversificationExplosion in specialty niche employment sites focusing on specific occupationsLocalization:Local boards developed by national sites compete with local newspapers,Craigslist (local job listings)Job search engines/aggregators:“Scraping” listings from thousands of online job sites, specialty recruitingservices, and employer sites, to provide free, searchable job listings in one spotE.g., Indeed.com, SimplyHired, and JobCentralSocial networking:LinkedIn; Facebook apps used by members to establish business contacts andnetworks, while employers use the sites to find potential job candidates or“check up” their background for screeningMobile appsUsing mobile devices by job seekers to search for jobs, researched companies,create and upload resumes, and applyCopyright © 2012 Pearson Education Slide 11-67