Order Fulfillment Along

the Supply Chain 12

Contents Learning Objectives

Opening Case: How Amazon.com
Fulfills Orders........................................................ 559 Upon completion of this chapter, you will be
able to:
12.1 Order Fulfillment and Logistics:
An Overview ............................................... 561 1. Define EC order fulfillment and describe the
EC order fulfillment process.
12.2 Problems in Order Fulfillment
Along Supply Chains ................................. 565 2. Describe the major problems of EC order
fulfillment.
12.3 Solutions to Order Fulfillment
Problems Along the Supply Chain ........... 567
3. Describe various solutions to EC order fulfill-
ment problems.
12.4 RFID and CPFR as Key Enablers
4. Describe RFID supply chain applications.
in Supply Chain Management .................. 578
5. Describe collaborative planning and the CPFR
12.5 Other E-Commerce Support Services ..... 583 model.
Managerial Issues.................................................. 586 6. Describe other EC support services.
Closing Case: Multichannel Retailers – 7. Discuss the drivers of outsourcing support
Experiences of Nordstrom and REI .................... 590 services.

OPENING CASE: HOW AMAZON.COM

FULFILLS ORDERS

The Problem

With traditional retailing, customers go to a phys-

ical store and purchase items that they then take
home. Large quantities are delivered to each store
or supermarket; there are not too many delivery
destinations. With e-tailing, customers want the
Electronic supplementary material The online version
goods quickly and to have them shipped to their
of this chapter (doi: 10.1007/978-3-319-10091-3_12)
contains supplementary material, which is available to homes. Deliveries of small quantities need to go to
authorized users a large number of destinations. Also, items must

E. Turban et al., Electronic Commerce: A Managerial and Social Networks Perspective, 559
Springer Texts in Business and Economics, DOI 10.1007/978-3-319-10091-3_12,
© Springer International Publishing Switzerland 2015
560 12 Order Fulfillment Along the Supply Chain

be available for immediate delivery. Therefore, • Step 3. The items (such as books, games, and
maintaining an inventory of items becomes criti- CDs) are stocked in the warehouse in bins.
cal. Maintaining inventory and shipping products Each bin is equipped with a red light. When an
costs money and takes time, which may negate item in the bin needs to be picked up, the red
some of the advantages of e-tailing. Let us see light turns on. Pickers then pick up the items
how Amazon.com, the “king” of e-tailing, han- from the bins with red lights and then turn off
dles the situation. the lights.
Amazon started with “virtual retailing” as a • Step 4. Each picked item is placed in a basket
business model – no warehouses, no inventory, with a barcode designating the order number.
and no shipments. The idea was to take orders and The baskets are placed on a 10-mile long
receive payments electronically and then let others winding conveyor belt in the warehouse. Each
fill the orders. It soon became clear that this model, basket is directed automatically to a specific
although appropriate for a small company, would destination point guided by barcode readers.
not work for the world’s largest e-tailer. • Step 5. Each full basket is checked to assure
that the barcodes are matched with a specific
order. Then the items are moved to appropri-
The Solution ate chutes, where they slide into delivery
boxes. The system arranges for multiple items
Amazon.com decided to change its business to reach this same box if there are several
model and handle its own inventory and logistics. items in one order.
Furthermore, for a fee the company provides • Step 6. The boxes are then sealed for delivery.
logistics services to any seller even its competi- If gift wrapping was selected, this is done by
tors. The company spent billions of dollars to hand.
construct their own warehouses around the coun- • Step 7. The full boxes are then taped, weighed,
try and became a world-class leader in warehouse labeled, and routed to one of the truck bays in
management, warehouse automation, packaging, the warehouse for shipment; some are owned
and inventory management. For a description see by UPS, the U.S. Postal Service (USPS), and
Harkness (2013). other shippers.
How is Amazon.com able to efficiently fulfill Del Rey (2013) provides a photo slideshow of
many millions of orders every month? the operation of one of Amazon.com’s largest
• Step 1. When you place an order at Amazon. centers located in Phoenix, AZ.
com and designate a destination, the com- Amazon.com also rents out space in its ware-
puter program knows from where it is going house and provides logistics services to other
to be shipped. It is usually shipped from companies. It takes orders for them, too. How
Amazon’s fulfillment center, or from the sell- does this work?
ers’ locations. Sellers have an option to ship 1. Sellers label and ship items in bulk to Amazon.
their merchandise to Amazon.com for stor- com.
age and processing. Amazon lists the prod- 2. When Amazon.com receives sellers’ items, it
ucts in its online catalog and may advertise stores them until an order is placed.
the product(s). When an order arrives, a com- 3. When an order is placed, Amazon.com will
puter program will route the order to where it pick, pack, and ship the items to individual
will be fulfilled. Amazon.com has dozens of customers and may combine several items in
distribution centers. In general, a typical the same order.
Amazon.com distribution center operates in 4. Amazon.com manages after-ordering cus-
the follow way: tomer service and handles returns as needed.
• Step 2. All orders received are routed elec- Until a couple of years ago, Amazon.com out-
tronically by the dispatcher to specific parts sourced the actual shipment of products to UPS
pickers for fulfillment. and the USPS. This enabled them to locate their
12.1 Order Fulfillment and Logistics: An Overview 561

warehouses and distribution centers in low-cost Sources: Barr (2013), Del Rey (2013), Harkness
states in order to ship to high-cost states with (2013), Manjoo (2012), and services.amazon.
larger populations. It also limited their shipments com/fulfillment-by-amazon/how-it-works.htm
to next day or two-day service. In mid-2012 (accessed April 2015).
Amazon.com decided to offer “same day” delivery
service in a select group of cities (Manjoo 2012).
A number of EC companies tried out “same day” LESSONS LEARNED FROM THE CASE
service before and failed. In order to deliver this
service Amazon.com spent millions of dollars to The Amazon.com case illustrates the com-
construct distribution centers in major metropoli- plexity and benefits of the overall order ful-
tan areas in California, Texas, Virginia, Tennessee, fillment process used by a large e-tailer.
and New Jersey. In these cases shipments are han- This chapter provides a detailed overview
dled by other third-party delivery services. of the fulfillment process in EC, focusing
on the major problems associated with this
EC support service, as well as the solutions
Some Recent Innovations used to overcome those problems.

Amazon is a great innovation company. Some

recent innovations that will be discussed later in this
chapter are: same day delivery (e.g., Amazon Fresh),
the use of robots in warehouses, and the use of 12.1 ORDER FULFILLMENT
drones (in planning) for delivery within 30 minutes. AND LOGISTICS:
Amazon also delivers in some cities in one hour! AN OVERVIEW

Comparatively speaking, taking orders over the

The Results Internet may be the easy part of B2C. Fulfilling
orders and delivering the ordered items to the
In the beginning, Amazon.com’s warehouses were customers’ doors can be the tricky part. For
only able to deliver 1 million pieces a day, creating example, as the open case showed, Amazon.com
delays during peak periods. Today, the average initially started out as a totally virtual company
warehouse can deliver hundreds of thousands of accepting orders and payments but relying on
pieces a day. During the peak holiday season, their third parties to fulfill and deliver the orders.
warehouses must handle millions of pieces per day. Eventually, they came to realize that they needed
The current system gives Amazon.com the ability physical warehouses with thousands of employ-
to offer lower prices and stay competitive, espe- ees in order to expedite deliveries and substan-
cially because the company is becoming a huge tially reduce order fulfillment costs. In order to
online marketplace that sells thousands of items. understand the importance of order fulfillment
To increase efficiency, Amazon.com combines and delivery in EC, as well as the complexities
several items into one shipment if they are small and problems associated with each, you first
enough. Shipping warehouses do not handle have to have a general understanding of these
returns of unwanted merchandise – the Altrec.com concepts.
warehouse in Auburn, Washington, handles returns.
More recently, Amazon.com created “Pantry,”
a pilot program providing same day delivery of a Basic Concepts of Order Fulfillment
number of the non-perishable items found in a gro- and Logistics
cery store (e.g., detergent). The program is aimed
at Amazon’s Prime members and is designed to Regardless of the type of product and the type
compete with Costco and Walmart’s Sam’s Club. of commerce involved – online or off, order
The program is described in Barr (2013). fulfillment refers to all the operations a company
562 12 Order Fulfillment Along the Supply Chain

undertakes from the time it receives an order to the pick up or receive anywhere. The closing case in
time the items are delivered to the customers, this chapter discusses the issues, use, and benefits
including all related customer services. For exam- of this multichannel integration.
ple, a customer must receive assembly and opera-
tion instructions with a new appliance. This can be
done by including a paper document with the prod- Overview of Logistics
uct or by providing the instructions on the Web. In
addition, if the customer is dissatisfied with a prod- Logistics encompasses activities required to effi-
uct, an exchange or return must be arranged. ciently and effectively control and manage the
Order fulfillment encompasses a number of movement and storage of items, services, and
back-office operations, which are the activities information across the entire supply chain to the
that support the fulfillment of orders, such as consumer and potentially back. Logistics can be
packing, delivery, accounting, inventory manage- viewed as a major activity in order fulfillment.
ment, and shipping. It also is strongly related to
the front-office operations, or customer-facing
activities, such as advertising and order taking, Traditional Versus EC Logistics
that are visible to customers.
Obviously, the overall objective of order ful- EC logistics, or e-logistics, refers to the logistics
fillment is to deliver the right product, to the right of EC systems mainly in B2C. The major differ-
customer in a timely, cost effective, and profit- ence between e-logistics and traditional logistics
able manner. The way these objectives are is that the latter deals with the movement of large
achieved varies between e-tailing and offline amounts of materials to a few destinations (e.g.,
retailing because e-tailers are focused on deliver- to retail stores). E-logistics shipments typically
ing smaller numbers of items directly to the indi- are small parcels sent to many customers’ homes.
vidual consumer, while many retailers are Other differences are shown in Table 12.1.
focused on delivering volumes of products to the
store shelf. Of course, these days e-tailing and
conventional retailing are intertwined because The EC Order
most retailers have multiple sales and services Fulfillment Process
channels – Web, mobile, in store, call center, etc.
This requires them to integrate the various chan- In order to understand why there are problems
nels, enabling customers to order anywhere and in order fulfillment, it is beneficial to look at a

Table 12.1 How e-logistics differ from traditional logistics

Characteristic Traditional knowledge EC logistics
Type, quantity Bulk, large volume Small parcels
Destinations Few Large number, highly dispersed
Demand type Push Pull
Value of shipment Very large, usually more than $1,000 Very small, frequently less than $50
Nature of demand Stable, consistent Seasonal (holiday season), fragmented
Customers Business partners (in B2B), usually repeat Usually unknown in B2C, many
customers (B2C), not many
Inventory order flow Usually unidirectional, from manufacturers Usually bidirectional
Accountability One link Through the entire supply chain
Transporter Frequently by the company, Usually outsourced, sometimes by the
sometimes outsourced company
Warehouse Common Only very large shippers (e.g., Amazon.com)
operate their own
12.1 Order Fulfillment and Logistics: An Overview 563

Figure 12.1 Order fulfillment and the logistic process

typical EC fulfillment process, as shown in • Activity 2: Checking for in-stock availability.

Figure 12.1. The process starts on the left, when Regardless of whether the seller is a manufac-
an order is received, and after verification that it turer or a retailer, as soon as an order is
is a real order, several activities take place, some received, an inquiry needs to be made regard-
of which can be done simultaneously; others ing stock availability. Several scenarios are
must be done in sequence. These activities possible that may involve the material man-
include the following steps: agement and production departments, as well
• Activity 1: Making sure the customer will as outside suppliers and warehouse facilities.
pay. Depending on the payment method and In this step, the order information needs to be
prior arrangements, the validity of each pay- connected to the information about in-stock
ment must be determined. In B2B, the com- inventory availability or manufacturing
pany’s finance department or a financial capability.
institution (i.e., a bank or a credit card issuer, • Activity 3: Arranging shipments. If the
such as Visa) may do this. Any holdup may product is readily available, and it is paid for,
cause a shipment to be delayed, resulting in a it can be shipped to the customer right away
loss of goodwill or a customer. In B2C, in (otherwise, go to activity 5). Products can be
many countries, the customers usually prepay, digital or physical. If the item is physical and
frequently by credit card or by using services it is readily available, packaging and ship-
such as PayPal (Chapter 11). In other coun- ment arrangements need to be made. It may
tries the customer may go to a payment station involve both the packaging and shipping
(e.g., a convenience store) and prepay there. department and internal shippers or outside
564 12 Order Fulfillment Along the Supply Chain

logistics services. Digital items are usually other commodity items. However, Amazon.
available because their “inventory” is not com does not stock books for which it
depleted. However, a digital product, such as receives only a few orders. In such cases, the
software, may be under revision, and unavail- publishers or intermediaries must make spe-
able for delivery at certain times. In either cial delivery arrangements. In either case,
case, information needs to flow among sev- appropriate receiving and quality assurance
eral partners. of incoming materials and products must
• Activity 4: Insurance. Sometimes the con- take place. Once production (activity 6) or
tents of a shipment need to be insured. This purchasing from suppliers (activity 7) is
could involve both the finance department and completed, shipments to the customers
an insurance company, and again, information (Activity 3) can be arranged.
needs to flow, not only inside the company, but • Activity 8: Contacts with customers. Sales
also to and from the customer and insurance representatives need to keep in constant con-
agent. tact with customers, especially in B2B, start-
• Activity 5: Replenishment. Customized orders ing with notification of orders received and
will always trigger a need for some manufactur- ending with notification of a shipment or a
ing or assembly operation. Similarly, if standard change in delivery date. These contacts are
items are out of stock, they need to be produced usually done via e-mail and are frequently
or procured. In both cases, production can be generated automatically. For typical services
done in-house or by suppliers. The suppliers that customers need, see Online File W12.1.
involved may have their own suppliers (sub- • Activity 9: Returns. In some cases, customers
suppliers or tier-2 suppliers). want to exchange or return items. Such returns
• Activity 6: In-house production. A plan is can be a major problem, as billions of dollars
needed for in-house production. Production in North American goods are returned each
planning involves people, materials, compo- year for both online and offline situations. The
nents, machines, financial resources, and pos- movement of returns from customers back to
sibly suppliers and subcontractors. In the case vendors is called reverse logistics.
of assembly, manufacturing, or both, plant Order fulfillment processes may vary, depend-
services may be needed, including possible ing on the product and the vendor. The order
collaboration with business partners. Services fulfillment process also differs between B2B
may include scheduling of people and equip- and B2C activities, between the delivery of goods
ment, shifting other products’ plans, working and services, and between small and large prod-
with engineering on modifications, getting ucts. Furthermore, certain circumstances, such as
equipment, and preparing content. The actual in the case of perishable materials or foods or
production facilities may be in a different pharmaceuticals, require additional steps, admin-
country than the company’s headquarters or istrative activities, and legal constraints and
retailers. This may further complicate the flow obligations.
of information, collaboration, and communi- The opening case describes how Amazon.com
cation. All this needs to be done efficiently fulfills its orders. Complex processes, such as
and effectively. those used by Amazon.com, may have problems
• Activity 7: Use contractors. A manufacturer (see Section 12.2) that are often minimized or
may opt to buy products or subassemblies eliminated through automation (as the slideshow
from contractors. Similarly, if the seller is a in Del Rey 2012 demonstrates).
retailer, such as in the case of Amazon.com
or Walmart.com, the retailer must purchase
products from its manufacturers. Several sce- The Importance of Order Fulfillment
narios are possible. Warehouses can stock
purchased items, which is what Amazon.com Order fulfillment is considered a critical success
does with its best-selling books, toys, and factor for e-commerce. Wozniak (2013) lists
12.2 Problems in Order Fulfillment Along Supply Chains 565

the following five keys order fulfillment issues detect problems before they occurred. The
that are critical for profitability and customer problem resulted in bad publicity for Best Buy.
satisfaction. A similar situation arose during the 2013 holi-
• Correct product delivery. Customers abandon day season in the U.S., although the fulfillment
shopping from a vendor that delivers even one and delivery problems were much more wide-
incorrect item (295 of all shoppers). spread among e-tailers. While online sales
• On time delivery. 42% of customers will increased a little over ten percent from the previ-
change vendors that do not ship as promised. ous year, last minute orders were up close to
• Order tracking. Order tracking and e-mail 50%. Many of these last minute orders were no
notifications are a must now. doubt predicated on the promise of one to two
• Speedy delivery. Retailers must meet cus- day deliveries. As a result of this last minute flood
tomer expectations. of requests, the major carriers – UPS and FedEx –
• Free shipping. Helps a lot. Common for were unable to handle the massive volume,
expensive items, also see Amazon’s Prime resulting in a substantial percentage of orders
membership. failing to be delivered in time for Christmas
(Heller 2013). A number of retailers had to offer
Order Fulfillment and the Supply Chain gift coupons or other forms of remuneration to
The nine-activity order fulfillment process is an make up for the missed deliveries.
integral part of the supply chain. The flows of The inability to deliver products on time is a
orders, payments, information, materials, and typical supply chain problem in both offline and
parts need to be coordinated among all the com- online commerce. Several other problems have
pany’s relevant department participants, as well been observed along the supply chain: Some
as with and among all relevant external partners. companies grapple with high inventory costs;
The procedures of supply chain management shipments of wrong products, materials, and
(SCM) must be considered when planning and parts occur frequently; and the cost to expedite
managing the order fulfillment process, which operations or shipments is high. The chance that
due to its complexity may have problems. such problems will occur in EC is often higher
because of the mismatch between standard sup-
SECTION 12.1 REVIEW QUESTIONS ply chain structures and processes and the special
1. Define order fulfillment and logistics. nature and requirements of EC. For example,
2. Compare traditional logistics with e-logistics. most manufacturers’ and distributors’ warehouses
3. List the nine activities of the order fulfillment are designed to ship large quantities to a set num-
process. ber of stores; they are not designed to optimally
pack and ship small orders to a large number of
customers’ doors. Improper inventory levels are
12.2 PROBLEMS IN ORDER typical in EC, as are poor delivery scheduling and
FULFILLMENT ALONG mixed-up shipments.
SUPPLY CHAINS

During the 2011 holiday season online sales Uncertainties in Demand

increased 15% from the previous year. Some
retailers were caught off guard (Hayes 2012). For Many problems along the EC supply chain stem
example, the large demand for some products from demand uncertainties and the difficulties
from BestBuy.com led to problems in fulfilling that ensue across the supply chain in trying to
orders made in November and December 2011. meet this uncertain demand. This is where
As a consequence, Best Buy was unable to fulfill demand forecasting comes into play. The major
many of these orders. The reason was that the goal of demand planning is to forecast at a very
supply chain management system was unable to detailed level the number of products of a certain
566 12 Order Fulfillment Along the Supply Chain

type that will be needed to meet the demand at use external logistics services rather than in-
specific locations at particular points or time house departments for these functions. These
intervals in the future. For instance, a virtual external logistics services are often called third-
retailer might want to estimate the number of party logistics suppliers (3PL), or logistics ser-
smartphones of a particular model that will be vice providers. Outsourcing logistics services can
needed to fulfill potential orders for a particular be expensive, and it requires more coordination
city or area of a city during the upcoming holiday and dependence on outsiders who may not be
season. reliable. For this reason, large virtual retailers
Usually, demand forecasts rest on statistical usually have their own physical warehouses and
(time series) estimates from historical patterns distribution systems. Other virtual retailers are
and trends in sales or order data. The estimates creating strategic alliances with logistics compa-
try to incorporate a number of factors in under- nies or with experienced mail-order companies
standing what produced these historical patterns that have their own logistics systems.
and trends so these factors can be taken into
account when making the estimates. Some of the
factors might include economic conditions, Inefficient Financial Flows
prices, seasonal adjustments, weather conditions,
estimates of consumer confidence, and the impact Note that supply chain problems and improve-
of promotions of various types. Obviously, ments refer not only to the flow of goods but also
anyone of these factors can change very quickly, to the flow of information and money. Money
as well as the fact that consumers tastes can flow includes invoicing, payment, collection, and
change quite radically, which is why demand so forth.
forecasting is as much an art as it is a science. In spite of the availability of computer-based
The problem is that demand planning is prob- systems, many suppliers, manufacturers, distrib-
ably the most critical planning process in the sup- utors and retailers rely on manual and paper-
ply chain because it determines many of the other based systems to conduct financial transactions.
processes in the chain. Among other things, it These inefficient financial processes not only
drives the plans of how many orders can be filled slow the flow of cash across the supply chain but
from inventory, how much a retailer will buy, halt the flow of goods and services and put the
how much manufacturers will need to build, what various partners at a competitive disadvantage.
raw materials are needed, how much factory To succeed in today’s global economy trading
capacity is needed, how much will have to be partners need to rely on automated systems to
shipped, and when and where it will have to be speed their financial transactions. For solutions to
shipped, and so forth. Inaccurate estimates of such problems, see Crossgate Inc. (2010).
demand ripple throughout the supply chain. This
is why the demand forecast should be conducted
frequently, and adjustments need to be made to Lack of Information Sharing
plans in collaboration among the business part-
ners along the supply chain. Companies attempt In today’s world the flow of information across
to achieve accurate demand forecasts by methods the supply chain is almost as critical as the flow
such as information sharing using collaborative of goods and services. Information systems sup-
commerce. port this flow, enabling communication and coor-
dination of the various players and systems in the
chain. Without these systems and the information
Inadequate Logistical Infrastructure sharing they support, the supply chain could not
exist or survive.
Pure play EC companies are likely to have more Virtually every world-class company has a
problems because they do not have a logistics variety of information systems designed to sup-
infrastructure already in place and are forced to port both supply chain planning and execution.
12.3 Solutions to Order Fulfillment Problems Along the Supply Chain 567

Included are some combination of integrated technologies facilitate most of these solutions.
capabilities designed to support network design, They also provide for automation of various
demand, supply, and logistics planning along with operations along the supply chain that usually
systems enabling supply, transportation, ware- improve its operation. In this section, we will dis-
housing, labor, and return logistics management. cuss some of the specific solutions to EC order
One of the most persistent order fulfillment fulfillment problems along the supply chain.
problems is the bullwhip effect. Basically, it refers
to the mismatch between the actual demand for
goods and the inventory supplied upstream in the Improvements in the Order-Taking
supply chain to meet the assumed demand. The Activity
mismatch results in excess inventory and safety
stock that is used as a buffer against underesti- One way to excel in order fulfillment is to
mated demand. In practice the mismatch grows as improve the order-taking activity and its links to
you move up the chain from the retailer to the dis- fulfillment and logistics. Order taking can be
tributor to the supplier to the manufacturer so that done via e-mail or on a webstore and it may
variability in inventory and safety stock increases be automated. For example, in B2B, orders can
along the way. One way to reduce the mismatch is be generated and transmitted automatically to
to ensure that information and, thus visibility, suppliers when inventory levels fall below a cer-
about demand flows to all the parties involved, so tain threshold. It is a part of the vendor-managed
that there is only “one version of the truth” instead inventory (VMI) strategy described in Chapter 5.
of each party either producing its own estimate The result is a fast, inexpensive, and more accu-
from different data sources or only working with rate (no need to rekey data) order-taking process.
the previous link in the chain, rather than all par- In B2C, Web-based ordering using electronic
ties relying on common data that is close to the forms expedites the process, making it more
actual point of sale. accurate (e.g., automated processes can check the
The effect is described in Online File W12.2. input data and provide instant feedback), and
reduces processing costs for sellers. When EC
SECTION 12.2 REVIEW QUESTIONS order taking can interface or integrate with a
1. List some problems along the EC supply company’s back-office system, it shortens cycle
chain. times and eliminates errors.
2. Explain how uncertainties create order fulfill- Order-taking improvements also can take
ment problems. List some of these problems. place within an organization, for example, when
3. What problems may exist in financial supply a manufacturer orders parts from its own ware-
chains? house. When delivery of such parts runs smoothly,
4. Describe the role of 3PLs. it minimizes disruptions to the manufacturing
5. Why is information sharing needed along the process, reducing losses from downtime.
end-to-end supply chain?

Warehousing and Inventory

12.3 SOLUTIONS TO ORDER Management Improvements
FULFILLMENT PROBLEMS
ALONG THE SUPPLY CHAIN A popular EC inventory management solution is
a warehouse management system (WMS). On
Many EC logistics problems are generic; they the surface, WMS refers to a software system that
can be found in the non-Internet world as well. helps in managing warehouses. Behind the
Therefore, many of the solutions that have been scenes, any market-leading WMS provides:
developed for these problems in brick-and-mortar • Inbound functions such as yard manage-
companies also work for e-tailers. IT and EC ment, appointment scheduling, multi-method
568 12 Order Fulfillment Along the Supply Chain

receiving, cross-docking, put-to-store, quality Figure 12.2. Notice that in a hub structure
assurance, staging, and put-away connection between supply chain partners and
• Inventory functions such as inventory visi- elements is much shorter. Also, coordination and
bility, lot-serial control, multi-level holds, control is done at the center of the hub, making
counts, replenishments, value-added services the management more efficient, and the structure
(VAS) processing, work order processing, increases visibility. Long supply chains are usu-
internationalization, and slotting ally more susceptible to problems. Also, the hub
• Resource management such as dynamic pick structure management is usually fully digital,
location assignment, equipment utilization, making order fulfillment faster, less expensive,
facility utilization, task management, automa- and less problematic.
tion interfaces, and workforce management
• Outbound functions such as shipment order
management, multi-method order picking, Speeding Up Deliveries: From Same
retail in-store and dark-store picking and pro- Day to a Few Minutes
cessing of e-commerce orders, cartonization,
shipping and parcel manifesting, sequenced As discussed earlier, a major success factor in EC
staging and loading, and compliance of ship- is the speed within which shoppers receive their
ping documents. orders. And indeed, the competition for fast
• 3PL/divisional support such as multi-client delivery is intensifying.
architecture, client billing, client-based pro- FedEx initiated the concept of “next day”
cess modeling, cross-client optimization, delivery in 1973. It was a revolution in door-to-
client visibility and reporting door logistics. A few years later, FedEx, intro-
See, for example, jda.com, for a description duced its “next-morning delivery” service. In the
of the detailed capabilities of a WMS. digital age, however, even the next morning may
A WMS is useful in reducing inventories and not be fast enough. Today, we talk about same-
decreasing the number of out-of-stock incidents. day delivery and even delivery within an hour.
Such systems also are useful in maintaining an Deliveries of urgent materials to and from hospi-
inventory of repair items so repairs can be expe- tals, shipping auto parts to car service shops, and
dited; picking items out of storage bins in the delivering medicine to patients are additional
warehouse; receiving items at the receiving docks; examples of such a service. The opening case to
and automating the warehouse operations. For this chapter described Amazon.com’s recent
example, introducing a make-to-order production implementation of their “same-day” delivery ser-
process and providing timely and accurate vice. Two other newcomers to this area are eFul-
demand information to suppliers can minimize fillment Service (efulfillmentservice.com) and
inventories and out-of-stock incidents. In some OneWorld Direct (owd.com). These companies
instances, the ultimate inventory improvement is have created networks for the rapid distribution
to have no inventory at all; for products that can of products, mostly EC-related ones. They offer
be digitized (e.g., software), order fulfillment can national distribution systems across the United
be instantaneous and can eliminate the need for States in collaboration with shipping companies,
inventory. such as FedEx and UPS.
Delivering groceries is another area where
speed is important, as discussed in Chapter 3.
Changing the Structure and Process Quick pizza deliveries have been available for a
of the Supply Chain long time (e.g., Domino’s Pizza). Today, many
pizza orders can be placed online. Also, many
An efficient solution to many supply chain prob- restaurants deliver food to customers who order
lems is to change the supply chain structure online. Examples of this service can be found
from a linear to a hub structure as illustrated in at gourmetdinnerservice.com.au and the
12.3 Solutions to Order Fulfillment Problems Along the Supply Chain 569

Figure 12.2 Changes in the supply chain

GrubHub company. Some companies even offer perishable food is to be transported. Buyers
aggregating supply services, processing orders may need to be home at certain times to accept
from several restaurants and then making deliver- the deliveries.
ies (e.g., dialadinner.com.hk in Hong Kong).
Supermarket deliveries are often done same Delivery by Drones
day. Arranging and coordinating such deliver- Ideally, e-tailers want to deliver faster than you
ies may be difficult, especially when fresh or can get products by going to a store and buying
570 12 Order Fulfillment Along the Supply Chain

then. The futuristic solution is delivery of be managed by one of many freight forwarders
packages by drones in minutes. A dream? such as A & A Contract Customs Brokers, a
Amazon.com believes that the dream will come company that helps other companies find “for-
true in 2015. However, this may take much lon- warders.” Forwarders help prepare goods for
ger due to legal, technological (sensors’ capabili- shipping and work with carriers to determine
ties) and other constraints, see Black (2014). the optimal way to ship. Forwarders can also
find the least expensive prices on air carriers,
Example: Amazon Prime Air and the carriers bid to fill the space with for-
One day we will see a fleet of Prime Air vehicles in warders’ goods that need to be shipped.
the sky, delivering packages to customers’ doors.
For how the delivery is envisioned see the video Example
and text at amazon.com/b?node=8037720011. SkyMall (skymall.com; a subsidiary of Gemstar-
The technology is available today, the cost is TV Guide International), is a retailer that sells
declining and the Federal Aviation Administration from catalogs on airplanes, over the Internet, and
is working on the regulations. According to a lob- by mail order. It relies on its suppliers to fill the
bying registration filing, Amazon Prime Air hired orders. For small suppliers that do not handle
Akin Gump Strauss Hauer & Feld to lobby regard- their own shipments and for international ship-
ing testing and operation of unmanned aerial ments, SkyMall contracts the appropriate distri-
vehicles. bution centers owned by Sykes Enterprises. Note:
Amazon is not the only company that banks The company went out of business in 2015.
on delivery by drones. For example, QuiQui is a
startup that plans to deliver medicine in the San Instead of a joint venture or equity ownership
Francisco Bay Area with delivery time of with partners, many companies simply outsource
8–12 minutes (see Segall 2014). logistics with comprehensive logistics service
providers like UPS and FedEx. Their services
Same Day Delivery cover all forms of EC including B2C, B2B, and
We covered this topic in Chapter 3 as it related to G2B. See Case 12.1 for a description of the broad
groceries. Also cited there is the increased com- EC services that UPS provides. One advantage of
petition. In addition to Amazon Fresh many other outsourcing is that it is easy to change the logis-
companies are active in the market. Notable are tics provider. Outsourcing is especially appealing
Instacart, Postmates, and Google Express (see to small companies.
Pisani 2014). But, same day delivery does not
only apply to groceries. Amazon is starting same
day delivery of everything in several large cities.
Google Shopping Express is active too, and so CASE 12.1: UPS PROVIDES BROAD
are eBay, Uber Rush and others (Bowman 2014). EC SERVICES
For one hour delivery see Halkias (2015).
In 2013 United Parcel Service (ups.com) deliv-
ered close to 17 million packages with the help
Partnering Efforts and Outsourcing of over 395,000 employees, each day, all over
Logistics the globe, using a network of hundreds of planes
and thousands of vans. This represents a volume
An effective way to solve order fulfillment prob- of 4.3 billion packages per year, an increase of
lems is for an organization to partner with other over a 4% increase in volume from the prior
companies. For example, several EC companies year, due in large part to increases in deliveries
have partnered with UPS or FedEx. for EC. UPS is the undisputed leader in packages
Logistics-related partnerships can take delivery worldwide. Towards this end, they
many forms. For example, marketplaces may provide customers with tools and applications
Case 12.1: UPS Provides Broad EC Services 571

for tracking packages, examining shipping histo- process and handle the orders. In response, UPS
ries, figuring time-in-transit, and verifying on is focusing on:
time arrival. • Improved Forecasts. Online retail is growing
In their annual financial reports UPS describes rapidly – faster than many companies have antic-
their business as being divided into three seg- ipated. The methods used for forecasting demand
ments: U.S. Domestic Package, International and the impacts of this demand upstream on the
Package, and Supply Chain and Freight. For the supply chain no longer work in this environ-
past few years, these segments have represented ment. Greater collaboration is required with
around 62%, 22%, and 16%, respectively. While large customers in order to estimate the impact
package delivery represents the major part of of evolving consumer behavior and promotions
their business, they also provide expertise, infra- (like guaranteed free delivery).
structure, and technology for managing global • Network Throughput. Investments are required
logistics services. These logistics services include to update the infrastructure of a number of
“transportation, distribution, forwarding, ground, UPS’ distribution centers and to improve the
ocean and air freight, brokerage and financing” routing capabilities of their delivery systems.
(UPS 2014). In essence, for customers who uti- Increased automation is critical to the
lize these services, UPS runs major parts of their improvement of the distribution centers, while
supply chains. the rollout of their On-Road Integrated
A major component of their Supply Chain and Optimization and Navigation (ORION) sys-
Freight business segment is their worldwide net- tem is key to improved routing. ORION opti-
work of distribution centers. For example, in mizes the routes taken by delivery vehicles
China they have over 130 centers for supporting resulting in shortened overall distances for a
the distribution of goods to customers in close to given delivery cycle, improved delivery times,
90 cities in the country. The centers manage and more efficient fuel consumption (see
receiving, storage, order processing, and ship- Konrad 2013). It also supports better tracking
ment. The centers are also used to provide post- of packages.
sales services including planning, fulfillment, • Shipment Visibility. With the growth of their
testing, reporting, refurbishing, and reverse logis- Supply Chain and Freight business, there has
tics for critical parts. These latter capabilities, for been a substantial increase in the number of
example, are utilized by the manufacturers and truck trailers that customers leave at their dis-
suppliers of automobile parts. tribution centers. UPS has limited visibility to
the contents in these trailers.
• Improved Communication. Better commu-
Even Experts Can Encounter nication between shippers and receivers is
Problems needed during peak periods and when disrup-
tion occur in the network. Better communica-
As noted in Case 12.1, in spite of UPS’ supply tions will enable their customers to not only
chain expertise and infrastructure, they were respond to disruptions but also to proactively
still unable to handle the peak in demand and plan for the peaks.
the surge in last minute orders experienced dur-
ing the 2013 holiday season. The overall volume
of orders throughout December, as well as the Impact of Ship from Store
number of last minute orders spurred by retail-
ers guaranteeing next day delivery, even for Many of the EC orders that UPS handles involve
orders placed at 11 PM on Christmas Eve, far shipments that travel long distances from one of
exceeded UPS’s projections and, consequently, their or the retailer’s distribution center to the
the ability of their supply chain networks to customer. Obviously, this results in a higher cost
572 12 Order Fulfillment Along the Supply Chain

to either the customer or the retailer or both. is using them on a large scale in EC. According
Although UPS has adjusted their shipment costs to Lobosco (2014) Amazon planned to use 10,000
so that the margin percentage is essentially the robots in its warehouses by the end of 2014. You
same regardless of distance, longer distances can watch the video titled “Robot Army Helps
mean higher revenues. Run Warehouse” (3:10 minutes), cited by
In an effort to reduce shipping costs, some of Lobosco (2014), to see what the robots are doing.
the specialty retailers like the Gap, are servicing In 2015 Amazon was using over 20,000 robots.
online orders by shipping directly from the store
to the customer (Nilsson 2013). Similarly, larger
retailers, who have been shipping directly from Integrated Global Logistics Program
their stores for quite some time, have substan-
tially increased these shipments. For example, in An increase in global trading created a need for
the past year Walmart has doubled the number of an effective global logistics system. Order fulfill-
their stores using direct from store shipments. In ment problems described earlier tend to be even
essence, the store nearest the customer becomes larger in longer supply chains that cross country
a distribution center. While UPS and their main borders. The number of partners in such situa-
competitor FedEx are still used for a majority of tions is usually larger than in domestic logistics
these deliveries, the fact that the distances are (e.g., customs brokers, global carriers), and so is
shorter means that their revenues are also the need for coordination, communication, and
reduced. collaboration. Furthermore, such systems require
In the short run this is not likely to have a a high level of security, especially when the
major impact on UPS’s overall revenues. However, Internet is the centric technology platform.
over the next few years, as alternative EC distri- Integrating separate segments of the supply chain
bution methods emerge (e.g., order online and can be very beneficial for minimizing problems
ship from store and pick up in store), and as in long global chains.
Amazon.com’s distribution network expands (see
opening case), UPS and FedEx will have to come
up with alternative strategies to address the Order Fulfillment in Make-to-Order
potential revenue impacts. and Mass Customization

Sources: Based on Nilsson (2013), Konrad (2013), As you may recall from Chapter 1, one of the
UPS (2014), and ups.com (accessed April 2015). advantages of EC is the ability to easily custom-
ize products and personalize services. Although
Questions taking customized orders is easily done online,
1. What sort of outsourcing services does UPS the fulfillment of such orders may not be simple.
provide besides package delivery? Mass production enabled companies to reduce
2. Why would a shipper, such as UPS, expand to the price per unit. Customization is usually
other logistics services? expensive, since each item must be handled sepa-
3. What changes is UPS contemplating to avoid rately. Customization also requires time, espe-
the problems encountered during the 2013 cially for large products like cars. However,
holiday season? consumers usually want customized products to
4. Why does “ship from store” EC delivery rep- be delivered in a timely fashion at price points
resent a threat to UPS’ business? that are not much higher than those of a similar
product that is mass produced. So, the question
Using Robots in Warehouses is: how does a supplier, manufacturer or retailer
Robots have been used in warehouses to fetch do this at a reasonable cost to themselves and in a
parts stored in bins for many years. What is new reasonable time for their customers?
Case 12.1: UPS Provides Broad EC Services 573

Fulfilling Orders ing customers’ trust and loyalty. Some time ago,
Dell was a pioneer in providing customized prod- it was found that the absence of a good return
ucts to end consumers in a timely and cost effec- mechanism was the number two reason for shop-
tive fashion. They were able to do this using mass per reluctance to buy online. A good return pol-
produced components that were assembled to icy is a must in EC.
meet the customized orders of their customers. Dealing with returns is a major logistics prob-
This approach has been adopted by many other lem for EC merchants. Several options for han-
manufacturers. Most customized cars, shoes, dling returns are:
toys, textbooks, and wedding rings are made this
way. Of course, when you talk about millions of
computers at Dell, the supply chain, the logistics,
and the delivery of components become critical • Return the item to the place of pur-
(see EC Case 12.2 p. 578 for a discussion of Dell chase. This is easy to do with a purchase
supply chain practices). You also need to closely from a brick-and-mortar store, but not a
collaborate with your suppliers. In addition, you virtual one. To return a product to a vir-
need to have flexible production lines where tual store, a customer needs to get
changes are made quickly and inexpensively authorization, pack everything up, pay
(e.g., painting cars at Toyota), and you need tools to ship it back, insure it, and wait up to
that enable quick and not-so-expensive changes two billing cycles for a credit to show up
(usually driven by computerized systems). This on his or her credit card statement. The
is usually a part of intelligent factories or produc- buyer is not happy and neither is the
tion lines. seller, who must unpack, check the
For sources on intelligent factories and mass paperwork, and resell the item, usually
customization, see the International Journal of at a loss. This solution is workable only
Mass Customization and Smart Factory KL if the number of returns is small or the
(smartfactory.eu). merchandise is expensive (e.g., Blue Nile).
Here, we present examples of how customiza- Some vendors, (e.g., Amazon.com),
tion is accomplished by these methods. enable customers to print prepaid UPS
or USPS shipping labels that make
Example 1: Intelligent Factories returns easier for the customers.
These factories work on totally integrated auto- • Separate the logistics of returns from
mation that enables mass customization to be the logistics of delivery. With this option,
executed at a reasonable cost and speed. Major returns are shipped to an independent
developers are Siemens AG, IBM, and General returns unit and are handled separately.
Electric. This solution may be more efficient from
the seller’s point of view, but it does not
Example 2: Distributed Mass Customization ease the return process for the buyer.
Etsy (etsy.com) is a market maker for handmade • Completely outsource returns. Several
goods, many of which are customized and sold outsourcers, including UPS and FedEx,
online. Thousands of small producers custom provide logistics services for returns.
produce on demand. Etsy aggregates them into The services deal not only with delivery
one electronic marketplace. and returns but also with the entire
logistics process. FedEx, for example,
offers several options for returning
Handling Returns (Reverse Logistics) goods.
• Allow the customer to physically drop
Allowing for the return of defective or unsatisfac- the returned item at a collection sta-
tory merchandise and providing for product tion or at a physical store of the same
exchanges or refunds, are necessary to maintain-
574 12 Order Fulfillment Along the Supply Chain

Some of the major differences in order

vendor. Offer customers locations (such management capabilities were pinpointed in
as a convenience store or the UPS Store) another survey sponsored in 2013 by Honeywell
where they can drop off returns. In Asia and conducted by Peerless Research Group
and Australia, returns are accepted in (2013) for Logistics Management and Supply
convenience stores and at gas stations. Chain Management Review. Based on responses
For example, BP Australia Ltd. (gaso- from 469 supply chain managers, most of whom
line service stations) teamed up with were responsible for either B2B or a combination
wishlist.com.au, and Caltex Australia of B2B and B2C EC systems across a range of
is accepting returns at the convenience industries, the survey revealed that:
stores connected to its gasoline stations. • The most important missions for their systems
The accepting stores may offer in-store were increasing the volume and speed of ful-
computers for ordering and may also fillment while reducing costs per order,
offer payment options, as at Japanese increasing profitability, and improving cus-
7-Elevens (7dream.com). In Taiwan tomer service.
and some other countries, you can order • Many of the inefficiencies and increased costs
merchandise (e.g., books), pay, pick up in order fulfillment were due to increased
the item ordered, and return unwanted transportation, packaging, and materials costs.
items, at a 7-Eleven store. Click-and- • The keys to addressing the inefficiencies
mortar stores usually allow customers to and costs rest with improved supply chain
return merchandise that was ordered software applications, re-engineered (fulfill-
online to their physical stores (e.g., ment) operations, and adoption of supply
walmart.com and eddiebauer.com). chain analytics.
• Auction the returned items. This option B2B fulfillment tends to be more inefficient
can go hand-in-hand with any of the pre- than B2C because it is usually more complex.
vious solutions. Typically, the shipments are larger, there are mul-
tiple distribution channels, the shipment fre-
quency is more varied, the breadth of the carrier
services is more uneven, there are fewer EC car-
For strategy, guidelines, and other information rier offerings, and the EC transaction paths are
on returns, see The Reverse Logistics Executive much more complicated. The types of improve-
Council. ments in applications and re-engineering of
processes needed to resolve these sorts of com-
plications revolve around the automation of
Order Fulfillment in B2B physical systems, as well as the use of business
process management (BPM) software to auto-
According to recent forecasts by Forrester mate processes.
Research (reported by Sheldon and Hoar 2013),
online revenues for B2B EC in 2013 were sub- Using E-Marketplaces and Exchanges
stantially higher than online revenues for B2C to Ease Order Fulfillment Problems
EC. The figures were close to $570 billion versus in B2B
$250 billion, respectively. In spite of the sizeable In Chapter 4, we introduced a variety of
difference, B2B EC is far less developed than e-marketplaces and exchanges. One of the major
B2C EC. The differences are found not only in objectives of these entities is to improve the opera-
the front-end experience but also in the back- tion of the B2B supply chain. Let’s see how this
office functionality including information man- works with different business models.
agement, Web content management and order • A company-centric marketplace can solve
management. several supply chain problems. For example,
Case 12.1: UPS Provides Broad EC Services 575

CSX Technology developed an extranet-based logistics. Such an interface, or even integration,

EC system for tracking cross-country train shortens cycle time and eliminates errors.
shipments as part of its supply chain initiative, • Managing risk to avoid supply chain break-
and was able to effectively identify bottle- down can be done in several ways. Carrying
necks and more accurately forecast demand. additional inventories is effective against the
• Using an extranet, Toshiba America provides risk of stock-outs, and hence, poor customer
an ordering system for its dealers to buy service, but it can be expensive. Also, in cer-
replacement parts for Toshiba’s products. The tain cases the risk increases because products
system smooths the supply chain and delivers may become obsolete. (Managing inventories
better customer service. was described in Chapter 4.)
• HighJump Software suggested taking into • Inventories can be minimized by introducing
account a number of key elements for optimal a build-to-order manufacturing process as
order fulfillment including the automation of well as by providing timely and accurate
picking, packing and shipping, the transfor- information to suppliers. By allowing busi-
mation of paper-based processes, and the ness partners to electronically track in route
inclusion of sales and marketing input into orders and production activities, inventory
various supply chain processes. management can be improved and inventory
For additional discussion on how fulfillment is levels and the expense of inventory manage-
done in B2B, see fedex.com/us/supply-chain/ ment can be minimized. Inventories can be
services/fulfillment-services and Demery (2012). better managed if we know exactly where
parts and materials are at any given time
Order Fulfillment in Services (e.g., by using RFID). Retailers’ inventories
Thus far, we have concentrated on order fulfill- can be managed electronically by their
ment with physical products. Fulfilling service suppliers.
orders (e.g., buy or sell stocks, process insurance • Self-service can reduce supply chain problems
claims) may involve additional information pro- and costs. Some activities can be done by cus-
cessing, which requires more sophisticated EC tomers, business partners, or employees. For
systems. example, customers can self-track the status
of their orders (e.g., at FedEx, UPS, USPS,
Other Solutions to Supply Chain etc.); using FAQs, customers and business
Problems partners may solve small problems by them-
• Visibility increases along the supply chain. It selves. Customers can self-configure details of
is critical to know where materials and parts orders (e.g., for a computer at HP, Dell, and
are at any given time. This is referred to as vis- Apple), and finally, employees can update per-
ibility. Such knowledge can help in solving sonal data online.
problems such as delays, combining ship- • Collaboration among members of the supply
ments, and more. Visibility is provided by chain can shorten cycle times, minimize
several tools, such as bar codes, RFID, collab- delays and work interruptions, lower invento-
orative devices, and collaborative portals that ries, and lower administrative costs. A variety
provide access to information required to of tools exists ranging from collaborative hubs
manage various aspects of the supply chain. and networks to collaborative planning.
Visibility enables the efficient coordination
of supply chain activities in spite of rapid
changes in the market. Innovative E-Fulfillment Strategies
• Order fulfillment can become instant if the
products can be digitized (e.g., software). In Several innovative e-fulfillment strategies exist.
other cases, EC order taking interfaces with For example, supply chain partners can transmit
the company’s back-office systems, including information flows and hold off shipping physical
576 12 Order Fulfillment Along the Supply Chain

goods until a point in time when they can make components and finished products required to fill
more direct shipments. An example of logistics the various customer orders.
postponement is merge-in-transit. This system enabled Dell to handle the over-
Merge-in-transit is a model in which compo- whelming majority of their purchase orders
nents for a product need to arrive from two or online through an Internet portal. The portal was
more physical locations. For example, in ship- used by suppliers to view the requirements of
ping a desktop PC, the monitor may come from various orders and to work with Dell on fore-
the East Coast of the United States and the CPU casted requirements and delivery dates. In this
from the West Coast. Instead of shipping the way, only those components required to fulfill
components to a central location and then ship- current orders were shipped to Dell’s factories.
ping both together to the customer, the compo- The result was a substantial reduction in the flow
nents are shipped directly to the customer and of parts, the warehouse space required to manage
merged into one shipment by the local deliverer the parts, and idle inventory. Compared to other
(so the customer gets all the parts in one deliv- competitors, Dell had less than 4 days of inven-
ery), reducing unnecessary transportation. tory at any given time, while their competitors
One of the most innovative logistics systems is had more than 30 days of inventory on hand.
that of Dell Computers, as described in Case 12.2. In both the B2C and B2B world of computer
electronics, components and models have a short
lifespan. Today’s computer models are rapidly
CASE 12.2: DELL’S WORLD-CLASS becoming obsolete. Dell’s automated system
SUPPLY CHAIN AND ORDER enabled them to avoid this problem, as well as
FULFILLMENT SYSTEM helping their suppliers respond rapidly to changing
demand.
Since 2004, AMR Research, now part of Gartner,
has been publishing an annual Supply Chain Top
25 Ranking. The ranking is based on a combined Segmented Supply Chain
assessment from Gartner’s supply chain experts
along with votes from external supply chain peers. In 2008, things began to change for Dell. Dell
Since its inception, Dell has appeared on this list found that their online configure-to-order system
every year, reaching as high as number 2 in 2011. was too inflexible and resulted in configurations
that were too expensive for its other, faster grow-
ing business segments – their retail stores, enter-
Direct-to-Consumer prise customers, and high-volume consumer
and Configure-to-Order products. In each case, fewer, cheaper configura-
tions were required. Because of the mismatch
One of the key reasons for their continued high between their supply chain model and the expec-
ranking has been the quality of their logistics and tations of their newer customers in newer chan-
order fulfillment systems. Dell was a pioneer in nels, Dell’s competitors were able capture
the direct-to-order consumer business model, as significant market share. In response, Dell
well as the configure-to-order method of manu- decided to transform its supply chain into a seg-
facturing. For much of the time period between mented model with different policies for different
2004 and present day, this business model and types of customers. The result was four supply
manufacturing method served them well. Dell chain segments, each focused on a different type
was able to automate the order taking and fulfill- of customer. The four segments are displayed
ment processes, enabling them to coordinate in Table 12.2 along with their distinguishing
with their suppliers to produce the specific characteristics.
Case 12.2: Dell’s World-Class Supply Chain and Order Fulfillment System 577

Table 12.2 Dell’s segmented supply chain

Build-to-order: Build-to-spec: built in short
built when Build-to-plan: built Build-to-stock: built time period according to
SC production configured order in anticipation of and stocked in corporate specs with no
policy received forecasted demand anticipation of demand inventory stocks
SC segment Online Retail Online Corporate
Volume Low High High Med-high
Product batch One Large Large Med-large
size
Finished goods No Yes, at retailer Yes, at Dell No
inventory
Lead time Short Long Long Long
Source: Based on Simchi-Levi et al. (2012) and Thomas (2012)

The Results these the same companies ranked 1 through

3 in 2012?
Dell’s shift to a segmented supply chain substan- 2. What type of supply chain did Dell originally
tially impacted the efficiencies and effectiveness have? What were its benefits?
of their supply chain. Some of the major benefits 3. Why did Dell encounter supply chain prob-
included: lems around 2008?
• Improved product availability 4. What is a segmented supply chain?
• Reduced order-to-delivery times 5. Describe Dell’s segmented supply chain.
• Fewer configurations required to meet cus-
tomer demand
• Improved forecast accuracy Integration and Enterprise Resource
• Reduced transportation and manufacturing Planning
costs.
Up until 2011, these improvements served If you review Figure 12.1 (p. 565) for the order
Dell’s bottom line well. In 2011 they were ranked fulfillment process, you will notice that certain
number 2 on the Supply Chain Top 25; in 2012 activities involve interfacing with other informa-
they were number 4, and in 2013, number 11. tion systems, such as finance, inventory manage-
The shift in rankings was primarily a function of ment, production schedule, vendor and customer
the declining revenues in their PC business and contact, and logistics. Most of these interfaces are
had little to do with the performance of their sup- internal, but some are external (most with suppli-
ply chain. Dell’s overall business model was built ers and customers). For the sake of effectiveness
on providing PC systems for businesses and con- and efficiency, such interfaces need to be done
sumers. This business has been severely impacted quickly and without errors. The fewer manual
by the rapid increase in smartphones and tablets, interfaces we need to make, the better. How won-
which has eroded the demand for PCs. It will take derful it would be if we used only one interface,
more than improvements in the supply chain to and if it was automated! This is exactly what an
address the declining demand. enterprise resource planning (ERP) system does.
Sources: Based on Hofman et al. (2013),
Simchi-Levi et al. (2012), and Thomas (2012). The Supply Chains of Tomorrow
According to a comprehensive study done at
Questions MIT, tomorrow’s supply chains will have to
1. If Dell was ranked number 11 in 2013, what deliver various degrees six outcomes (reported
companies were ranked 1 through 3? Were by Melnyk et al. 2010), each with a corresponding
578 12 Order Fulfillment Along the Supply Chain

set of specific design traits. The outcomes that much more information. Also, they can be read
drive the supply chains are: from a longer distance (up to 50 feet).
1. Monitoring cost, quality, and on-time delivery Theoretically, RFID can be utilized and read
2. Safety and security of goods delivered in many places along the supply chain, as illus-
3. Eliminating waste, reducing pollution, improv- trated in Figure 12.3. Over the long run, RFID
ing the environment tags will be attached to most items flowing
4. Resilience, quick recovery from disruptions through the supply chain and tracked and moni-
of all kinds tored at most of the places depicted in
5. Responsiveness – change quickly to adapt to Figure 12.3. To date, cost has been a major
changing conditions inhibitor to the uptake of RFID technology.
6. Innovation – using the supply chain as a However, costs are coming down to the point
source of new processes and products, both where companies will be willing to invest in
internally and with business partners RFID because they can be more certain of
These outcomes will assure effective and effi- achieving an ROI on their RFID investments.
cient order fulfillment. Even if costs are reasonable, organizations still
need to learn how to effectively use RFID tech-
SECTION 12.3 REVIEW QUESTIONS nologies with their back-office systems and how
1. List the various order-taking solutions. to redesign and retool their business processes
2. List solutions for improved delivery. so they can accrue solid business benefits from
3. Describe same-day shipments. these technologies.
4. Describe some innovative e-strategies for Given these developments, what effect will
order fulfillment. RFID have on supply chains? Let’s look at
5. Describe how to effectively manage the return Figure 12.4, which shows the relationship
of items. between a retailer (Walmart), a manufacturer
6. Describe issues in B2B fulfillment. (such as P&G), and P&G’s suppliers. Note that
7. List three outcomes of tomorrow’s supply chain. the tags are read as merchandise travels from the
supplier to the retailer (steps 1 and 2). The RFID
transmits real-time information on the location of
12.4 RFID AND CPFR AS KEY the merchandise. Steps 3 through 6 show the use
ENABLERS IN SUPPLY of the RFID at the retailer, mainly to confirm
CHAIN MANAGEMENT arrivals (step 3) and to locate merchandise inside
the company, control inventory, prevent theft, and
Two major technologies were found to be effec- expedite processing of relevant information
tive for improving and reducing problems along (steps 4 through 6). It is no longer necessary to
the end-to-end supply chains: RFID and CPFR. count inventories, and all business partners are
able to view inventory information in real time.
This transparency can go several tiers down the
The Essentials of RFID supply chain. Additional applications, such as
rapid checkout, which eliminates the need to scan
Radio frequency identification (RFID) is a tag each item, will be provided by RFID in the future.
technology in which RFID (electronic) tags are According to Reyes (2011), RFID can help
attached to or embedded in objects (including improve supply chain visibility, asset visibility
people) and employ wireless radio waves to com- and capital goods tracking, returnable asset track-
municate with RFID readers so that the objects ing, work-in-process tracking, as well as manag-
can be identified, located, or can transmit data. ing internal supply chains. Examples of several
Tags are similar to barcodes, but they contain applications are presented next.
12.4 RFID and CPFR as Key Enablers in Supply Chain Management 579

Figure 12.3 Digital supply chains (Source: Intel, “Building the Digital Supply Chain: An Intel Perspective.” Intel
Solutions White Paper, January 2005, Figure 5, p. 9. Reprinted with permission from Intel Corporation)

RFID Applications in the Supply cool state and in ensuring timely delivery.
Chain Around the Globe Starbucks is requiring its distributors to employ
RFID tags to measure the temperature in the
Many potential and actual applications exist in delivery trucks. These tags are programmed to
enterprises using RFID (e.g., see RFID Journal). record the temperature inside the truck every few
The following are examples of how RFID is minutes, and on return to the depot, this tempera-
used in the supply chain. For a comprehensive ture data can be downloaded and analyzed care-
review see Reyes (2011) and the RFID Journal fully. If there are unacceptable readings (e.g., the
(rfidjournal.com/case-studies). temperature is deemed to have risen too high),
efforts are made to determine the cause and rem-
RFID at Starbucks edy the problem. This can then cause a redesign
As Starbucks expands its range of fresh foods of critical business processes with regard to the
(such as salads, sandwiches, and the like) avail- transportation and handling of food. As RFID
able at its stores, the complexity and demands of technology matures, it is conceivable that in the
managing this supply chain increases. Keeping future, the tags themselves will be able to detect
the food fresh depends on keeping it at a steady variations in temperature and send a signal to a
580 12 Order Fulfillment Along the Supply Chain

Figure 12.4 RFID at Walmart and its suppliers: the seven-step process (Source: Drawn by E. Turban)

thermostat to activate refrigeration fans within the robust tag. Furthermore, the tags need to last
truck. For details, see Xue (2010). about five years in order for the application to be
financially viable.
RFID at Deutsche Post (Germany) Deutsche Post developed a custom tag and
Deutsche Post owns six million shipping con- RFID reader, and uses specialized software in
tainers that it uses to hold and transport about this innovative application. Several other post
70 million letters and other items that pass offices around the world use RFID (e.g., Canada).
through its distribution centers daily. In order to
process these crates, Deutsche Post prints in RFID at Atlantic Beef Products (Ontario,
excess of 500 million thick paper labels, all of Canada)
which are thrown away after a single use. It was Cow’s ears are tagged with RFID tags. After a
environmental concerns, rather than purely eco- cow is slaughtered, its ear tags are scanned for
nomic ones, that drove Deutsche Post’s RFID food traceability. The carcass goes onto two leg
initiative. hooks, each equipped with an RFID chip. They
Deutsche Post uses passive RFID tags with a are synced to each animal’s database record. The
bi-stable display, meaning that the text displayed RFIDs replace barcodes, which could get con-
remains on-screen after the power is removed taminated with E. coli on the slaughter house.
and does not change until power is restored and The RFID helps track the movement of each cow
the text is rewritten by an RFID interrogator. and the meat produced at any time. The system
Tags on the crates must be readable from all won a gold medal from the Canadian IT organi-
angles and in all types of weather, requiring a zation. For details, see Makepolo (2014).
Case 12.3: Stanley Black & Decker’s Collaborative Success with Lowe’s and Home Depot 581

Collaborative Planning, Forecasting, use outside the CPG arena is not widespread. As
and Replenishment Jakovljevic (2010) highlights, the gap between
reality and hype is attributable to a number of
As you may recall, a major problem in order factors, including:
fulfillment is the demand forecast. A related • There is a general reluctance and lack of trust
problem is the bullwhip effect. A possible solu- among trading partners to share data.
tion to both problems is CPFR. • The overall approach is complicated and
Collaborative planning, forecasting, and involves a number of steps and processes. This
replenishment (CPFR) refers to the practice of makes it difficult to start and maintain the
suppliers, manufacturers, and retailers collabo- intertwined processes.
rating on the planning and forecasting of demand • The approach overlooks the fact that the dif-
so that the supply of goods and services matches ferent parties have different goals and objec-
customer demand at the retailer’s shelf. The goal tives. As a result, they tend to focus on those
of CPFR is to minimize the inefficiencies in the parts of the approach that directly impact their
supply chain that result from the mismatch of goals and ignore those parts of the approach
supply and demand, both in the amount of goods that don’t.
that flow as well as in the timing of the flow. • Existing technologies are incapable of han-
Large manufacturers of consumer goods, such as dling the breadth of processes and/or the vol-
P&G, have superb supply chains resulting from umes of data required to support the required
their use of CPFR. planning, forecasting, and replenishment.
For the essentials of CPFR “Google Images of Since 2012, a special Voluntary Interindustry
CPFR model.” This figure is based on the guide- Commerce Solutions (VICS) advisory commit-
lines originally conceived and approved by the tee (VICS 2013) has been focusing on one of the
Voluntary Interindustry Commerce Solutions key elements of CPFR – store-level Distribution
(VICS) committee in 1998. The guidelines pre- Resource Planning (DRP). The use and benefits
scribe a cyclical process in which sellers, buyers, of DRP are discussed in EC Case 12.3.
and end customers are considered. The process
starts with strategy and planning, followed by
demand and supply management, which results CASE 12.3: STANLEY BLACK &
in execution. The results are analyzed, leading to DECKER’S COLLABORATIVE
a reexamination of the strategy. SUCCESS WITH LOWE’S AND HOME
CPFR can be used with company-centric B2B DEPOT
and with sell-side or buy-side marketplaces. The
major benefits that follow from CPFR include: In today’s retail world, consumers are in the driver’s
faster adjustments to consumer demand; more seat. They expect a “seamless” experience across
precise sales forecasts; reduced out-of-stock all the shopping channels that a retailer offers. This
resulting in improved sales; reduced safety stock has put a strain not only on retailers to deliver the
resulting in reduced inventory; and reduced han- right products to the right channel at the right time,
dling and administrative costs. There have been but also on every other node in the supply chain,
a number of case studies detailing the realized particularly their suppliers. This strain has resulted
benefits of CPFR. Many of these case studies in a renewed interest on collaboration focused on
have involved consumer packaged goods (CPG), optimizing inventory and order fulfillment.
companies like Kraft Foods, Kimberly Clark, One of the key technologies supporting this
Proctor & Gamble, and Johnson & Johnson to renewed collaboration is store – level DRP. Store-
name a few (see Sadhu et al. 2011 for a summary Level Distribution Resource Planning (DRP)
of these cases). is a collaborative approach that utilizes the retail-
In spite of its long history and a relatively er’s POS data to produce a model that yields a
large number of success stories, acceptance and bottoms-up, time-phased forecast of consumer
582 12 Order Fulfillment Along the Supply Chain

sales, shipments, receipts, and inventories at all overtime costs, unfulfilled demand, and problem-
stores or channels and distribution centers (DCs) atic inventory levels.
for all items usually over a 12-month period. After a thorough review, the process and sys-
Typically, the forecasts are for daily periods in tem was replaced by a 3rd party software demand
the near-term (say the next 3 months) and weekly forecasting system which provided the means to
for the remaining time. These forecasts are then use POS data from Lowe’s and Home Depot to
used by the suppliers (manufacturers) to calcu- model item level demand at the store level across
late – not forecast – what should be produced and time. In this way they had a centralized process
delivered, where it should be produced and deliv- for conducting line reviews, as well as determin-
ered, and when it should be produced and deliv- ing the impacts of price changes and promotions.
ered. In this way, supply is tied directly to demand Later they added a system for master planning at
on the (real or virtual) shelf. If there are changes the plant level and for fulfillment which improved
in the demand at a store or channel, then the operating efficiency and improved fill rates and
model is used to adjust production and delivery. optimized the multi-level replenishment process.
The model for a single forecast provides visi- All of the systems were provided by JDA Software
bility across the supply chain with a number of Group, Inc. (jda.com).
attendant benefits (VICS 2013): In 2010, Stanley Black & Decker and Lowe’s
• Improved availability at the shelf, in-stocks, ser- were nominated for the VICS CPFR Implementation
vice levels, forecast accuracy and productivity. Excellence award for their DPR implementation.
• Reduced safety-stock, product costs, transpor- The nomination noted the joint improvements in
tation costs and lead times. fill rates to 98% percent levels, in-stock improve-
In alliance with the superstore retailers Lowe’s ments to 98%, reduction in excess inventory, and a
and Home Depot, Stanley Black & Decker has 10% improvement in forecast accuracy, along with
been one of the strongest proponents of DRP. reduced transportation costs.
Stanley Black & Decker was built in 2010 from
the merger of The Stanley Works with Black & Sources: Based on Ackerman and Padilla (2009),
Decker. According to their latest financial reports, Fiorletta (2013), Pappas (2013), VICS (2013), and
today they are a global provider of power and hand stanleyblackanddecker.com (access April 2014).
tools, products and services for industrial applica-
tions, mechanical access solutions (e.g. door Questions
locks), and electronic security and monitoring sys- 1. What is DPR?
tems. In 2013, their revenues were approximately 2. What are the benefits of DPR?
$11 billion with close to 50% coming from North 3. Describe the DPR system established by
America. Within North America two of their larg- Stanley Black and Decker in collaboration
est customers are Lowe’s and Home Depot. with Lowe’s and Home Depot.
A few years back, before the merger, Black & 4. What benefits did Stanley Black & Decker
Decker established dedicated demand forecast- and Lowe’s realize with their DPR system?
ing teams for one of their three divisions
(Hardware and Home Improvement) that worked SECTION 12.4 REVIEW QUESTIONS
directly with Lowe’s and Home Depot in the 1. What is RFID?
same cities where the two retailers were located. 2. How can RFID improve supply chain visibility?
The focus was on matching supply levels with 3. Describe three RFID supply chain applications.
consumer demand while maintaining the high fill 4. What is CPFR?
rates and delivery schedules required by the two 5. How can CPFR improve supply chain opera-
retailers. The overall process, which rested on tions of an e-commerce retailer?
spreadsheets, proved too cumbersome, inflexible 6. What are some of the reasons that CPFR has
and time consuming. The result was increased not enjoyed widespread use?
12.5 Other E-Commerce Support Services 583

technology-consulting services. These include

12.5 OTHER E-COMMERCE SAP, IBM, HP, Oracle, Microsoft, Cisco, Intel,
SUPPORT SERVICES and many more.

Depending on the nature and magnitude of its EC

initiatives, a company may require several other Directory Services, Newsletters,
support services. The services range from con- and Search Engines
sulting to directory services, newsletters, special-
ized search engines, a number of value-added The EC landscape is huge, with hundreds of
services, and outsourced EC services. thousands of companies selling products and ser-
vices online. How can a buyer find all the suitable
sellers? How can a seller find all the suitable buy-
Consulting Services ers? In B2B, vertical exchanges can help with
this matching process, but even vertical exchanges
How does a firm learn how to do something that include only a limited number of potential part-
it has never done before? Many firms, both start- ners, usually located in one country. To overcome
up and established companies, rely on outside the problem of finding buyers or sellers online, a
consulting firms. Some of these firms have estab- company may use directory services.
lished a reputation in one area of expertise,
whereas others are generalists. Some consultants Directory Services
even take equity (ownership) positions in the There are several types of directory services. Some
firms they advise. Some consultants will build, simply list companies by categories; others pro-
test, and deliver a working website and may even vide links to companies. In many cases, the data
host it and maintain it for their clients. There are are classified in several different ways for easy
three broad categories of consulting firms. search purposes. In others, special search engines
The first type of consulting firm includes those are provided. Finally, value-added services, such
that provide expertise in the area of EC but not in as matching buyers and sellers, are available. The
traditional business. In the past there were a num- following are some popular directories:
ber of larger consulting firms specializing in EC • B2B-Today.com (b2b-today.com) is an e-busi-
services. Many of these firms were acquired or ness portal aimed at small to medium enterprises
changed direction. Today, this expertise is pro- and providing B2B directory services to Chinese
vided by smaller firms such as Candid software suppliers of goods and services across a wide
(candidinfo.com), Holbi (holbi.co.uk), and variety of industries ranging from automotive to
Lounge Lizard (loungelizard.com). These firms medical to office supplies just to name a few.
were all started prior to the dot-com bubble and The portal supports the RFQ process (Request
are still in operation today. for Quotation from buyers to suppliers), as well
The second type of consulting firm is a tradi- as a number of other related activities.
tional consulting company that maintains organi- • Websters (webstersonline.com) is a large
zational units that focus on EC. These firms business directory organized by location and
leverage their existing relationships with their cor- by product or service. In addition, it provides
porate clients and offer EC value-added services. listings by industry and subindustry (accord-
Representative companies are Accenture, Boston ing to SIC and NAICS codes).
Consulting Group, Deloitte & Touche, Ernst & • ThomasNet (thomasnet.com) provides a
Young, McKinsey, and PricewaterhouseCoopers. directory of several hundred thousands of man-
The third category of consulting firms is EC ufacturers of industrial products and services
hardware and software vendors that provide in about 70,000 categories.
584 12 Order Fulfillment Along the Supply Chain

Newsletters Trademark and Domain Names

There are many B2B newsletters to choose from. A number of domain name services are available.
Several are e-mailed to individuals free of charge. Examples are mydomain.com, register.com,
Examples of B2B newsletters are shown at easyspace.com, and whois.net.
savvyb2bmarketing.com/home/newsletters
magazines. Many companies (e.g., Ariba) issue Digital Photos
corporate newsletters and e-mail them to people Companies such as IPIX (ipix.com), which is
who request them. part of Minds-Eye-View, Inc., provide innovative
Directories and newsletters are helpful, but pictures and video capabilities for websites.
they may not be sufficient. Therefore, one may
need specialized search engines. Access to Commercial Databases
Subscribers to ProQuest Dialog (dialog.com) can
Search Engines and News Aggregators access about 900 databases, including those con-
Several search engines can be used to discover taining patents, trademarks, government reports,
B2B-related information. Some of these are embed- and news articles.
ded in the directories. Here are some examples:
• iEntry (ientry.com) provides B2B search Knowledge Management
engines, targeted “niche engines,” and several IBM Domino offers the capability to integrate
industry-focused newsletters. iEntry operates social knowledge with IBM’s Websphere Portal
a network of websites and e-mail newsletters software, providing enhanced team collaboration
that reaches more than two million unique and networking.
opt-in subscribers. Newsletters are available
in each of the following categories: Web Client Matching
Developers, Advice, Technology, Professional, TechRepublic (techrepublic.com) matches busi-
Sports & Entertainment, Leisure & Lifestyles, ness clients with firms that provide a wide variety
and Web Entrepreneurs. Click on a newsletter of IT services. It works like a matchmaking
to get a brief description and view sample service. Clients define what they want, and
content. TechRepublic performs the searching and screen-
• Sourcetool (sourcetool.com) is a search ing, checking against some general parameters
engine that locates information and aggregates and criteria. This reduces the risk of clients mak-
B2B (and other business) news. ing bad choices. Buyers also save time and have
greater exposure to a larger number of IT service
providers.
More EC Support Services
E-Business Rating Sites
Many other service providers support e-com- A number of sites are available for businesses to
merce in different ways. Each service provider research rankings of potential partners and sup-
adds a unique value-added service. This section pliers. Bizrate.com, forrester.com, gomez.com
describes only several representative examples. (now part of Compuware), and consumersearch.
com all provide business ratings.
Trust Services
Chapter 13 introduced the role of trust in B2C. Security and Encryption Sites
Trust also is important in B2B because one can- An example of security/encryption sites is VeriSign
not touch the seller’s products and because buy- (verisign.com). The company provides valuable
ers may not be known to sellers. Trust-support encryption tools for all types of EC organizations.
services such as TRUSTe and BBBOnline (Better It also provides domain site registration and sev-
Business Bureau) are used both in B2C and B2B. eral security mechanisms.
12.5 Other E-Commerce Support Services 585

Table 12.3 Other B2B services

Category Description Examples
Marketplace concentrator Aggregates information about products and services Internet Mall, Insweb, Industrial
(aggregator) from multiple providers. Purchasers can search, Marketplace
compare, shop, and sometimes complete the
purchase transaction
Information brokers Provide product, pricing, and availability Travelocity, Autobytel
(infomediaries) information. Some facilitate transactions, but their
main value is the information they provide
Transaction brokers Buyers can view prices and terms, etc. but the E*TRADE, TD Ameritrade
primary business activity is to execute the
transaction
Digital product delivery Sells and delivers software, multimedia, and other Most software and media vendors.
digital products over the Internet Also sandowl.com
Content provider or Creates revenue by providing content Most publishers
publisher
Online service provider Provides service and support for hardware and CyberMedia.com, TuneUp.com
software users
Specialized directories Provide leads to a variety of B2B services Business.com, KnowledgeStorm,
categories Searchedu.com

Web Research Services tions. The process includes the following major
A number of Web research providers help steps:
companies learn more about technologies, trends, 1. EC strategy initiation, formulation, and imple-
and potential business partners and suppliers. mentation (Chapter 13)
Some of these are idc.com, zdnet.com, and 2. Systems design (Chapter 14)
forrester.com. 3. Building (or buying) the systems (Chapter 16)
4. Hosting, operating, and maintaining the EC
Coupon-Generating Sites site (Chapter 16)
A number of vendors help companies generate
online coupons. Q-pon.com and centsoff.com IT Outsourcing and Application
are a couple of examples. Service Providers
Table 12.3 presents additional services avail- In the past many outside contractors focused on
able for B2B operations. serving SMEs with few IT staff and smaller IT
budgets. Today, enterprises of all sizes rely on
outside contractors to service a substantial part of
Outsourcing EC Support Services their EC system requirements. The list of large
companies who rely on third-party vendors to run
Most companies do not maintain in-house EC their B2C websites is extensive. Examples include
support services. Instead, they outsource many of sites such as eddiebauer.com, 1800flowers.com,
these services. and lenovo.com. Several types of providers offer
services for creating and operating electronic
Why Outsource EC Services? webstores.
In general, outsourcing has many benefits and only
few limitations and risks. For a comprehensive SECTION 12.5 REVIEW QUESTIONS
list of benefits, see outsource2india.com/why_ 1. Describe the role of EC consultants and list
outsource/articles/benefit_outsourcing.asp. their major types.
To show the importance of outsourcing, we 2. Describe the value offered by directory ser-
will look briefly at the typical process of develop- vices. Provide three examples of what value
ing and managing EC infrastructure and applica- they add.
586 12 Order Fulfillment Along the Supply Chain

3. Explain why specialized search engines are in which part of order fulfillment we should
needed. count on partners. The typical activities that
4. List some other EC support services. may be outsourced are shipping, warehous-
5. List the major reasons why companies out- ing, inventory holding, return management,
source EC support services. and so on. Decide on the appropriate third-
party logistics supplier that can provide reli-
able service for these activities. For certain
MANAGERIAL ISSUES items that you cannot supply well, a partner
may take care of the entire merchandising as
Some managerial issues related to this chapter well as order fulfillment, especially if you
are as follows: have leverage on the online brand image. An
1. If you are an EC vendor, what is the bottle- example is Fulfillment by Amazon (FBA)
neck in the order fulfillment process? Order sellers.
fulfillment is an important task, especially for 4. How should we manage returns? Dealing
e-tailers. The problem is not only the physical with returns is important for CRM, yet may
shipment, but also the efficient execution of not be simple. Reverse logistics is very costly,
the entire order fulfillment process, which and most companies cannot continue online
may be complex along a lengthy supply chain. business if the return rate is too high. Use the
To enhance the order fulfillment process, the CRM system to identify the items with higher
vendor needs to identify the bottleneck that return rates and resolve the reason or stop the
needs improvement. Potential issues are online sales of these items. A company should
delayed delivery date, high return rate, high estimate its percentage of returns and plan a
inventory cost, high shipping cost, and poor process for receiving and handling them. The
integration along the supply and demand logistics of returns may be executed through
chains. The EC vendor should identify its own an external logistics service provider.
problem first. 5. What logistics information should we pro-
2. For which items should we keep our own vide to customers? Customers, particularly
inventory? As Amazon.com has experienced, business customers, want to know the avail-
online vendors try to avoid keeping inventory ability of inventory and delivery date at the
because it is expensive. However, we should time of order. To meet these needs, the EC
not neglect the fact that retailing with appro- system should be integrated with the back-end
priate inventory is a source of extra profit as information system. Customers may also want
well. In addition, for certain items, it is not to trace the status of order processing, which
possible to assure on-time delivery without should be managed by more than one com-
having controllable inventory; the no-inven- pany along the order fulfillment process. To
tory policy is not always the best policy. A provide seamless information beyond the
company has to design the portfolio plan of boundary of the vendor, the partners should
inventory and distribution centers for the collaborate while developing their informa-
items that have a positive effect of having tion systems.
inventory. A CPFR program may be adopted 6. Should we use RFID for the order fulfill-
to minimize the burden of holding inventories. ment? If your buyer requires you to use RFID
The plan for distribution centers must be bal- tags, there is no choice but to follow the
anced with the plan of outsourced items request; however, the expertise and equipment
through partners. of RFID are not always available within a
3. What is the alliance strategy in order ful- company. Some third-party logistics service
fillment? Partnerships and alliances can providers support the tagging service. One
improve collaboration and increase the effi- question is who pays for the cost and who gets
ciency of the supply chain. We need to decide the benefit? So far, big buyers such as Walmart
Summary 587

and the Department of Defense get the bene- insufficient coordination and information
fit, while the suppliers pay the cost. In the long sharing among business partners.
run, suppliers may be able to share the benefit 3. Solutions to order fulfillment problems.
in inventory management. However, it will Automating order taking (e.g., by using forms
take time until the penetration becomes perva- over the Internet) and smoothing the supply
sive enough to maximize the benefit of RFID chain are two ways to solve order fulfillment
technology. problems. Several other innovative solutions
7. Can we use CPFR in SMEs? CPFR is a con- exist, most of which are supported by soft-
ceptual model for working with business part- ware that enables more accurate inventories,
ners and is usually effective and efficient with coordination along the supply chain, and
for large organizations. However, since it is appropriate planning and decision making.
basically a conceptual model of collaborative 4. RFID tags. Replacing barcodes with RFID
planning, it may work in some SMEs where can greatly improve locating items along the
collaborative planning is critical. A visit to supply chain quickly. This technology has
gs1us.org/industries/apparel-general- many other benefits, which will soon out-
merchandise, and an examination of some of weigh the major limitations. The major appli-
the applications there, can help identify places cations are improving supply chain visibility,
where CPFR can help SMEs. expediting tracking, speeding up inventory
counting, speeding up deliveries, and reduc-
ing errors.
SUMMARY 5. Collaborative planning and CPFR. Collab-
orative planning concentrates on joint demand
In this chapter, you learned about the following forecasting and on accurate resource and
EC issues as they relate to the chapter’s learning activity planning along the supply chain.
objectives. Collaborative planning tries to synchronize
1. The order fulfillment process. Large num- partners’ activities. CPFR is a business strat-
bers of support services are needed for EC egy that attempts to develop standard protocols
implementation. Most important are payment and procedures for collaboration. Its goal is to
mechanisms and order fulfillment. On-time improve demand forecasting by collaborative
delivery of products to customers may be a planning in order to ensure delivery of materi-
difficult task, especially in B2C. Fulfilling an als when needed. In practice there are a num-
order requires several activities ranging from ber of successful implementations, although
credit and inventory checks to arranging ship- there is not widespread use. Recently, VICS
ments. Most of these activities are part of has focused on another collaborative process –
back-office operations and are related to logis- store-level DPR – which provides detailed
tics. The order fulfillment process varies from demand forecasts used to calculate inventory
business to business and also depends on the and distribution requirements from sourcing to
products to be delivered. Generally speaking, the retail shelf or channel.
the following steps are recognized: payment 6. Other support services. EC support services
verification, inventory checking, shipping include consulting services, directory services,
arrangement, insurance, production (or infrastructure providers, and many more. One
assembly), plant services, purchasing materi- cannot conduct EC without some of them.
als, customer contacts, and return of defective These support services need to be coordinated
or unwanted products. and integrated. Some of them can be done in-
2. Problems in order fulfillment. It is difficult house; others must be outsourced.
to fulfill B2C orders due to difficulties in fore- 7. Outsourcing EC services. Selective out-
casting demand and potential delays in supply sourcing of EC services is usually a must.
and deliveries. Problems also result from Lack of resources, time and expertise forces
588 12 Order Fulfillment Along the Supply Chain

companies of all sizes to outsource, despite 10. Investigate and discuss how artificial intelli-
the risks of doing so. Using ASPs is a viable gence can be used to pick and pack orders
alternative, but they are neither inexpensive faster and more accurately. Begin with
nor risk-free. McGown (2010).

KEY TERMS TOPICS FOR CLASS DISCUSSION

AND DEBATES
Collaborative planning, forecasting,
and replenishment (CPFR) 1. Chart the supply chain portion of returns to a
Distribution Resource Planning (DRP) virtual store. Check with an e-tailer to see how
E-logistics it handles returns. Prepare a report based on
Logistics your findings.
Merge-in-transit 2. Discuss how CPFR can solve order fulfillment
Order fulfillment problems along the supply chain. Use any
Radio frequency identification (RFID) image from Google of the CPFR model to
Reverse logistics relate the elements of the figure to your pro-
Third-party logistics suppliers (3PL) posed solutions.
Visibility 3. Identify the major concerns about using RFID
Warehouse management system (WMS) by companies. Discuss the validity of these
concerns.
4. Should a B2B EC company outsource its
DISCUSSION QUESTIONS delivery of ordered goods?
5. Some say outsourcing B2B services may hurt
1. Discuss the problem of reverse logistics in the competitive edge. Others disagree. Discuss.
EC. What types of companies may suffer the 6. Which activities are most critical in order
most from this problem? fulfillment of B2C (check Table 12.1)? Which
2. Explain why UPS views itself as a “technol- are for B2B? Discuss the differences.
ogy company with trucks” rather than as a 7. Debate the issue of outsourcing EC order ful-
“trucking company with technology.” fillment. Consult Johnson (2010).
3. Under what situations might the outsourcing 8. Debate: Should companies use RFID or not?
of EC services not be desirable? 9. Find the status of Amazon.com’s same day
4. UPS and other logistics companies also pro- delivery project. Write a report.
vide financial services. What does this mean
and what is the logic behind this?
5. Differentiate order fulfillment in B2C from INTERNET EXERCISES
that of B2B.
6. Discuss the motivation of suppliers to improve 1. The U.S. Postal Service (USPS) is also in the
the supply chain to customers. EC logistics field. Examine its shipping ser-
7. Describe the advantages of RFID over a regular vices and tracking systems at usps.com.
barcode in light of supply chain management. What are the potential advantages of these
8. Discuss how CPFR can lead to more accu- systems for EC shippers?
rate forecasting and how it can resolve the 2. Enter xpertfulfillment.com, shipwire.com,
bullwhip effect. and infifthgear.com. Compare their EC
9. Describe the importance of providing a sin- order fulfillment services. Write a report.
gle demand forecast for improving control 3. Visit freightquote.com and the sites of two
along the entire supply chain. other online freight companies. Compare the
Team Assignments and Projects 589

features offered by these companies for

online delivery. TEAM ASSIGNMENTS
4. Enter efulfillmentservice.com. Review the AND PROJECTS
products you find there. View the video about
their operation. How does the company organize 1. Assignment for the Opening Case
the network? How is it related to companies Read the opening case and answer the follow-
such as FedEx? How does this company ing questions:
make money? (a) What were the drivers of the centralized
5. Enter cerqa.com and find information about warehousing?
products that can facilitate order fulfillment. (b) Amazon.com is using third-party compa-
Write a report. nies for delivery. Can you guess why?
6. Enter kewill.com. Find the innovations offered (c) Can Amazon.com use RFID in its ware-
there that facilitate order fulfillment. Compare houses? If yes, where and when? If no,
it with shipsmo.net. Write a report. why not?
7. Visit b2b-today.com. Go to the B2B (d) Find how Amazon.com handles returned
Communities area and identify the major merchandise.
vendors there. Then select three vendors and (e) Draw Amazon.com’s supply chain for
examine the services they provide to the B2B books.
community. (f) Where do you think there are intelligent
8. Go to ariba.com. Who is Ariba and what (software) agents in Amazon.com’s order
supply chain solutions do they provide? fulfillment/logistics?
Prepare a report describing the solutions they 2. Each team should investigate the order fulfill-
offer in the procurement arena. ment process offered at an e-tailer’s site, such
9. Investigate the status of CPFR. Start at as barnes-andnoble.com, staples.com, or
gs1us.org/industries/apparel-general- walmart.com. Contact the company, if neces-
merchandise, conduct a search. Also enter sary, and examine any related business partner-
apics.org/sites/apics-supply-chain-council ships. Based on the content of this chapter,
and find information about CPFR. Write a prepare a report with suggestions for how the
report on the status of CPFR. company can improve its order fulfillment pro-
10. Enter future-store.org and find the progress cess. Each group’s findings will be discussed in
on the use of RFID and other tools in supply class. Based on the class’s findings, draw some
chain improvements in retailing. conclusions about how companies can improve
11. Enter reverselogistics.com and summarize order fulfillment.
the differences between reverse and forward 3. FedEx, UPS, the U.S. Postal Service, DHL,
logistics. and others are competing in the EC logistics
12. Discuss the difficulties in fulfilling orders for market. Each team should examine one such
fresh food. Start with Thau (2010). company and investigate the services it pro-
13. Enter freshdirect.com and examine the meth- vides. Contact the company, if necessary, and
ods it uses to improve order fulfillment of aggregate the team’s findings into a report that
online grocery items. Also explain how they will convince classmates or readers that the
do an eco-friendly fulfillment. company is the best. (What are its best fea-
14. Visit alice.com. What type of business is it? tures? What are its weaknesses?)
What supply chain services do they provide? 4. Enter Ingram Micro’s resources site (ingram-
Describe their relationship with OHL. What micro.com). Use the case studies and articles
services does OHL provide and why are they there to write a report on the importance and
critical to Alice.com’s operation? benefits of Web fulfillment. Include both order
15. Enter corporate.sifycorp.com and study their fulfillment and reverse logistics.
enterprise services. Specifically find what sup- 5. Watch the video titled “Marks and Spencer
port services they provide. Write a report. Expands RFID to All Its Stores” (22:50 minutes)
590 12 Order Fulfillment Along the Supply Chain

at rfidjournal.com/videos/view?1282. Write Multichannel Evolution at Nordstrom

a report describing who M&S is, how they
have and are going to use RFID in retail, and Founded in 1901 in Seattle, WA, Nordstrom, Inc.
the benefits they hope to achieve. is a high end fashion retailer offering clothing,
6. Read about the warehouse management systems shoes, and accessories for men, women, and chil-
provided by JDA (RedPrairie) and Manhattan dren. They have 117 full-line stores in 44 coun-
Associates (including some of their warehouse tries. Additionally, they have 119 Nordstrom
case studies) and answer the following: Rack stores, 2 Jeffrey boutiques, one clearance
(a) What supply chain processes are sup- store, a private subsidiary called HauteLook, a
ported by both systems? NYC boutique called Treasure & Bond, and their
(b) What are the major benefits of each online site, nordstrom.com.
system? Nordstrom began their online presence in
(c) What are the major differences in the 1998 with nordstromshoes.com. In 2000 this
capabilities provided? was enhanced to include their entire catalog but
7. The competition on ‘same day delivery’ is did not incorporate the inventory in the stores. In
intensifying with more and more competitors the same vein, the merchandising, marketing, and
enter the race. Investigate the status of the accounting systems used to run their online and
competition including delivery by drones offline stores were different. Around 2004,
(e.g., FAA’s approval). Start with Bowman Nordstrom began to look at the possibility of
(2014). Write a report. combining the systems and providing online cus-
tomers with the same experience they got in the
store. From the customer’s perspective, the key to
CLOSING CASE: MULTICHANNEL providing a similar experience across multiple
RETAILERS – EXPERIENCES channels: in store, Web, catalog, call center,
OF NORDSTROM AND REI mobile, etc. – is providing access to inventory
information and the capability to fulfill an order
Retail channels such as store, Web, catalog, from any point in the system – ship to home, ship
call center, or kiosk cannot satisfy the expecta- to store, or pick up in store.
tions of today’s consumers alone. In today’s It took 4 to 5 years to combine the online and
consumer-centric world, customers want to buy in store experience into an integrated multichan-
what they want, at a price they want, where and nel system. By 2009, Nordstrom had aggregated
when they want, and all these with same day its inventory and was providing visibility to in-
delivery or easy pickup. The result is that many store inventory on its website. Basically, stores
online and offline retailers are providing custom- were treated as warehouses or distribution centers
ers multiple channels for satisfying these for online customers. Under this scheme, custom-
demands. For example, a multi-channel retailer ers were able to pick up online purchases in stores.
might offer customers the means to purchase
online and pick up their purchase in the physical Nordstrom’s Multichannel Systems
stores. Or, a retailer with stores might provide The technical underpinning for these multichannel
in-store kiosks that enable customers to search capabilities was provided by Sterling Commerce’s
online for merchandise that is not in the store, Selling and Fulfillment Suite which included
locating the merchandise at either a nearby store, Sterling Catalog and Offer Management, as well
or offering the ability to purchase it online and as their Order Management capabilities. At the
have it delivered to the customers homes or to a core of the Suite is a centralized order hub that
store location of their choice. One retailer who synchronizes orders and provides access to inven-
has long history of providing multi-channel sales tory across all the channels. In today’s terminol-
and service is Nordstrom. ogy, this sort of system is called a “Distributed
Closing Case: Multichannel Retailers – Experiences of Nordstrom and REI 591

Order Management” (DOM) system. Today, there • Web-Based Kiosks – Like many other retail-
are a variety of software vendors that provide ers, REI got its online start in the late 1990s.
DOM capabilities including Oracle, Manhattan However, unlike most retailers, they brought
Associates, IBM Sterling, and JDA Software. All web-based kiosks into their stores shortly
of these DOMs offer a baseline of capabilities after that. In this way, customers can order
including: from their portfolio of over 40,000 products.
• System-wide views of inventory across the Obviously, this is many more items than are
entire supply chain, anticipating shortages and stocked in the average store.
delivery problems • In-Store Pickup – Customers can shop online
• Optimized fulfillment across the system tak- and have the item shipped to a local store of
ing into account, transportation cost, labor, their choice. The main benefit of this service is
and service level that once customers are in the store they are
• Determination of fulfillment location for ship much more likely to purchase other products.
to home, ship to store, or pick up in store. • Gift Registry – Many retailers provide online
• Support order lifecycle management includ- gift registries. Like their other services, REI’s
ing creation, modification, and cancellation registry can be established, followed, and
• Availability of information about items, updated online, in the store, or through their
prices, and promotions across the supply chain call center.
• Full financial functionality including authori- REI’s multi-channel capabilities are built on top
zation, fraud management, invoicing, and of IBM’s WebSphere Commerce platform. Over
settlement. the years this platform has enabled REI to integrate
the disparate systems from the individual channels
Multichannel Impact into a set of cohesive supply chain capabilities,
at Nordstrom such as order fulfillment or the product catalog,
From the inception, Nordstrom’s multichannel that are uniformly available to all the channels.
integration had immediate effects. Same-store Like Nordstrom, REI has enjoyed strong
sales went from declining to an increase close to revenue growth since the inception of its integra-
10%. At the same time, the percentage of tion multichannel capabilities. In 2011, revenues
customers who completed purchases after search- were around $1.7 billion making it one of the
ing for an item almost doubled. Inventory turns leaders in outdoor equipment and apparel. In
improved from 4.8 in 2005 to 5.4 in 2009. Finally, addition to their bottom line growth, all of the
overall sales reached $8.3 billion in 2009. multi-channel capabilities enjoyed immediate
growth and rapid payback. Customers who par-
ticipated in two channels spent 114% more and
Multichannel Experiences those using three channels spent 48% more. Also,
at REI REI’s In-Store Pickup capabilities increased
sales by 1% within the first year of operation.
Even today, the various sales and marketing What Nordstrom and REI have recognized is
channels of most retailers are managed as sepa- that the key to multichannel support is the cus-
rate silos rather than as an integrated whole. Like tomer. Retailers need to concentrate on provid-
Nordstrom, another well-known exception is ing uniform sales and services to customers
Recreational Equipment, Inc. (or REI for short). where, how, and when they want them, regard-
REI was started in 1938 and is headquartered in less of the channel.
Kent, WA. They have 129 stores in 22 states and
are the largest consumer co-op with over 10 mil- Sources: Based on Banker (2011), Clifford
lion members. Since the late 1990s, REI has pro- (2010), Friedman (2011), Lynch (2012), Taylor
vided a number of multi-channel options for (2012), nordstrom.com and rei.com (both
customer sales and service including: accessed February 2014).
592 12 Order Fulfillment Along the Supply Chain

Questions Logistics Activities required to efficiently and

1. How would you define multichannel retail? effectively control and manage the movement
2. What multichannel capabilities does Nordstrom and storage of items, services and information
support? across the entire supply chain to the consumer
3. What multichannel capabilities does REI have? and potentially back.
4. What are some of the major features of a dis- Merge-in-transit Logistics model in which
tributed order management (DOM) system? components for a product may come from two
5. What are some of the benefits that arise from (or more) different physical locations and are
integrated multichannel sales and services? shipped directly to the customer’s location.
Order fulfillment All the operations a company
undertakes from the time it receives an order to
the time the items are delivered to the custom-
ONLINE FILES ers, including all related customer services.
available at affordable-ecommerce- Radio frequency identification (RFID) Tag
textbook.com/turban technology in which RFID (electronic)
tags are attached to or embedded in objects
W12.1 What Services Do Customers Need? (included people) and employ wireless radio
W12.2 The Bullwhip Effect waves to communicate with RFID readers so
that the objects can be identified, located, or
can transmit data.
COMPREHENSIVE EDUCATIONAL Reverse logistics The movement of returns
WEBSITES from customers to vendors.
Store-level distribution resource planning
rfid.org: News, videos, cases. (DRP) A collaborative approach that uti-
rfidjournal.com: Comprehensive collection of lizes a retailer’s POS data to produce a model
articles, cases, videos. that yields a bottoms-up, time-phased fore-
vics.org: Business guidelines, collaboration (CPFR). cast of consumer sales, shipments, receipts
apics.org: Association for Operations Management. and inventories at all stores or channels and
cscmp.org: Council of Supply Chain Management. DCs for all items, usually over a 12-month
asuscma.org: Supply Chain Management Asso- period.
ciation. Third-party logistics suppliers (3PL) External,
reverselogisticstrends.com: News, trade shows, rather than in-house, providers of logistics
cases, etc. services.
agents.umbc.edu: Large collection of informa- Visibility The knowledge about where materials
and parts are at any given time, which helps
tion about intelligent agents.
in solving problems such as delay, combining
silicon.com/white-papers: Publications on
shipments, and more.
enterprise planning and supply management.
Warehouse management system (WMS) A
software system that helps in managing
warehouses.
GLOSSARY

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 Part V
E-Commerce Strategy and Implementation

Chapter 13 EC Strategy, Globalization, and SMEs

Chapter 14 Implementing EC Systems: From Justification to Successful
Performance
Chapter 15 E-Commerce: Regulatory, Ethical, and Social Environments
Chapter 16 Launching a Successful Online Business and EC Projects
 EC Strategy, Globalization,
and SMEs 13

Contents Learning Objectives

Opening Case: Procter & Gamble’s
Upon completion of this chapter, you will be
E-Commerce Strategy........................................... 597
able to:
13.1 Organizational Strategy: 1. Understand the essentials of online business
Concepts and Overview ............................. 600
competition and strategy and how the Internet
13.2 The Strategy and Performance and EC influence Porter’s Five Forces model.
Cycle and Tools .......................................... 603
2. Describe the performance and strategy cycle.
13.3 E-Commerce Strategy Initiation .............. 606 3. Describe the strategy initiation phase.
13.4 E-Commerce Strategy 4. Understand the activities of strategy formulation.
Formulation ................................................ 610 5. Understand the strategy implementation phase.
13.5 E-Commerce Strategy 6. Describe strategy assessment, including the
Implementation .......................................... 615 role of metrics.
13.6 E-Commerce Performance 7. Describe performance improvements and inno-
Assessment .................................................. 618 vations in EC.
13.7 Performance Improvement
8. Evaluate the issues involved in global EC.
and Innovation ........................................... 623 9. Describe how small and medium-sized busi-
nesses can use EC.
13.8 A Strategy for Global E-Commerce ......... 626
13.9 E-Commerce Strategy for Small
and Medium-Sized Enterprises ................ 631
OPENING CASE: PROCTER
Managerial Issues.................................................. 634 & GAMBLE’S E-COMMERCE
Closing Case: Innovative Web Auction STRATEGY
Strategy Nets Higher Productivity for
Portland Fish Exchange........................................ 639 Procter & Gamble Company (P&G) is the world’s
largest multinational company of consumer goods.
With over 121,000 employees and over $84 bil-
lion in sales (in 2014), the company is considered
one of the world’s best. Its products include some
Electronic supplementary material The online version
of the most well-known brands such as Tide,
of this chapter (doi: 10.1007/978-3-319-10091-3_13)
contains supplementary material, which is available to Crest, Pampers, Old Spice, Gillette, and Charmin.
authorized users The company is known as a global innovator,

E. Turban et al., Electronic Commerce: A Managerial and Social Networks Perspective, 597
Springer Texts in Business and Economics, DOI 10.1007/978-3-319-10091-3_13,
© Springer International Publishing Switzerland 2015
598 13 EC Strategy, Globalization, and SMEs

introducing revolutionary products and excelling In addition to their traditional marketing research
in marketing communication. of what customers are doing at home, P&G is
now monitoring customers’ conversations on the
Web, knowing that potential buyers spend a con-
The Problem siderable amount of time on Facebook and other
social networks. Coleman-Lochner (2012) pro-
P&G operates in a very competitive industry vides the following examples of P&G advertis-
where other large global companies are extremely ing on social media: Pepto-Bismol on Facebook
active (e.g., Unilever, Johnson & Johnson). Brand and Twitter (see above), Secret Deodorant’s anti-
recognition is a critical success factor, and exten- bullying drive on Facebook, Cover Girl on
sive advertisement is necessary. P&G is known Facebook and Twitter, and Iams Pet food on
for being a pioneer in the radio and TV production Facebook and in blogs.
of soap operas (the term “soap opera” is based on P&G’s strategy in 2012 was to test the viral
P&G’s detergents and soaps). P&G sponsors effect of social media. The idea was that promo-
music, TV shows, movies, and sporting events tions in social media can be much more cost
(including the London Olympics in 2012 and the effective than TV promotions. The company
Sochi Winter Olympics in 2014). As of 2000, the selected Old Spice as their brand for testing
company is active on the Internet, sponsoring social media ads.
numerous online communities and operating doz-
ens of websites (one for each brand). The Old Spice Brand
The rise of the social customer (Chapters 1 The Old Spice brand includes dozens of products
and 7) contributes to a more intense competition. for both men and women: deodorants, body
The customers now can share information and wash, cologne, and more. The brand is known for
experiences, compare prices, get coupons online, its successful social media campaigns. We distin-
learn about the ingredients in products and their guish between the permanent presence on social
environmental impact, recommend, evaluate, and networks and social networking and special
trash the brands that they do not like. All these advertising campaigns.
make customers less loyal to some brands and
more loyal to others. Sales of some of P&G’s The Major Social Media Presence
brands (e.g., Pepto-Bismol) had been flat or even Old Spice Website (oldspice.com). This site
declining, since 2000. In 2010, P&G noticed that includes product information, videos, photos, dis-
Pepto-Bismol users had been discussing the play ads, a webstore, and downloads (e.g., ring-
stomach pain reliever online, especially on week- tones, screensavers, wallpaper).
end mornings, after they had overindulged the • Presence on Facebook (facebook.com/old
night before. Therefore, the marketers decided to Spice). Similar information as on the brand’s
entice customers to use Pepto-Bismol before they website and ‘Likes’ (over 2,600,000 as of June
began eating and drinking. Their strategy was to 2014), comments (posts) by fans, and special
advertise on Facebook by posting the catchy slo- campaigns.
gan “Celebrate Life.” This resulted in an 11% • Presence on Twitter (twitter.com/OldSpice).
market-share gain in the following 12 months Old Spice has over 221,000 followers on
through fall 2011 (see Coleman-Lochner 2012). Twitter, who tweet their questions, requests,
and opinions to be answered by Old Spice and
shared by other followers.
The Solution • Presence on YouTube. A large number of
related videos (many featuring “The Old Spice
P&G has been active online since the late 1990s, Guy”) are available (youtube.com/user/Old
and they began using social media in 2005. Spice). These videos are popular (over 231
According to Coleman-Lochner (2012), social million video views as of June 2014). P&G
networking is taking central stage at P&G. was recognized for its social media presence at
Opening Case: Procter & Gamble’s E-Commerce Strategy 599

the 2014 Winter Olympics. P&G was the most true. As described in Chapter 8, crowdsourcing and
“buzzed-about brand” with over 27 million collaboration facilitate innovation. Additionally,
YouTube views during the first week of the CEO Robert McDonald (as reported by Chui and
Games (Horovitz 2014). Fleming 2011), sees improvement in innovations.
• Using Pinterest. In 2012, P&G began pinning He wants to make P&G “the most technologically
material onto a Pinterest board (Edwards enabled business in the world.”
2012). Since then, the company is actively Related to social media is the use of analytics
pinning material for many of its brands. for strategy assessment. To read the case study,
see Effie Awards (2011) and P& G Innovations
The 2010 Campaign (undated).
In order to appeal to the younger generation, In 2014, P&G is shifting from a presence in
Procter and Gamble wanted to get both men and social media to a convergence of e-commerce
women talking about Old Spice. The Widen + and social media; see Cooper (2014) for details.
Kennedy advertising agency began with a viral Sources: Based on Chui and Fleming (2011),
marketing campaign during the 2010 Super Cooper (2014), Coleman-Lochner (2012), Brady
Bowl, starring “The Old Spice Guy,” who became (2013), Bullas (2011), Ehrlich (2010), and pg.
“The Men Your Men Could Smell Like.” com/en_US/downloads/innovation/factsheet_
According to Ehrlich (2010), within 24 hours, OldSpice.pdf (accessed June 2014).
there were 5.9 million video views and 22,500
comments posted. According to Lipp (2010),
Old Spice became the most-viewed sponsored
LESSONS LEARNED FROM THE CASE
channel on YouTube. Old Spice gained 80,000
Twitter followers in two days and 740,000 Appropriate IT and EC strategies, can help
Facebook fans. The campaign’s success made it companies survive and excel. For global
a continuous one. According to Bullas (2011), companies such as P&G, digitization is
the number of YouTube views increased to 236 becoming an essential strategy. Lately,
million a month and the sales figures increased using social media has helped increase
by 107%. sales. For such large company, a formal
For additional results, see a video case study strategy is necessary.
of Wieden + Kennedy’s Old Spice Media Social The case illustrates an advertising cam-
Campaign (posted August 10, 2010), at weareso- paign that was planned by a consultant (an
cial.net/blog/2010/08/wieden-kennedys- advertising agency), was implemented first
spice-case-study. on an experimental basis (the Super Bowl),
was enhanced (the “Response Campaign”),
and then was evaluated for success. We dis-
The Results tinguish four major steps in strategy devel-
opment.
As indicated by the results of the Old Spice social First is strategy initiation, this is when
media campaign, people’s reactions to well orga- P&G decided to use social media; then
nized campaigns via social media can be over- strategy formulation, which included the
whelming. The number of viewers and interactions design of the campaign and the plan of the
reached record highs and sales volume increased strategy (e.g., the selection of the brand).
as well. Overall, the company is doing well with The third phase, strategy implementation
the new strategy. P&G now advertises heavily on was the detailed plan for how to ‘go social’
the Internet (e.g., their YouTube channel), but still (e.g., how to utilize YouTube, Facebook,
advertises on TV. and Twitter). Finally, in strategy assess-
While some are afraid that the social media ment, the results were measured using
activities will sink P&G’s innovation program several metrics.
(e.g., Baskin 2012), others think that the opposite is
600 13 EC Strategy, Globalization, and SMEs

The focus of this chapter is on the basic steps Porter’s Five Forces Model
in the creation of strategic planning as influenced and Strategies as Influenced
by the Internet and used in EC companies. by the Internet and EC
The chapter also presents and discusses issues
related to creating an e-strategy to engage in Porter’s “Five Forces” model has been used by
global EC and the opportunities that EC creates companies to better compete in their industry.
for small and medium-sized enterprises (SMEs). It also illustrates how EC can facilitate a compa-
ny’s competitive advantage (see Hanlon 2013).
The model recognizes the following five
13.1 ORGANIZATIONAL major forces in an industry that affect the degree
STRATEGY: CONCEPTS of competition and, ultimately, the level of profit-
AND OVERVIEW ability. They are:

An organizational strategy is a comprehensive

framework for expressing the manner in which a 1. Threat of entry of new competitors
business plans to achieve its mission, what goals 2. Bargaining power of suppliers
are needed to support it, and what plans and poli- 3. Bargaining power of customers or buyers
cies will be needed to accomplish these goals. 4. Threat of substitute products or services
Strategy also is about making decisions on what 5. Rivalry among existing firms in the
activities not to pursue and trade-offs between industry
strategic alternatives. An organization’s strategy
(including EC and IT strategies) starts with
understanding where the company is today with The strength of each force is determined by
respect to its goals, and where it wants to be in the industry’s structure, government regulations,
the future. The economic/financial crisis of size of the industry, and the global competition.
2008–2014 has made it even more important to Existing companies in an industry need to protect
have effective EC and IT strategies as sales con- themselves against newcomers and the five
tinue to grow and global competition intensifies. forces. Alternatively, they can use the forces to
improve their position, to fight newcomers or to
challenge the leaders in the industry. The rela-
Strategy in the Web Environment tionships between the forces are shown in
Figure 13.1. The definitions and details are pro-
Many strategies depend on the goals of increas- vided by Porter (1980) and Hanlon (2013).
ing revenues, profitability, and shareholder val-
ues. An example is Amazon.com’s strategy to Strategies for Gaining Competitive
defer profitability in the short run and instead Advantage
increase revenue and market share. The data con- While implementing Porter’s model, companies
sidered by a company are included in the value can identify the forces that influence competitive
proposition of the business model, especially advantage in their marketplace and then develop
concerning customers. a defensive or offensive strategy. Porter (1985)
Today, a strategy formulation process must proposed three such classical strategies: cost
include the Internet, which is more important than leadership, differentiation, and niche strategies.
ever before. According to Porter (2001), “Many In Table 13.1, we list seven strategies for gaining
have argued that the Internet renders strategy obso- competitive advantage. Each of these strategies can
lete. In reality, the opposite is true . . . it is more be enhanced by EC, as shown throughout the book.
important than ever for companies to distinguish A popular strategy of gaining competitive
themselves through strategy. The winners will be advantage is to learn what your competitor is
those that view the Internet as a complement to, not doing. For methodology and tools, see Rayson
a cannibal of, traditional ways of competing” (p. 2). (2014).
13.1 Organizational Strategy: Concepts and Overview 601

Figure 13.1 Porter’s five forces model

Table 13.1 Strategies for competitive advantage The Impact of the Internet
Strategy Description
Niche Select a market niche and be the best in Porter (2001) has identified several ways that the
quality, speed, or cost in that market Internet can influence each of the five forces of
Growth Increase market share, acquire more competitiveness. These five forces and associated
customers, or sell more types of products Internet impacts are shown in Table 13.2.
Alliance Work with business partners in
partnerships, alliances, joint ventures, or
virtual companies
Example
Innovation Introduce new products/services; put new Facebook, Google, and others compete for social-
features in existing products/services; network advertising dollars. Google, for example
develop new ways to produce products/ created Google+ to compete with Facebook.
services In 2014, Facebook paid $19 billion to buy the
Time Treat time as a resource, then manage it,
cross-platform messaging app “WhatsApp.” It is
and use it to the firm’s advantage
recognized as a “strategy to gain both a mobile
Entry Create barriers to entry. By introducing
barriers innovative products or using EC business interface that is not only more user-friendly than
models to provide exceptional service, anything Facebook created, but that also has
companies can create entry barriers to certain monetizable features that come along
discourage new entrants
with P2P application use” (ActiveVest 2014).
Customer Persuade suppliers or customers to remain
or supplier loyal to a company instead of switching to
lock-in the competition. Reduce customers’ Many companies are examining the impact
bargaining power by locking them to a of the Internet and EC today and tomorrow on
supplier their business. For these firms, an e-commerce
602 13 EC Strategy, Globalization, and SMEs

Table 13.2 Impacts of e-commerce and social commerce on industry competition

Competitive force Impacts
Bargaining power Decreases. Due to e-procurement, availability of more suppliers and competitors (global),
of suppliers increased use of e-auctions, Internet procurement tends to give all buyers equal access to
suppliers. There is more product standardization and reduction of differentiation among suppliers.
Not much difference in prices. Finally, the cost of customers switching to other sellers is low
Bargaining power Increases. Due to the ability to compare prices, buy online, use group buying and daily deals
of customers (e.g., Groupon), use more recommendations (including from friends), get more power due to
social networking, customers are more knowledgeable (e.g., global directories such as Alibaba.
com) and have more information, see Brownell (2013). Customers can buy in global markets,
reducing switching costs. Customers can negotiate via new models (e.g., Priceline’s name-your-
own-price model)
Barriers to entry Decreases. Due to the ease of starting online businesses, there is faster access to information that
is more accurate, reduced start-up and fixed costs, and new business reputation can spread fast
online via word of mouth. It gets easier to clone competitors. Many new startups appear online.
New brands can get good reputations quickly
Threat of Increases. New products/services can be developed and advertised quickly on a global basis.
substitute Customers (and B2Bs) can find substitutes faster and easier. They also can get reviews and
products and recommendations rapidly. EC and SC facilitate new business models that can create alternative
services products/services (e.g., e-books, are replacing hardcover books)
Rivalry among Increases. Markets are more efficient, and it is easy to get competitive information in a timely
existing manner. However, companies have more competitors to contend with and there is less localization
competitors advantage. Global players gain access to local markets, increasing competition. More SMEs are
competing. Increased online business facilitates competition. Amazon.com has caused
competitors to reduce prices and close stores (e.g., Best Buy; see Dignan 2012). Fierce
competition is evidenced in the travel and fashion industries as well as in jewelry. Many
competitors are declaring bankruptcy

strategy (e-strategy or EC strategy) can be very you avoid some of the pitfalls associated with
helpful. e-commerce. The major challenges associated
The process of building an EC strategy will be with developing an EC strategy are shown in
explained in detail later in this chapter. First, Table 13.3.
though, we continue our overview of organiza- As companies become more experienced with
tional and IT strategies, of which e-commerce e-commerce and the technology continues to
strategy is a component. improve, the benefits of EC will far outweigh the
limitations. In general, total EC sales are growing
15 to 18% annually. Thus, companies need to
Strategic Planning for IT and EC have some EC strategy to be able to compete. In
the next section, we will discuss the process,
Developing EC strategy requires creativity, plan- tools, and techniques that companies typically
ning, resources, good technological skills, and use to plan their strategy effectively.
overcoming technical limitations. Technical limi-
tations can often be resolved by spending addi- SECTION 13.1 REVIEW QUESTIONS
tional capital, whereas nontechnical limitations 1. What is strategy?
involve things such as people’s lack of trust in 2. Describe strategy in the Web environment.
computers or resistance to change, and they are 3. Describe Porter’s Five Forces model.
not as easy to overcome. 4. Describe strategies for gaining competitive
As time passes, the limitations, especially the advantage.
technological ones, are becoming less of an issue. 5. Understand the influence of the Internet and
In addition, careful planning can minimize the EC on each of Porter’s forces.
negative impact of some of them, and hopefully, 6. Relate EC strategy to organizational IT
the information provided in this chapter will help strategies.
13.2 The Strategy and Performance Cycle and Tools 603

Table 13.3 E-commerce challenges

Technological Non-technological
Software standards: lack of universally accepted Distrust: skeptical buyers and sellers. Lack of trust in “virtual”
standards for quality, security, and reliability companies
Integration: difficult to integrate new e-commerce Regulations: lack of national and international government
applications and software with existing regulations and industry standards
applications and databases
Cost to customers: expensive and/or inconvenient Measurement: immature methodologies for measuring benefits
Internet access (in some areas) of, and justifying, e-commerce
Legal: unresolved legal issues
Security: perception that e-commerce locations are not secure

Strategy Initiation
13.2 THE STRATEGY AND
PERFORMANCE CYCLE In the strategy initiation phase, an organization
AND TOOLS is setting its vision, goals, and objectives.
Looking at its environment, strategy initiation
The major objective of a strategy is to improve includes an assessment of a company’s strengths
organizational performance. Therefore, strategy and weaknesses, and examines the external fac-
development and performance are interrelated and tors that may affect the business. Additionally, a
described here as a five phase cyclical process. company may undertake a competitive and com-
petitor analysis to determine its strategy. All
these activities need to be related to the Internet
Strategy and Performance Cycle and e-commerce.
Specific outcomes from this phase include a
A strategy is important, but the process of devel- company analysis. One key outcome from this anal-
oping a strategy can be even more important. No ysis should be a clear statement of the company’s
matter how large or how small the organization, value proposition (see discussion in Chapter 1).
the strategic planning process leads managers to For a description and examples, see Davis (2012)
assess the current performance of the firm, then and Skok (2013).
determine where the performance should be, and
plan how to get from where a company is to
where it wants to be. Example: Amazon.com
Any strategic planning process has five major Amazon.com recognizes that besides selling
phases, initiation, formulation, implementation, books, there is also value in providing customers
assessment, and performance improvement, as with information about books, personalized ser-
shown in Figure 13.2. The major phases of the vices, and outstanding customer care. Amazon is
strategic planning process, and some identifiable continuously expanding its product line (e.g.,
activities and outcomes associated with each adding the grocery same day delivery service;
phase, are discussed briefly in the following text. increasing its App store to include 200 countries).
The phases are then discussed more extensively This increases the value proposition to its cus-
in Sections 13.3, 13.4, 13.5, 13.6, and 13.7. Note tomers. Moreover, since Amazon’s inception in
that the process is cyclical and continuous. 1995, the company frequently changes its busi-
A brief description of the five phases follows. ness model.
604 13 EC Strategy, Globalization, and SMEs

Strategy Initiation

Vision, Mission,
Objectives, Goals
Performance
Improvement and
Management
Innovations
Strategy Formulation

Planning
Performance/Strategy Justification
Assessment
Metrics, Monitoring

Strategy Implementation

Resource Allocation
Project Management

Figure 13.2 The strategy-performance cycle

Typical goals and objectives of EC include: • Market Research: Competitor and Industry
Analyses. Competitor analysis involves scan-
ning the business environment to assess the
• Improved performance
strategy, strengths, and weakness of all types
• Gain competitive advantage
of competitors. Several methodologies are
• Increased sales and revenue
available to conduct such an analysis, including
• Improved customer and partner service
strengths, weaknesses, opportunities, threats
and relationships
(SWOT) analysis and competitor analysis (see
• Generation of new business models and
‘competitor analysis’ at tutor2u.net/business/
facilitating innovation
strategy/competitor_analysis.htm).

These goals are based on the following con-

cepts and activities: Strategy Formulation

Core Competencies Once the goals and objectives are known and
A core competency refers to the unique capabili- prioritized, a company can start to formulate its
ties of companies, which are difficult to imitate. strategy.
For example, Google’s core competency is its Strategy formulation refers to the develop-
expertise in information search technology, and ment of specific strategies and tactics to exploit
eBay’s core competency is in conducting online opportunities and manage threats in the business
auctions. VeriSign’s expertise is in Internet security environment in light of corporate strengths and
and Priceline concentrates on travel and hospitality. weaknesses. In an EC strategy, the result is likely
• Forecasts. Forecasting means predicting future to be a list of EC applications or projects to
behavior and trends of factors that may impact be implemented (e.g., e-procurement, e-auctions).
the business. For details, see Section 13.4.
Case 13.1: Warner Music Group’s Digital Strategy 605

Specific activities and outcomes from this Strategy Assessment

phase include:
Strategy assessment refers to the continuous
performance monitoring, the comparison of
• Business opportunities. The strategy ini-
actual to desired performance, and the evaluation
tiation may point to future opportunities.
of the progress toward the organization’s goals,
• Cost–benefit analysis. Each proposed
resulting in corrective action and, if necessary, in
opportunity must be assessed and justified.
strategy reformulation (see Section 13.7). In
More information about conducting a cost–
strategy assessment, EC metrics are used as a
benefit analysis is included in Chapter 14.
standard against which the performance level of
• Risk analysis, assessment, and man-
the strategy is compared using analytics. For
agement. The risks of each proposed
large EC projects, business performance man-
EC initiative (project) must be analyzed
agement tools can be employed.
and assessed. If a significant risk is sus-
pected, then a risk management plan is
required. Of particular importance in an
EC strategy are business risk factors Performance Improvement
such as a transition risk. and Innovations
• Business plan. Many of the outcomes
from these first two phases – goals, com- Obviously, if the analysis shows a negative
petitor analysis, strategic opportunities, result, it is necessary to take some corrective
risk analysis, and more are components of action. A key activity here is to improve the
a business plan. The business plan should performance. However, even if the results are
consider the necessary resources and the good, the organization may take actions that
budget. The business plan should contain a range from providing bonuses for the best
value proposition section (see Skok 2013). performers identified in the analysis, to raising
the desired levels of performance in the future.
A key activity here is being innovative, because
Strategy Implementation even good performance can be improved by
innovation. In addition, techniques such as
In this phase, the emphasis is on “How do we do
competitive analysis can be useful. For details,
it?” The strategy implementation phase includes
see Section 13.7.
tactics, plans, schedules, deployment strategies,
At times, the strategic planning process
resource allocation, and project management.
requires reassessment of today’s strategy, while
The major specific activities and outcomes
preparing a new strategy for tomorrow, as dem-
from this phase include:
onstrated in Case 13.1.

• Project planning. Project planning inclu-

des setting project objectives, metrics, a
project schedule, and EC initiatives. CASE 13.1: WARNER MUSIC
• Resource allocation. All internal and GROUP’S DIGITAL STRATEGY
external resources need to be properly
planned and allocated. In 2008, Warner Music Group (WMG) desig-
• Project management. Each project nated Michael Nash as the executive vice presi-
needs to be managed during the imple- dent of digital strategy. His responsibilities
mentation phases. Activities here range included key initiatives such as EC applications,
from purchasing parts to developing an social commerce, and innovative online new
Internet security system. music-based services and products.
606 13 EC Strategy, Globalization, and SMEs

The Opportunity Questions

1. Why did WMG change their distribution
Nash played a major role in the corporate strat- strategy?
egy, strategic partnership relations, and expan- 2. Why did it develop a deal with YouTube? Is
sions (e.g., new projects) for WMG since 2000. this a strategic alliance?
The partnership portfolio includes AT&T, 3. Why did WMG start its digital-oriented strategy?
Amazon.com, Google, Microsoft, Motorola, 4. Explore the ad arrangement with Outrigger.
Verizon, and Sony Ericsson. Does it make sense? Why?
WMG, an independent spinoff of AOL, was 5. Identify the activities in strategy initiation and
one of the first brands to team up with YouTube. strategy formulation in this case.
WMG was also a pioneer in licensing their prod-
ucts to other subscription and ad-supported music
services. Nash’s early assessment of music distri- Major Tools for Strategic Planning
bution via the Internet was that, by having numer-
ous partners to sell a product, WMG would This section describes a few of the most popular
increase its profits. tools used by strategists. The following are the
WMG is acquiring companies all over the major generic tools: (1) Strategy maps, (2)
world (e.g., in June 2013 it acquired Russia’s SWOT analysis, (3) Competitor analysis grid
Gala Records Group). (including competitive intelligence), (4) Scenario
By implementing this strategy, WMG focused planning, (5) Balanced scorecard, (6) Business
on mobile services and online music sites. The plan and business case, and (7) Value proposi-
company started with a small group known as tion analysis.
Outrigger. The purpose was to see how well Notes: (a) To learn how to build a business
Outrigger could sell ads on WMG videos on case for social media, see the video “How to
YouTube, and on social networks, blogs, or the Build a Business Case for Social Media” at you-
artist’s website. Thus, the strategy was to sell ads tube.com/watch?v=_59iJrYanw0.
through Outrigger and share the revenue with the
video site. This strategy differed from that of SECTION 13.2 REVIEW QUESTIONS
other companies in the industry who had licens- 1. Describe the strategy-performance cycle.
ing agreements with distributors or collected roy- 2. Describe the strategy initiation phase.
alties when videos were played. 3. Describe the strategy formulation phase.
4. What is involved in strategy implementation?
5. What is strategy assessment?
6. Describe the phase of performance improvement.
The Results

WMG’s revenue grew substantially between 2005 13.3 E-COMMERCE STRATEGY

and the first fiscal quarter of 2009. Digital reve- INITIATION
nues increased to $184 million, equalling 20%
of the company’s total revenue. International In the strategy initiation phase, the organization
recorded music revenue climbed 12.7% from the prepares the initial steps needed for starting the
prior year quarter, and U.S. recorded music reve- strategy development cycle, such as collecting
nue reached 35%. WMG is and has been at the information about the company, its competitors,
forefront in digital leadership among the major and its business environment. The steps in strat-
music companies since 2005, showing the advan- egy initiation include a review of the organiza-
tage of e-commerce over physical stores. Sources: tion’s vision and mission; an analysis of the
Based on Learmonth (2009), Warner Music Group industry, company, competitive position; and
(2008), and wmg.com (accessed June 2014). various initiation-related issues.
13.3 E-Commerce Strategy Initiation 607

Representative Issues in E-Strategy Example

Initiation in E-Commerce One of the first large-scale social networks was
GeoCities (acquired by Yahoo! in 1999). However,
With a company, competitors, and trend data in Yahoo! shut down the site after 10 years of huge
hand, a strategist faces a number of questions losses. On the other hand, Facebook was not
about its approach to, and operation of, its EC a first mover, but it succeeded and replaced
strategy that need to be explored prior to strategy MySpace, which was a leader. LinkedIn, Groupon,
formulation. These activities are generic. The Foursquare, and Pinterest are also successful first
“how to” can be found in many strategy books. movers.
Here we describe some issues in strategy initia-
tion relevant to EC. So what determines whether a first mover
succeeds or fails? It has been suggested that
First-Mover Advantage the following factors are important determi-
The business, IT, and e-commerce worlds all have nants of EC success: (1) the size of the oppor-
examples of companies that have succeeded with tunity (i.e., the first-mover company must be
first-mover advantage. However, some companies big enough for the opportunity, and the oppor-
have failed, despite their first-mover advantage. tunity must be big enough for just one com-
Generally, the advantages of being first include an pany); (2) the nature of the product (i.e.,
opportunity to make a first and lasting impression first-mover advantage is easier to maintain in
on customers, to establish strong brand recogni- commodity products in which later entrants
tion, to lock in strategic partners, and to increase have a hard time differentiating their products);
switching costs for customers. (3) whether the company can be the best and
most innovative in the market.
Example
Amazon.com operated the first major online
bookstore, and laid the groundwork for brick-
and-mortar bookstores such as Barnes & Noble • Does the company have to spend capital
to follow suit. Two strategies Amazon used to (and how much) to be a first mover?
maintain its first-mover advantage were (1) to • What is the optimal way to conduct
partner with Borders (a competitor, now defunct) market timing should an opportunity
and (2) to expand its product line to include present itself?
housewares, apparel, electronics, and toys that • From which of the three types of ben-
attracted customers who were looking for more efits listed above will the first entrant
than just books. in the market most likely achieve
success?
In some cases, being the first mover can have • Can the company afford sufficient resources
some disadvantages. The risks of being a first to maintain its first mover position?
mover include the high cost of pioneering EC • Will it be difficult to follow someone
initiatives, making mistakes, the chance that a else that is a first mover?
second wave of competitors will eliminate a first • What are the advantages of following
mover’s lead through lower cost and innovation, the first mover?
and the risk that the move will be too early. • Will technology be better or cost less, or
Although the advantage of a speedy market will customer needs be easier to
entry cannot be ignored, followers can be more determine?
profitable than first can movers in the long run.
608 13 EC Strategy, Globalization, and SMEs

Since a company cannot determine if and Example

when they will gain a first-mover advantage, the To eliminate channel conflict, companies can use
following questions should be answered when a B2B2C model. For examples of two companies
deciding EC strategies: that took their B2B business into the world of
Company strategists can examine the answers B2B2C e-commerce, see Taddonio (2011).
to these questions and determine the appropriate E-commerce may require that new intermedi-
approach that has the highest potential for long- aries are added to the distribution chain (e.g.,
term benefits. aggregator, e-payments, escrow services), which
may add to the problem of channel conflict. For
Managing Channel Conflict example, delivery to the customer’s home is a key
and Disintermediation to customer satisfaction, leading many e-tailers
As discussed in Chapter 3, channel conflict may to hire a delivery company.
arise when an existing company adds an online
distribution channel. In general, the strategy today Price Conflict and Its Management
is to add EC as an additional marketing and sales Price conflicts may occur when the same product
channel. This may create a channel conflict. is priced differently when it is sold online (usu-
Selling online may result in disintermediation. ally lower) than when it is sold in the physical
Disintermediation refers to the removal of stores of the same company. This is a common
intermediaries in the EC supply chain. This occurs, practice in selling airline tickets. For a discus-
for example, when consumers buy directly from sion, see Section 13.4.
manufacturers. When a company adds EC as a Both price and channel conflicts can be mini-
distribution channel, it may undercut its existing mized or eliminated if the EC business is separate
intermediaries who serve the other channels. Here from the non-EC business.
are some possible strategies that sellers can use to
ease disintermediation: Separating Online and Offline
Operations
Converting a company’s online operations into a
• Let the regular distributors fulfill the separate new company makes sense when: (1)
e-business orders, as the auto industry is the volume of anticipated e-business is very
usually doing. Buyers can order online, large; (2) a new business model needs to be
and then receive directions to go to distrib- developed; (3) the subsidiary can be created
utors where they can pick up their orders. without dependence on current operations and
• Provide online services to intermediar- legacy information systems; and (4) the online
ies (e.g., by building portals for them) company is given the freedom to form new alli-
and encourage them to re-intermediate ances, attract new talent, set its own prices, and
themselves in innovative ways. raise additional funding. Barnes & Noble,
• Sell some products only online, such as Halifax in the United Kingdom (online bank-
LEGO (lego.com) is doing. Other prod- ing), and ASB Bank in New Zealand are a few
ucts may be advertised online, but sold examples of companies that have established
only offline. separate companies or subsidiaries for their
• Avoid channel conflict entirely by not online operations.
selling online. In such a case, a company
could still have an EC presence by offer- Brand Independence
ing promotions and customer service A company faces a similar decision when decid-
online, as BMW (bmw.com) is doing. ing whether to create a separate brand for its
online offerings.
13.3 E-Commerce Strategy Initiation 609

Strategy in the Web 2.0 Environment a personalized message, including a promotion or

and in Social Networking coupons).

Social networks and Web 2.0 tools and platforms It is important to consider the following issues
are being used extensively by organizations when planning a successful online EC strategy
today. Reported benefits included the ability to that includes social media:
provide more innovative products and services,
market their products and services more effec-
tively, gain better access to knowledge, maintain • Develop an overall e-commerce strategy
lower costs, and raise revenues. For example, with clearly defined business and EC
because of the current recession, companies are goals.
investing heavily in Web 2.0. • Develop an innovative, online, and offline
Shuen (2008) offers four major reasons why brand strategy involving social networks
companies should create and use in-house social • Plan for customer engagement activities
networks: (1) immediate access to knowledge, • Leverage the top social commerce plat-
expertise, and human connections; (2) growth of forms (e.g., Facebook, Twitter) by creat-
social relationships and expansion of affiliations; ing merchant pages
(3) self-branding through a personal digital iden- • Use LinkedIn to create vendor profiles
tity and reputation; and (4) viral distribution of (corporate profile)
knowledge through referrals, testimonials, bench- • Leverage social networks for mobile
marking, and RSS updating. In 2008, Deloitte, strategy
IBM, and Best Buy began seeing benefits from • Create surveys and two-way communi-
early adoption of internal social networking. cation mechanisms to solicit feedback
A popular strategy is to start EC projects with from customers regarding products and
small groups of employees to test their response services. This will help in strategy
to the Web 2.0 tools. For example, Dell first formulation.
launched internal blogs before creating IdeaStorm,
which is offered to customers to submit ideas,
engage in dialog with company representatives, Shuen (2008) provides a comprehensive
and so forth. guide to Web 2.0 strategy, and Gold (2008) pro-
More than ever, marketers are using social vides a strategic guide for mobilizing applica-
networking tools in a wide range of activities, as tions and modifying them to fit a company’s
illustrated in the following examples. specific needs.

Example SECTION 13.3 REVIEW QUESTIONS

The importance of social media as critical to mer- 1. Describe the advantages, risks, and success
chants’ e-commerce success was discussed by factors that first movers face.
GoECart (goecart.com; 2010), in an interview 2. What are the advantages and disadvantages of
with the company’s CEO. GoECart is an creating a separate online company?
e-commerce vendor that provides retailers with 3. Why might an existing company decide to
innovative, on-demand e-commerce solutions create a new brand for its e-commerce site?
(“software as a service”). The company helps 4. What strategic benefits are associated with
retailers develop personalized CRM based on using social networks?
data available in social networks (e.g., a florist 5. Distinguish between social strategy and digi-
who has access to a customer’s birthdate can send tal strategy.
610 13 EC Strategy, Globalization, and SMEs

Determining an Appropriate EC
13.4 E-COMMERCE STRATEGY
Application Portfolio Mix
FORMULATION
For years, companies have tried to find the most
The outcome of the strategy initiation phase
appropriate portfolio (group) of EC (or other)
should be a number of potential EC initiatives
projects among which an organization should
that can exploit opportunities on one hand and
share its limited resources. The classic portfolio
mitigate threats on the other. In the strategy for-
strategy attempts to balance investments with dif-
mulation phase, the firm must decide which ini-
ferent characteristics.
tiatives to implement and in what order. Strategy
formulation activities include evaluating specific
The BCG Model and an Internet
EC opportunities and conducting cost–benefit
Portfolio Map
and risk analyses associated with those opportu-
Boston Consulting Group (BCG) implemented a
nities. Specific outcomes include a list of approved
well-known matrix (called a BCG matrix; also
EC projects or applications, risk management
known as a “Boston” matrix or “growth-share”
plans, pricing strategies, and a business plan.
matrix) for cash allocation among projects. The
These will be used in the next phase of strategy
matrix is based on the observation that a compa-
implementation. The following are the major
ny’s business units can be classified into four
activities in this phase.
categories. Each business unit can be classified as
a star, wild card (or “unknown” or “question
marks”), cash cow, and dog. The two levels of the
matrix are: “market growth rate” and “market
Selecting E-Commerce Opportunities share.” Each can be either “low” or “high.” The
results are placed into four cells, into which the
There are many potential ways to get involved in corporation would classify its projects (or busi-
EC (e.g., see Pantic 2013). ness units): stars (high growth, high share), cash
Selecting an appropriate EC project(s) involves cows (high share, low growth), wild cards (high
a justification, ranking, and cost-benefit analysis. growth, low share), and dogs (low growth, low
Best results can be achieved with input solicited share). Money can then be moved within the bud-
from both internal and external participants. One get, for example, from the business units classi-
approach is to use a strategy driven by existing fied as “cash cows” to projects in stars and wild
factors. For example, a problem-driven strategy cards that have the highest upside potential. The
may help a company if its EC strategy can solve model can be used to prioritize EC projects. For
an existing, difficult problem (e.g., using forward details, see netmba.com/strategy/matrix/bcg.
e-auctions via e-auctioneers such as Liquidation.
com to dispose of excess equipment). As noted The Viability-Fit Model
earlier, a late-mover strategy can be effective if Tjan (2001) adapted the BCG approach to create
the company can use its brand, technology, supe- what he calls an “Internet portfolio map,” which is
rior customer service, or innovative products and based on a potential fit between the culture of com-
strategies to overcome any potential deficiencies panies and the project viabilities. The viability area
resulting from not being the first mover. Examples includes success factors such as projected sales, jus-
are Internet Explorer’s emergence as the leading tification, and use of resources. Similarly, metrics
browser, and Facebook becoming the top social such as alignment with core capabilities, alignment
network. with other company initiatives, fit with organizational
However, most times it is best to use a system- culture and structure, and ease of technical imple-
atic methodology that determines which initia- mentation can be used to evaluate fit. Together, these
tives to pursue. create an Internet portfolio map (see Figure 13.3).
13.4 E-Commerce Strategy Formulation 611

Figure 13.3 The internet portfolio map (Sources: Based on Tjan (2001), Sones (2001); and the authors’
experiences)

Each company can determine criteria to be In addition to the above more well-known
used to assess viability and fit. Senior managers strategy methods, there are many special models
and outside experts evaluate each proposed EC (some of which are properties). For example,
initiative (e.g., a B2B procurement site, a B2C Egol et al. (2014) presents four new models for
webstore, an enterprise portal) on each of these e-marketing.
criteria, typically on quantitative (e.g., 1 to 100)
or qualitative (e.g., high, medium, low) scales. If
some criteria are more important than others are, Risk Analysis in Strategy Formulation
these can receive more weight. The scores are
combined, and average fit and viability scores are While Web 2.0 enables new business opportuni-
calculated for each initiative. Initiatives in which ties, it also may create substantial risks because of
there is high agreement on rankings can be con- the open computing and interactive nature of the
sidered with more confidence. technology. E-commerce risk is the likelihood
The candidate initiatives are then placed on the that a negative outcome will occur in the course of
portfolio map. If both viability and fit are low, the developing and operating an e-commerce initia-
project is rejected. If both are high, the project is tive. Risk on the Internet and in EC environments
adopted. If fit is high but viability is low, the proj- is different from those faced by offline compa-
ect is redesigned (to get higher viability). Finally, nies. For example, an EC auction company may
if the fit is low but the viability is high, the project face unique Internet security threats and vulnera-
is not adopted. Senior management must also bilities. As a result, a robust Web 2.0 security
consider factors such as cost–benefit and risk (dis- strategy is essential for fraud protection.
cussed next) in making the final decision about The most dangerous risk to a company
what initiatives become funded and in what order. engaged in e-commerce is business risk – the
612 13 EC Strategy, Globalization, and SMEs

possibility that developing and operating a new

e-commerce business could negatively impact CASE 13.2: RED HAT:
the well-being of the organization itself. In COLLABORATIVE STRATEGIC
Online File W13.1, attention is given to addi- PLANNING
tional business and EC risks.
This major, open source software company oper-
ates in a very competitive global market. Strategic
Collaborative Efforts in Strategy planning is critical for its success; therefore, the
Formulation company embarked on the following collabora-
tive strategic process:
Strategy formulation is considered a highly Step 1: Generated a set of priorities of issues
secretive process, which is done by a small team based on the company’s mission, objectives,
that only seldom involves outsiders (e.g., a con- and goals.
sultant). However, this situation is changing, Step 2: For each high priority issue, the company
mostly due to the trend of companies transform- created a team. The leaders of each team were
ing into social businesses. The basic idea is to top executives who were given tasks that were
open the planning process to be more participa- not related to their areas of expertise, with the
tory. According to Gast and Zanini (2012), com- hopes that they would generate fresh ideas.
panies that are experimenting with this approach Step 3: Each team used traditional, as well as
see two major benefits. One benefit is “improving Web 2.0 collaboration tools (e.g., blogs,
the quality of strategy by pulling in diverse and wikis), to reach any and all Red Hat employ-
detailed frontline perspectives that are typically ees, providing background information on
overlooked but can make the resulting plans more each issue, and requesting ideas and feedback.
insightful and actionable.” The second benefit The ideas were collected, organized and eval-
involves “building enthusiasm and alignment uated by all the participants. For a period of
behind a company’s strategic direction – a critical five months, there were discussions, online
component of long-term organizational health, chats, and debates. At the end of the “idea gen-
effective execution, and strong financial perfor- eration phase,” the best ideas were combined
mance.” Such participation usually helps in strat- into nine strategic priorities.
egy implementation. Step 4: The company created new teams, one for
Gast and Zanini (2012) provide the following each strategic priority. The teams identified
examples of collaborative (sometimes outsourced) initiatives for each priority (again using feed-
strategy formulation: back from employees). The teams included
• Wikimedia (the owner of Wikipedia) used people who were involved in strategy imple-
over 1,000 volunteers to generate ideas (a kind mentation and were empowered to plan and
of crowdsourcing) for the company’s future implement the one or two most important stra-
direction. The volunteers generated about 900 tegic initiatives.
proposals and participated in task forces in the This process resulted in the identification of
evaluation of the suggestions submitted and in some innovative ideas. It encouraged creativity
the formulation of specific aspects of the commitment for implementation. In addition,
strategy. there was an increased understanding of others’
• Red Hat (redhat.com), a major provider of work and better collaboration. Those who were
open-source software, formed teams that used involved in strategy implementation also partici-
wikis and other online tools to generate and pated in strategy initiation and formulation.
organize ideas for strategy development; this Because of the success of the project, Red
“idea generation phase” has restructured the Hat now updates and evaluates strategy on an
way Red Hat conducts strategic planning (see ongoing basis, rather than refreshing strategy
Case 13.2). yearly.
Case 13.2: Red Hat: Collaborative Strategic Planning 613

Despite the economic downturn, the company’s Other Issues in E-Commerce Strategy
earnings have grown consistently since the initia- Formulation
tion of the process. The stock price increased by
over 500% between 2009 and 2013. Different types of issues exist in e-strategy
For a detailed description of the process, its formulation, depending on the company, indus-
benefits, lessons learned, a supporting video try, nature of the applications, and so forth. Here
(“Jim Whitehurst on Red Hat Strategy”), and the we discuss some representative issues.
corporation’s financial results, see Yeaney (2011).
Source: Based on Yeaney (2011), Gast and
Zanini (2012), and Bort (2012). Managing Conflict Between the Offline
and Online Businesses
Questions In a click-and-mortar business, it may be diffi-
1. Red Hat is an open source company. Why was cult to allocate limited resources between
it more likely to use Web 2.0 tools? offline and online activities. The two activities
2. Relate the case to crowdsourcing (Chapter 8). can be viewed as competitors, especially in
3. Identify strategy formulation activities in the sell-side projects. In this case, personnel in
process. charge of offline and online activities may
4. View the video “Jim Whitehurst on Red Hat behave as competitors. This conflict may cause
Strategy” (2:26 minutes; at youtube.com/watch? problems when the offline side needs to handle
v=64V6nV0WnHE) cited in Yeaney (2011), and the logistics of the online side, or when prices
summarize the drivers and motivations. need to be determined. The ability of top man-
5. Summarize the benefits and the critical suc- agement to introduce change properly, and the
cess factors in the case. use of innovative processes that support col-
laboration, will all determine the degree of col-
laboration between offline and online units in a
Security Issues to Consider During business. It is essential to have strong support
Strategy Formulation by top management for both the offline and
online operations and a clear strategy of “what
Some security issues that need to be considered and how” each unit operates.
when setting up an EC strategy include:
Pricing Strategy
• Malware and other technological attack Traditional methods for determining price are the
methods. cost-plus and competition-based models. Cost-
• Human error and natural disasters. plus means determining the expenses associated
• Botnet DoS attacks that shut down order with producing a product (production cost) by
taking, or slow it down considerably. adding up all the costs involved – materials,
• Extortion, using DoS and DDoS as labor, rent, overhead, and so forth – and adding
blackmail platforms. an additional amount to generate a profit margin
• Business interruption due to any secu- (a percentage mark-up). The competition-based
rity attack. model determines price based on what competi-
• Relevant penalties and legal expenses tors are charging for similar products in the mar-
due to litigation. ketplace. For a comprehensive presentation see
• Damages caused by disgruntled employees. netmba.com/marketing/pricing.
• Damage to intellectual property (e.g., Pricing products and services for online sales
stolen or reproduced trade secrets). changes these pricing strategies in the following
ways:
614 13 EC Strategy, Globalization, and SMEs

by setting prices more competitively, adapting to

• Price comparison is easier. In tradi- changing prices, and segmenting customers for
tional markets, either the buyer, or more differentiated pricing.
often the seller, has more information
than the other party does, and the seller Multichannel Strategy
uses this information to determine a One of the most popular strategies in EC is offer-
product’s price. Price comparisons help ing several marketing channels to consumers,
create the ‘perfect market’ – one in including online and m-commerce. This is known
which both the buyer and the seller have as multichannel or omnichannel strategy. In some
ubiquitous and equal access to all rele- cases, companies need a policy of how to inte-
vant information, frequently in the buy- grate the several channels, in order to avoid chan-
er’s favor. On the Internet, search nel conflicts cited earlier. In addition, several pure
engines, and price comparison sites EC companies have opened physical locations.
(e.g., mysimon.com, kelkoo.co.uk) For example, Expedia (expedia.com) opened
make it easy for customers to find out Expedia Local Desks, located in select cities. In
who offers the product they want at the addition, it was rumored that in 2014, Amazon
lowest price. opened physical stores (called “Pantry”) where
• Buyers sometimes set the price. Name- they will sell about 2,000 items that would nor-
your-own-price models, such as Priceline. mally be found in a grocery store. Pantry will be
com and auction sites, provide buyers competing with warehouse stores like Costco and
with the option to set their own prices. Walmart’s Sam’s Club. For details, see usatoday.
• Online and offline goods are priced com/story/tech/2013/12/12/amazon-
differently. Pricing strategy may be pantry/4001707. In February 2015, Amazon
especially difficult for a click-and-mor- opened its first physical store. The strategy of
tar company. Setting online prices lower opening physical stores by pure online companies
than those offered by the offline side of can be complex. For example, Vaish (2011)
the same business may lead to internal describes the need to create a maturity model with
conflict, whereas setting prices at the different levels. The levels range from limited pres-
same level might hurt the competitive ence (Maturity Level 0) to optimization and inno-
advantage of the online business. vation (Maturity Level 4). For each level, a
• Differentiated pricing can be a pric- company needs different strategy initiation, formu-
ing strategy. For decades, airline com- lation, implementation and assessment. For more
panies have maximized revenues with on multichannel e-commerce, see Lee (2013).
yield management models – charging
different customers different prices for Acquisitions, Partnerships, Joint Venture,
the same product or service. In the B2C and Multi EC Model Strategy
EC marketplace, one-on-one marketing In contrast with early EC companies, which were
can provide price differentiation to a not diversified with one website, many EC com-
segment of customers (e.g., those buy- panies today have multiple online divisions and
ing an airline seat early). websites. Furthermore, many collaborate with
other companies in joint ventures or other kinds
of partnership. For example, Alibaba Group
(Chapter 4) includes nine companies (e.g.,
The consumer’s buying power is increasing Alipay, Alibaba.com, Tmall), and Amazon.com
due to Internet technologies that provide easy is in the business of selling hardware and soft-
access to pricing information. Sellers need to ware in addition to e-tailing. In 2014, China’s
implement smarter pricing strategies in order to Tencent Holdings purchased a percentage of Leju
be profitable and competitive, particularly using Holdings Ltd., an online real estate services
the Internet to optimize prices. This can be done company. Tencent wants to broaden their range
13.5 E-Commerce Strategy Implementation 615

of online services that can be connected to the continues, the team is likely to introduce changes
popular smartphone messaging application in the organization. Thus, during the implementa-
WeChat, which they own. Facebook, Google, tion phase, it also becomes necessary to develop
Apple and Amazon are aggressively seeking an effective change management program, includ-
access to a broad range of online services. Google ing the possibility of utilizing the business pro-
is even investing in robotics and Facebook pur- cess management approach. For a comprehensive
chased the virtual reality company Oculus VR in case study on implementing social media at IBM,
2014. Alibaba Group purchased a Silicon Valley see Chess Media Group (2012).
startup called TangoMe, and the list goes on and
on. Many of these acquisitions are purchased at Find a Champion
such a high price, like the $19 billion that Every Web project and every Web team requires
Facebook paid for WhatsApp. Do all the acquisi- a project champion. The project champion is
tions make sense? For example, many wonder if the person who ensures that the team is ready to
Facebook’s acquisition of Oculus VR for $2 bil- move forward and understands its responsibili-
lion is a visionary or crazy acquisition (e.g., see ties. The project champion is responsible for
Ortutay and Liedtke 2014). activities such as identifying the project’s
objectives, prioritizing phases, and allocating
SECTION 13.4 REVIEW QUESTIONS resources to ensure completion of the project,
1. Describe how a company should and should and so forth. The project champion may be the
not select EC applications. Web team leader or a senior executive. In his
2. Explain Tjan’s Internet portfolio map. study of e-strategy in 43 companies, Plant (2000)
3. List four sources of business risk in EC. What found that a strong project champion was pres-
questions exemplify each source of risk? ent in every e-commerce project that was suc-
4. Discuss three strategies for smarter online cessful, and that the champion was either a
pricing. senior executive or someone who was able to
5. Describe the multichannel issues and strategy. demonstrate the benefits the project would bring
6. Describe the acquisition strategy and its to the organization. Similarly, “top management
benefits. championship” was identified as a critical suc-
cess factor for organizational assimilation of
Web technologies.
13.5 E-COMMERCE STRATEGY
IMPLEMENTATION Start with a Pilot Project
A clever way to implement EC is to begin with
The execution of the strategic plan takes place one or a small number of EC pilot projects.
during the strategy implementation phase, where Problems can be determined during the pilot
EC systems are deployed. Decision makers eval- stage, allowing plans to be modified before it is
uate options, establish specific milestones, allo- too late.
cate resources, and manage the projects.
In this section, we examine some of the topics Allocate Resources
related to this implementation process. The resources required for EC projects depend on
the information requirements, the capabilities of
the performers, and the requirements of each proj-
E-Commerce Strategy ect. Some resources – software, computers, ware-
Implementation Process house capacity, staff – could be new and unique to
the EC project. A project’s success depends upon
Typically, the first step in e-strategy implementa- an effective allocation and utilization of shared
tion is to find a champion and establish an EC resources to the project such as databases, the
team, which then initiates and manages the intranet, and possibly an extranet. A variety of
execution of the plan. As EC implementation tools can assist in resource allocation.
616 13 EC Strategy, Globalization, and SMEs

Manage the Project Each option has its strengths and weaknesses,
Project management tools, such as Microsoft and the correct decisions will depend on factors
Project, assist in determining specific project such as the strategic priority of the application,
tasks, milestones, and resource requirements. the existing skills of the company’s technology
Standard system design tools (e.g., data flow dia- group, and when the EC application is needed.
grams) can help in executing the resource-
requirement plan. Outsource: What? When? To Whom?
Outsourcing can deliver strategic advantages for
firms in that it provides access to highly skilled or
E-Commerce Strategy low-cost labor, and provides potential market
Implementation Issues opportunities. Outsourcing is the process of con-
tracting (farming out) the company’s products,
There are several e-strategy implementation services, or work to another organization that is
issues, depending on the circumstances. Here we willing and able to do the job. Alternatively, the
describe some representative ones. company’s own employees could carry out these
projects in-house. In the context of EC, outsourc-
Build, Buy, or Rent EC Elements ing means the use of external vendors to acquire
Implementation of an EC application requires EC applications.
access to the construction of the company’s web-
site and integration of the site with the existing Example
corporate information systems (e.g., front end An interesting tool to help the ‘go or no go’ out-
for order taking, back end for order fulfillment). sourcing decisions is Gartner’s Magic Quadrant.
At this point, a number of decisions of whether to It analyzes companies (providers) along two
build, buy, or outsource various components or scales: the ability to execute and the completeness
an entire project needs to be made. Some of the of vision. Vendors are then placed in one of four
more specific decisions include the following: resulting quadrants (e.g. high ability to execute
and full vision make leaders, while low ability to
execute and high vision make visionaries).
Companies can use the quadrant to find the right
• Should site development be done inter- outsourcers. For details, see (gartner.com/
nally, externally, or by a combination of technology/research/methodologies/magic-
the two? Quadrants.jsp#m).
• Is it necessary to build the software
application or will the commercially Successful implementation of EC projects
available software be satisfactory? often requires careful consideration of outsourc-
• If a commercial software package will ing strategies, which involves: (1) evaluating
fit, should it be purchased or rented from when outsourcing should take place; (2) deciding
an application service provider (ASP)? which part(s) of the EC projects to outsource and
Should it be modified? which to keep in-house; and (3) choosing an
• Will the company or an external ISP (Inter- appropriate vendor(s).
net service provider) host the website?
• If hosted externally, who will be respon- Software-as-a-Service
sible for monitoring and maintaining the In considering outsourcing, a company should look
information and system? at both software-as-a-service and cloud computing
(see Online Tutorial T2) as outsourcing options.
13.5 E-Commerce Strategy Implementation 617

Table 13.4 In-house development versus outsourcing accommodate the changes an EC strategy brings.
In-house Sometimes these changes are incremental and
Criteria development Outsourcing can be managed as part of the project implemen-
Accessibility to the project Greater Limited tation process (e.g., see Harvard Business School
Knowledge of the system More Less Press 2010). In other cases, the changes are so
and its development
dramatic that they affect the manner in which the
Retention of staff’s Higher Lower
knowledge and skills
organization operates. In this instance, business
Ownership cost Higher Lower process reengineering or business process man-
Self-reliance for maintenance, Greater Lower agement is needed.
update, and expansion
Development times Longer Shorter Business Process Reengineering (BPR)
Experienced staff with Less More Business process reengineering (BPR) is a
technical know-how and methodology for conducting a one-time compre-
specialized areas
hensive redesign of an enterprise’s processes.
Outsourcing decisions are often made during BPR may be needed for the following reasons:
EC project implementation. Companies may
choose outsourcing when they want to experi-
ment with new EC technologies without spend-
ing too much money. • To fix poorly designed processes (e.g.,
A comparison of the in-house and outsourcing processes that are not flexible or scalable)
approaches is provided in Table 13.4. Sometimes, • To change processes so that they fit com-
after an evaluation of both approaches, a hybrid mercially available software (e.g., ERP,
approach is taken to leverage the benefit of both. e-procurement)
ISPs, ASPs, and consultants are external ven- • To produce a fit between systems and
dors (business partners) that are commonly processes of different companies that are
involved in EC application developments. partnering in e-commerce (e.g., e-mar-
It is important not to overestimate the advan- ketplaces, ASPs)
tages of outsourcing, since it also can involve a • To align procedures and processes with
number of risks such as the vendor going out of e-services such as logistics, payments,
business. When the vendor is a foreign company, or security
there may be additional risks such as shifts in the
political stability and the legal environment. In
addition, an organization’s lack of experience For an overview, see Johnston (2012). For a
with outsourcing and contract negotiations in a case study about Mary Kay using e-commerce
different culture may create problems. strategies to revamp its business model, see
Chapter 16 discusses several of these options Online File W13.3.
in more detail – build or buy, in-house or out-
source, host externally or internally. In many
such decisions, one needs to consider partners’ Business Process Management
strategy and business alliances as described in The term business process management (BPM)
Online File W13.2. refers to activities performed by businesses to
improve their processes. While such activities
usually are not new, software tools called busi-
Redesigning Business Processes: BPR ness process management systems have made the
and BPM execution of such activities faster and cheaper.
BPM systems monitor the execution of the busi-
During the implementation stage, many firms ness processes so that managers can analyze and
face the need to change business processes to change processes whenever needed. BPM differs
618 13 EC Strategy, Globalization, and SMEs

from BPR in that it deals not just with a one-time

change to the organization, but also with long- • Measure the extent to which the EC
term-consequences and repetitive actions. Business strategy and projects are delivering what
process management activities can be grouped they are supposed to deliver.
into three categories: monitoring, execution, and • Determine if the EC strategy and proj-
design. For details on value-driven BPM, see ects are still viable in the current chang-
Franz and Kirchmer (2012). ing business environment.
• Reassess the initial strategy in order to
Change Management learn from mistakes and improve future
Implementing large scale EC or social commerce planning.
projects may require change management ap- • Identify failing or lagging projects as soon
proaches, especially if the processes of the busi- as possible, and determine why they failed
ness have changed. A business can use a generic or lagged to avoid the same problems in
change management approach. For how IBM is the future.
conducting change management for Enterprise
2.0 applications, see Chess Media Group (2012). Web applications often grow in unexpected
For an additional description, see Chapter 14. ways, expanding beyond their initial plan. For
example, Genentec, Inc. (gene.com), a biotechnol-
SECTION 13.5 REVIEW QUESTIONS ogy giant, wanted to replace a home-grown online
1. Describe a Web (project) team and its purpose. bulletin board system (BBS). It started the project
2. What is the role of a project champion? with a small budget but soon found that the corpo-
3. What is the purpose of a pilot project? rate intranet had grown rapidly and had become
4. Discuss the major strategy implementation very popular in a short span of time, encompassing
issues of application development and BPR. many applications. Taking corrective action is part
5. Describe BPM and the need for it in EC of performance management, a topic we describe
development. in Section 13.7. For a guideline and framework for
performance management, see Gosselin (2010).

13.6 E-COMMERCE
PERFORMANCE The Performance Assessment Process
ASSESSMENT
The performance assessment is a process that is
The last phase of EC strategy development begins
based on the stated strategy, tactics, and implementa-
as soon as the deployment of the EC project is
tion plans. The process involves the following steps:
complete. Strategy assessment includes both the
continual assessment of the performance of the
implemented systems, and the periodic formal 1. Set up performance metrics.
evaluation of progress toward the organization’s 2. Monitor the performance of the business.
strategic goals. Based on the results, corrective 3. Compare the actual performance to the
actions are taken and, if necessary, the strategy is metrics.
reformulated. 4. Conduct an analysis using analytics,
including Web analytics.
5. Combine the analysis with the method-
The Objectives of Assessment ology of the Balanced Scorecard.
6. Present the results to management in the
Strategic assessment has several objectives. The form of reports, tables and dashboards.
most important ones are:
13.6 E-Commerce Performance Assessment 619

Figure 13.4 The Strategy, Tactics,

performance assessment Plans,
process Implementation

Balanced Performance
KPIs
Scorecard Metrics

Monitoring
Performance

Compare
Performance to
Metrics

Analytics,
Web Analytics

Reports and
Dashboards

The process is illustrated in Figure 13.4. A business metric is a quantifiable measure

This process is part of the larger cyclical that is used to track the performance of a business
process that starts with strategy initiation and for- process (see Klubeck 2011 and klipfolio.com/
mulation and ends with taking corrective action. resources/articles/what-are-business-metrics).
The major steps of the process are described in Establishing and measuring performance and
the remainder of this section. comparing it against the metrics is an important
key success factor.
Metrics can produce positive results in organi-
Establish and Use Metrics
zations by driving behavior in a number of ways.
Metrics can:
The first issue to address here is “what to assess?”
The answer to this is to identify the major activi-
ties listed in the strategy and plans. For example,
if one of the corporate objectives is to improve
customer service, it is necessary to find the strat- • Be the basis for establishing and assess-
egy, tactics, and plans to do so. Then one needs to ing specific goals and plans.
establish metrics. • Structure the value proposition of busi-
A metric is a specific, measurable standard ness models.
against which actual performance is compared. • Communicate a business strategy to the
A metric can be an absolute number or a ratio, workforce through performance targets.
and it can be tangible or intangible. For example, • Increase accountability when metrics
if the strategy includes the development of an are linked with performance appraisal
e-auction system for increasing sales, a metric programs and rewards.
can be the resultant sale volume.
620 13 EC Strategy, Globalization, and SMEs

Table 13.5 2012 E-strategy measurement challenges

• Align the objectives of individuals, % of companies
departments, and divisions to the enter- Description concerned
prise’s strategic objectives. Attracting new customers or clients 40
• Track the performance of EC systems, to the site
including usage, types of visitors, page Improving online marketing 38
effectiveness
visits, conversion rate, and so forth.
Retaining existing customers and 31
• Assess the health of companies by using clients
tools such as balanced scorecards and Finding the right staff 25
performance dashboards (see Person Managing technology innovation 16
2013). Analyzing and understanding how 13
to optimize performance
Planning an international strategy 7
Engaging social media channels 5
Measurements in Performance Metrics
Metrics need to be defined properly, with a clear In measuring performance KPIs, some compa-
way to measure them. For example, revenue nies may realize that their initial goals were unre-
growth can be measured in total dollars, in per- alistic, that their Web servers are inadequate to
centage change over time, or in percentage handle demand, or that expected cost savings have
growth as compared to that of the entire industry. not been realized. This calls for some adjustments.
Cost avoidance, for example, can be achieved in Assessing EC is difficult because of the many
many ways. Defining the specific measures is real life configurations and impact variables
critical; otherwise, what the metrics actually involved in what is being measured. In addition,
measure may be open to interpretation. Each it is important that the Web team address both the
metric can be expressed by one or several mea- evaluation of project performance and the assess-
sures, known as indicators. The most important ment of a changing environment.
indicators are called key performance indicators.
A key performance indicator (KPI) is a Intangible Variables
quantifiable measurement that reflects the critical When dealing with KPIs and their assessment,
success factors of a company, department, or one should also pay attention to intangible vari-
project. KPIs are used to measure performance in ables. For dealing with intangible variables, see
terms of meeting the company’s goals and objec- Hubbard (2010).
tives. There could be several KPIs for one metric
or one goal. Different companies measure suc- E-Commerce Metrics in Action
cess or failure by different sets of KPIs. (See An example of using metrics in strategy manage-
Francis 2013 for a discussion.) ment is provided in the case of Axon of New
Zealand (see Online File W13.4). To capitalize on
Examples this opportunity and retain its reputation, Axon
Hayes (2013) provides some examples of goals launched Quality Direct, an online procurement
and 32 suggested e-commerce KPIs. For example, service for small and medium-sized companies, to
for sales KPIs, he suggests monitoring daily or give them the same service as large companies.
weekly sales, traffic to the website, and custom- The case lists several Web-related metrics.
ers’ order size. For customer service KPIs, he sug-
gests counting e-mails and service-related chats. Performance Metrics
Performance metrics are measures of an organi-
Table 13.5 lists the measurement challenges zation’s performance. They are a subclass of gen-
that companies are facing. eral metrics.
13.6 E-Commerce Performance Assessment 621

Metrics are closely related to performance man- Social Media Monitoring Tools
agement systems and to the balanced scorecard. A large number of tools are available for social
media monitoring. For a comprehensive list, see
wiki.kenburbary.com, and Paine (2011).
Monitoring Performance A number of social media monitoring services
provide data to businesses (e.g., actionly.com,
Given the diversity of EC activities and websites, Radian 6; salesforcemarketingcloud.com/pro-
it is no wonder there are so many ways compa- ducts/social-media-listening, visibletechnolo-
nies conduct performance monitoring. The moni- gies.com, and twelvefold.com). Most of these
toring covers the activities occurring on websites, services track online content and then feed sum-
customers’ conversations in social media, finan- maries and other statistics into dashboards. Fee-
cial and marketing success, and more. Hundreds free services to conduct monitoring are available
of vendors provide tools and services; therefore, for smaller companies. For example, Google
it is not possible to list all of them. For example, News, Moreover Technologies, and Yahoo! track
AlertSite, a product of Smartbear Software news about companies and whole industries.
(smartbear.com), provides 24/7 website moni- Technorati (technorati.com) specifically tracks
toring and provides an alert if there is an issue social media sites. Some of the social media
with the site. For resources on website monitor- monitoring tools provide analytics as well.
ing, network performance, etc., see blog.moni-
tor.us. One major area of monitoring occurs in The Balanced Scorecard (BSC)
social media. For instructions on how to monitor One of the best-known and most widely used per-
your family’s Internet use, see Miller (2012). formance management systems is the Balanced
Scorecard (see balancedscorecard.org). Kaplan
Monitoring the Social and Norton first articulated this methodology in
Media Field their Harvard Business Review article “The
The amount of social media data on the Web is Balanced Scorecard: Measures That Drive
increasing exponentially with billions of videos, Performance” (see Kaplan and Norton 1992). For
photos, and endless tweets and other conversa- an overview, see Person (2013), and for resources,
tions. The problem that companies face is how to including white papers, examples, basics, and
monitor the Web for data that are relevant to infographics, etc., see balancedscorecard.org/
them. Furthermore, companies need to do this Resources/AbouttheBalancedScorecard/
quickly and at a low cost. The solution is select- tabid/55/Default.aspx. The major objective of
ing appropriate metrics and automating data col- the Balanced Scorecard is to monitor the execu-
lection. Companies can set up an automated tion of EC strategy-related activities. For details,
monitoring system on their own using e-mail, see Online File W13.5.
RSS feeds, or special software. For comprehen-
sive coverage see Turban et al. (2015), and for
tips for brand marketers, see forbes.com/sites/ Analyzing Performance Data
cherylsnappconner/2014/03/04/top-online-
reputation-management-tips-for-brand- Once data are collected, they can be compared to
marketers. metrics and KPIs. Both the performance data and
Google offers e-mail alerts for any keywords the deviations from the targets are analyzed.
of a user’s choice, such as a brand name, or a Analyzing e-commerce data and information is a
competitor’s brand name, and so forth. Users can comprehensive field that includes many methods
set up e-mail alerts for the entire Web, blogs, etc. and tools. We cover only the major ones in this
(e.g., see Beal and Strauss 2008). chapter.
622 13 EC Strategy, Globalization, and SMEs

Defining EC Analytics Web analytics are those related to the conversion

rate, from a visitor to a buyer.
EC analytics is an umbrella term that includes a Information about Web analytics is available
number of specialized analysis techniques. For from emetrics.org and jimnovo.com. Two of the
example, in the social media area, one can use many Web analytics tools providers are WebTrends
social filtering, social network analysis, senti- (webtrends.com) and Google Analytics (google.
ment analysis, and social-media analytics. In com/analytics).
general, e-commerce analytics describes the pro-
cess of measuring, analyzing, and interpreting Example: Google Analytics
the results of what we monitor (e.g., interactions This comprehensive tool conducts many statisti-
and associations among people). cal activities (e.g., time-series analysis, cross-
EC analytics is crucial for obtaining a strate- sectional analysis, scatter diagrams, trend
gic understanding of what is taking place in EC. analysis, ROI, and much more. For seven Google
EC analytics is a subcategory of Web analytics Analytics metrics to watch, see prdaily.com/
(described later). Main/Articles/7_Google_Analytics_metrics_
you_should_monitor_13939.aspx#).
Major Types of Analysis To learn about the new features of the Google
Analysis can be done on marketing data, finan- Analytics system and how to use them for
cial data, behavioral data, and on other data. The optimization, see Cutroni (2014). Several companies
major types of analysis are text and Web mining, have created tools to supplement Google Analytics.
optimization, forecasting and predictions, and Examples are: Agency Platform, Argyle Social,
sentiment analysis. Unilyzer, Social Commerce Insights by Bazaarvoice,
and Visible Intelligence from trucast.net.

Web Analytics and Its Major Tools Other Web analytic tools include: Yahoo! Web
analytics (web.analytics.yahoo.com). Watch the
One large and growing area of EC strategy video “SAS® Social Media Analytics” (3:49
assessment is Web analytics, which, according minutes) at youtube.com/playlist?list=PLED82
to the Web Analytics Association, “is the mea- 1CEF3DF6AB33.
surement, collection, analysis, and reporting of
Internet data for the purposes of understanding Social Media Activities
and optimizing Web usage.” It also can be used to There are many ways to analyze social media.
facilitate market research and performance Generic e-commerce tools such as Web mining
assessment. Web analytics begins by identifying and text mining can be used in social media too.
data that can assess the effectiveness of the site’s There are several other tools for data, texting, and
goals and objectives (e.g., too many visitors to a Web mining that are useful in social media. For
site map may indicate site navigation problems). comprehensive coverage of social media plat-
Web analytics concentrates on Web traffic pat- forms, tools to use to find customers, and much
terns and people’s behavior online. Next, analyt- more, see Sponder (2012). Following are some
ics data are collected, such as the location of site examples of analytical tools.
visitors, what pages they view, time spent visiting
the site, and the manner in which they interact Example 1
with the site’s content. The data can reveal the IBM SPSS Modeler (ibm.com/software/analyt-
impact of search engine optimization or an adver- ics/spss/products/modeler) is a predictive ana-
tising campaign, the effectiveness of website lytics software tool that measures trends in
design and navigation, and, most important, visi- consumer views of products and services that are
tor conversion. Because the goal of most EC collected from Web 2.0 tools (e.g., blogs and
websites is to sell products, the most valuable social networks). The upgraded versions of
13.7 Performance Improvement and Innovation 623

Modeler also analyze emoticons and common which conversations are important and should be
texting jargon terms. The software covers 180 monitored. For details, see ibm.com/analytics/us/
variables and 400,000 industry-specific terms en/conversations/social-sentiment- steam
that can be analyzed. punk.html.
For success in sentiment analysis, see
Example 2 Valentine (2014). For how Thomson Reuters is
Wendy’s International uses software to analyze incorporating sentiment analysis gained from
over 500,000 text-based customer messages col- Twitter to use in their market analysis and trading
lected each year. Using Clarabridge text analytics platform, see Lunden (2014).
software, Wendy’s analyzes comments from its
Web-based feedback forms, e-mails, receipt-based SECTION 13.6 REVIEW QUESTIONS
surveys, and social media. Before the emergence 1. Describe the need for assessment.
of social media, the company used a combination 2. Define metrics and describe their contribution
of spreadsheets and keyword searches to review to strategic planning.
comments in a slow and manual approach. 3. Describe the corporate performance manage-
ment approach to strategy assessment.
Example 3 4. What is the Balanced Scorecard?
Nielsen Social offers Twitter TV analytics and an 5. Describe Web analytics.
engagement platform. 6. Describe sentiment analysis.
7. What is the IBM sentiment analysis index?
Other major vendors that provide analytic
tools are clarabridge.com, attensity.com, sas.
com, and sap.com. 13.7 PERFORMANCE
IMPROVEMENT
Sentiment Analysis AND INNOVATION
Sentiment analysis or opinion mining refers to
a type of analysis that aims to determine the atti- The final step in the cycle is to determine, based
tude of a person with respect to a particular issue on the results of Phase 4, how to improve perfor-
as expressed in online conversations. For details, mance, or how to change the strategy.
see Pang and Lee (2008). It is measured by tech- Most organizations are consistently trying to
niques such as natural language processing improve their performance, which in many cases,
(NLP), computational linguistics, and text analy- is necessary to do in order to stay competitive or
sis to automatically identify and extract subjec- even to survive.
tive information found in social media. In this section, we discuss the following topics:
Automated sentiment analysis is a process of overview, dashboards, and performance improve-
training a computer to identify sentiments within ment via innovation. We also provide examples of
content using NLP. Various sentiment measure- innovative strategies.
ment platforms employ different techniques and
statistical methodologies to evaluate sentiments
while some use a hybrid system. An Overview of Performance
Improvement
IBM Social Sentiment Index
IBM developed an index that aggregates and There are many ways and tools to improve the
gauges public opinion from a range of social performance of organizations and individuals.
media sources. For example, the software identi- Which approach to use depends on a diagnosis of
fies the emotional context of the conversation what the performance assessment reveals. One
(e.g., between sarcasm and sincerity), and discovers approach is to do restructuring by using BPM and
624 13 EC Strategy, Globalization, and SMEs

BPR (Section 13.5). Large companies are using can be seen when you use Google to search
competitive intelligence (CI; see whatis.techtarget. “photos (or images) of dashboards.” For infor-
com/definition/competitive-intelligence-CI). mation on getting started with dashboards, a
This includes the analysis of competitive markets, dashboard gallery, articles, and more, see dash-
competitors, and the business environment. Using boardinsight.com, and for a comprehensive
the Balanced Scorecard to check the ‘health’ of guide to dashboards, including infographics and
companies has been recommended by Kaplan and case studies, see klipfolio.com/guide-to-business-
Norton (1996). Kaplan et al. (2010) suggest using dashboards.
the balanced scorecard to avoid failures of partner-
ships. The field of Industrial Engineering is dedi-
cated to performance improvement, as are several Innovation for Performance
other disciplines. Today, there are tens of thou- Improvement
sands of apps that can be used to improve the
performance of EC; many of the apps are for Innovation in e-commerce is similar to any other
smartphones. Therefore, it is impossible to list all innovation activity. It is the key to improving per-
the techniques available for performance improve- formance and may determine the success of
ment. Consequently, we have elected to cover only e-commerce projects as well as the success of the
two topics here: dashboards and innovations. entire organization, and possibly its survival.
What is unique today is the development of
philosophy, strategy, and tools for both manage-
Dashboards in E-Commerce ment and employees to engage much more fully
in the innovation process. Social media also pro-
Once data are analyzed and summarized in tables vides management with new methods of innova-
and charts, they need to be presented to manage- tion, such as the use of crowdsourcing for idea
ment for decision making. One popular tool to do generation and listening to customers’ sugges-
just that is a dashboard. tions (and complaints) as input for product design
or redesign.
What Is a Dashboard?
A dashboard is a control panel. Its most well- 1. Spigit, Inc. (spigit.com; now part of
known application is the instrument panel in front Mindjet Corporation) provides nine keys
of a driver of an automobile, or in front of an air- to innovation in the social media environ-
plane pilot. It usually involves many gauges and ment (Spigit 2011). A summary of some
indicators. An information dashboard (referred of the continually changing nine key
to as a “dashboard” in this chapter) is a visual pre- points is: Treat innovation as a discipline.
sentation of data organized in a way that is easy to 2. Create common community space to
read and interpret. It is popular user interface. The give everyone in the organization a
information is presented through gauges, charts, chance to contribute ideas.
maps, tables, etc., to reveal the direction and veloc- 3. Innovation benefits from a diversity of
ity of the measured metrics. Dashboards are very perspectives (e.g., in the composition
popular business tools for use by executives and of crowdsourcing participants).
managers since they visually summarize and track 4. Employees’ ideas should be free and
the important information (usually the status of unrestricted.
KPIs and metrics) and point to any deviations from 5. Create a culture of constant choices since
targets using alerts (e.g., red colors), indicating the markets are constantly changing.
where action needs to be taken. Dashboards are 6. Recognize that for innovation to take
usually interactive and integrate information from place, ideas must go through an evalua-
multiple sources. Dashboards may be customized. tion process; however, realize the power
There are many types of dashboards and of rejected ideas.
they can be very colorful. Over 100 examples
13.7 Performance Improvement and Innovation 625

The innovations must to be measured in order to and ToysRus.com. Target stores are also price
be managed. Here are few innovation strategies: matching items found on Target.com. For
• IBM helps their clients innovate their EC busi- details, see Wohl (2012). Toys “R” Us is
ness model by enabling the clients to better matching prices at their Babies “R” Us store
manage and redefine their value chain and use against competitors.
e-commerce technology (see ibm.com/smart- • Best Buy (bestbuy.com) is facing competition
e r p l a n e t / u s / e n / s m a r t e r _ c o m m e rc e / from all sides, mostly from Amazon.com and
overview). GameStop.com, which provides a serious
• Communication technologies and Web 2.0 threat to Best Buy’s sales. Best Buy’s physical
tools enable employees to work off site. The stores have become a showroom for people
virtual office (see Violino 2011) can help who visit the stores, use their smartphones to
increase performance. scan product barcodes to compare prices, and
• Many companies are integrating war games in then buy the same items at a cheaper price on
their innovations to study strategies for Amazon.com or other online stores. Due to its
improving their products. By simulating the losses, Best Buy was forced to close many of
thoughts and actions of their competitors (to their low level of sell stores. Best Buy’s strat-
see how their innovations compare with their egy now is to sell more products from its
rivals), they will be able to better seize oppor- online store, but it is still struggling. Best Buy
tunities (see Capozzi et al. 2012). has improved its customer service as well as
• A large number of innovations are related to its loyalty program and is offering free ship-
m-commerce. ping for its loyalty card members. For details,
Computerized creativity tools can facilitate see Dignan (2012).
innovation both for individuals and for groups. • Travelzoo Inc. (travelzoo.com) operates in a
For a list of individual and group creativity sup- competitive online environment. Their strat-
port tools, see Shneiderman (2007). Note that egy is to increase their reach, expand the sales
several Web 2.0 tools are on the list. For many force and develop new products, especially in
innovation-related cases, strategies, and articles, the mobile and hotel categories. eBay (ebay.
visit enterpriseinnovation.net. com) competes with Amazon, Etsy, Bonanza,
Common ways to improve innovations are: (1) and others by helping clothing start-up com-
Foster openness to innovation, (2) expand the panies put their webstores on eBay’s site.
pipeline of new ideas, (3) triage the most promis- • Facebook (facebook.com) sells game cards that
ing ideas, and (4) adopt a ‘test and learn’ are redeemable only for Facebook games.
approach. • Apple (apple.com) and Facebook (facebook.
com) have teamed up to counter Google by
bringing “Facebook Integration” through
Innovative Strategies: Some Apple’s iOS 6. With Facebook Integration,
Illustrative Examples users can sign in to Facebook and update their
status, share links in Safari, and post photos,
The following are several illustrative examples of with an option to allow Facebook to access
strategic EC decisions: their Contacts and Calendar. Apple also intro-
• Target Corporation (target.com) matched cer- duced Apple Maps (an unsuccessful attempt
tain online retailers’ prices during the 2012 to compete with Google Maps). However, in
holiday season to compete with other stores an attempt to better Maps, in 2014, Apple
for shoppers. They first decided to match purchased Spotsetter, a social search and
prices until December 24, but in 2013, they mapping startup.
decided to offer online price matching year- • Cars.com (cars.com) uses a differentiation
round. Target is matching prices offered by strategy by making its website a secure
Amazon.com, Walmart.com, BestBuy.com, display for all makes and models of cars. It
626 13 EC Strategy, Globalization, and SMEs

serves both consumers and dealers for new and

used cars. The site enables consumers to com- 13.8 A STRATEGY FOR GLOBAL
pare features, read recommendations, and E-COMMERCE
obtain quotes from dealers. By using Web 2.0
tools and platforms through sites such as Deciding whether to “go global” is a strategic
Facebook, Twitter, and Google+. For details, issue. In a June 30, 2010 report on world Internet
see (cars.com). use, Miniwatts Marketing Group reported that
• Google+ is a social network launched in nearly 2 billion people worldwide are regular
2011; it uses differentiation to advance its Internet users. In the second quarter of 2012,
network, building upon its search capabili- approximately 248 million people were in North
ties. Google+ is offering branding pages in its America, more than 800 million were in Asia,
effort to take advertising business away from and nearly a half billion were in Europe (inter-
Facebook. (Facebook has a huge competitive networldstats.com/stats.htm). These statistics
advantage due to the large number of mem- illustrate the enormous potential that exists for
bers and visits.) However, Google’s strategy companies to expand their market share globally
seems to have worked. By August 2011, it using EC. Today the figures are much higher.
became the fastest growing (in percentage) The decision to go global is made for many rea-
social network. sons, both reactive and proactive. Reactive reasons
• To support its Smarter Commerce strategic include factors such as competitors that are already
initiative, IBM acquired several EC compa- selling internationally. Proactive reasons include
nies at high prices (Coremetrics, Sterling sellers that are seeking economies of scale, look-
Commerce, Unica). IBM’s strategy is to ing for new international markets, gaining access
meet the demand for social media products to sufficient or new resources, cost savings, and
and services by tying mobile, social, analyt- local government incentives. Regardless of the
ics, and cloud computing together, for both reasons, expanding globally to realize a compa-
online and offline shopping. For details, see ny’s strategic objectives requires extensive plan-
Guinn et al. (2011). In April 2012, Facebook ning and responding quickly to opportunities.
bought Instagram for $1 billion. Many won- A global electronic marketplace can be an
dered why the company paid so much for a attractive opportunity in an EC strategy. Going
company with no revenue. The answer is: It global means access to larger markets, opportu-
is a strategic acquisition. Hill (2012) pro- nity to minimize taxes, and flexibility to employ
vides 10 reasons for the acquisition. (See a less expensive workforce anywhere. However,
discussion questions at the end of this going global is a complex and strategic decision
chapter.) process for several reasons. Geographic distance
is an obviously important issue in conducting
SECTION 13.7 REVIEW QUESTIONS business globally; however, frequently, it is not
1. Why do organizations need to improve perfor- the most important issue. Cultural differences
mance even if their performance is already and political, legal, administrative, and economic
good? issues must be considered. This section briefly
2. Define dashboards and explain their usage in examines representative opportunities, problems,
the strategy-performance cycle. and solutions for companies that are going global
3. Is it wise for big companies to pay so much with EC. For an overview of globalization, see
money to acquire small EC-related companies? Prahalad and Krishnan (2008).
13.8 A Strategy for Global E-Commerce 627

Benefits and Extent of Global Globalization and Social Networking

Operations Globalization of EC has benefitted greatly from
social networking. For example, there are about
A major advantage of EC is the ability to conduct four times more international Facebook mem-
business at any time, from anywhere, and at a bers than in the U.S. Furthermore, companies
reasonable cost. These are also the drivers behind such as Amazon.com, Google, Groupon, and
global EC, and there have been some incredible Yahoo! are very active globally. For insights
success stories in this area. For example: about going global in the social environment, see
Adobe (2012).

• eBay conducts auctions in hundreds of

countries worldwide. Barriers to Global E-Commerce
• Alibaba.com (Chapter 4) provides B2B
trading services to hundreds of thou- Despite the benefits and opportunities offered by
sands of companies worldwide. globalization, there are several barriers to global
• Amazon.com sells books and millions of EC. Some of these barriers face any EC venture
other items to individuals and separate but become more difficult when international
retail websites for 13 countries, includ- impacts are considered. These barriers include
ing the U.S., UK, France, and Brazil. authentication of buyers and sellers (Chapter 10),
• Small companies, such as ZD Wines generating and retaining trust (Chapter 9), order
(zdwines.com), sell to hundreds of fulfillment and delivery (Chapter 12), security
customers worldwide. HotHotHot (Chapter 10), and domain names (Chapter 16).
(hothothot.com), a tiny Internet pioneer- Others are unique to global EC. In this chapter,
ing company reported its first interna- we will discuss some of these barriers.
tional trade only after it went online; iGlobal stores (iglobalstores.com) offers sug-
within two years, global sales accounted gestions on what to offer international customers:
for 25% of its total sales. Global sales country-specific checkout experience, up-to-the
now are done via HotSauce.com service. minute currency conversion and foreign settle-
• Major corporations, such as GE and ment, global fraud and risk and its protection,
Boeing, have reported an increasing calculation of duty and tax, and integration with
number of international vendors partici- existing information systems. (Note: The offer-
pating in their electronic RFQs. These ings keep changing.)
electronic bids have resulted in a 10 to
15% cost reduction and more than 50% Cultural Differences
reduction in cycle time. The Internet is a multifaceted marketplace made
• In 2013, the NFL opened an e-com- up of cross-cultural users. The multicultural
merce shop for the Chinese market (nfl. nature of global EC is important because cultural
tmall.com), which partners with 25 attributes (such as social norms, local habits
regional TV broadcasters and digital and spoken languages) determine how people
media outlets across China (see PR interact with companies, agencies, and with each
Newswire 2013). other. Cultural and related differences include
• By recruiting online via social networks spelling differences (e.g., American versus
(e.g., xing.com and linkedin.com), British spelling), information formatting (e.g.,
many international corporations have dates can be mm/dd/yy or dd/mm/yy), graphics
considerably increased their success in and icons (e.g., mailbox shapes differ from coun-
recruiting employees to work in interna- try to country), measurement standards (e.g.,
tional locations. metric versus imperial system), and so forth.
Many companies are globalizing their websites
628 13 EC Strategy, Globalization, and SMEs

by creating different sites for different countries, ity of the site and the number of languages for
taking into account site design elements, pricing translation and can be a lengthy process.
and payment infrastructures, currency conver-
sion, customer support, and language translation. Machine Translation
Some companies address the cost and time prob-
Language Translation lems by translating their Web pages into different
Although the world population is over 7 billion languages through what is called machine trans-
(2014), only about 1 billion people speak English lations. A list of free translation programs can be
as their native or second language. In contrast, found at xmarks.com/site/www.humanitas-
more than 1.4 billion people speak Chinese. In international.org/newstran/more-translators.
their study of 1,000 top websites, Sargent and htm and websites.translations.com. For exam-
Kelly (2010) found that more than 72% of con- ples on how Lionbridge Technologies, Inc. uses
sumers would be more likely to purchase a prod- machine translation to help their clients, see lion-
uct with the description in their native language, bridge.com/clients. For example, in November
and 56.2% agreed that price is not as important as 2013, Lionbridge was selected by Net-A-Porter
being able to access information in their native (Case 1.1, Chapter 1) to develop and maintain
language. In order to reach 80% of the world’s translated content for Net-A-Porter’s global web-
population, a website would have to be translated sites. Net-A-Porter ships its luxury fashion prod-
into 83 of the world’s 6,912 languages. Therefore, ucts to 170 countries and operates several
a website offered in only one language can only non-English sites (e.g., Mandarin, French,
reach 20 to 30% of the total online population at German). For details, see Sklair (2009).
the most.
Clearly, these single language websites are Example: Ortsbo, Inc.
severely limiting their customer base. It is not The company that enables real-time global com-
surprising then, that language translation is one munication, claims more than 212 million unique
of the most obvious and most important aspects users in over 170 countries. Telus International
of creating and maintaining global websites. teamed up with Ortsbo in a customer care pro-
Sargent and Kelly (2010) also reported that 23 gram to enable Telus’s customer service agents to
was the average number of languages supported chat in real time online to almost anyone in their
by the 250 sites who participated in their survey. native language (as of 2013, the software is
The top 25 global websites support an average of available in 66 languages). Telus can offer multi-
58 languages. In 2014, Byte Level Research lingual support at a lower cost because they do
reviewed 150 corporate global websites, identify- not have to hire additional agents for each lan-
ing the 25 top “amazing global gateways” – lead- guage. (See Bach 2013 for details.)
ers, laggards, and best practice companies The Droid Translator app, launched in June
(bytelevel.com/reportcard2014/#25top). 2014, offers the capabilities to transform per-
The number one global website in 2011 was sonal and business chat by translating phone,
Facebook. It replaced Google, which was number video, and text chat in 29 languages (see Petroff
one in 2010. (In 2014, Google was back to num- 2014).
ber one.) Facebook’s representative innovations
include multilingual plug-ins, an improved global Legal Issues
gateway, and multilingual user profiles. The pri- One of the most contentious areas of global EC
mary problems with language translation are is the resolution of international legal issues
speed and cost. It may take a human translator a (Chapter 15). An ambitious effort to reduce dif-
week to translate a medium-sized website into ferences in international law governing EC is the
another language. For large sites, the cost can be United Nations Commission on International
more than $500,000, depending on the complex- Trade Law (UNCITRAL) Model Law on
13.8 A Strategy for Global E-Commerce 629

Electronic Commerce. Its purpose is to provide the supporting information systems. For exam-
national legislators with a set of guidelines that ple, many websites offer different language or
are internationally acceptable, which specify how currency options, as well as special content.
to overcome some of the legal constraints in the Europcar (europcar.com), for example, has a
development of e-commerce. It also provides for global presence in over 150 countries, each with
a safer legal platform to be constructed through an option for one of 10 languages. The company
the design of fair, current, and consistent guide- has a free iPhone app, which is available in eight
lines in e-commerce transactions (see uncitral. languages.
org).The Model Law has been adopted in some
form or another in many countries and legal juris- Payments in Global EC Trades
dictions, including Singapore, Australia, Canada, The issues facing global payments vary from
Haiti, and the United States. fraud to banking regulations. Some solutions
International trade organizations, such as the were discussed in Chapter 11. Companies such as
World Trade Organization (WTO) and the Asia- Elavon (elavon.com) provide global EC gateway
Pacific Economic Cooperation (APEC) forum, solutions (see Business Wire 2012).
have working groups that are attempting to
reduce EC trade barriers in areas such as pricing Economic and Financial Issues
regulations, customs, import/export restrictions, Economic and financial issues encompassing
tax issues, and product specification regulations. global EC include government tariffs, customs,
and taxation. In areas subject to government
Geographic Issues and Localization regulation, tax and regulatory agencies have
Barriers posed by geography differ based on the attempted to apply the rules used in traditional
transportation infrastructure between and within commerce to e-commerce, with considerable
countries and the type of product or service being success. Exceptions include areas such as inter-
delivered. For example, geographic distance is national tariff duties and taxation. Software
almost irrelevant with online software sales. shipped in a box would be taxed for duties and
tariffs upon arrival. However, software down-
Example: Clarins Group loaded online may rely on self-reporting and
Clarins Group (clarinsusa.com), a major player in voluntary payment of tax by the purchaser,
the skin care, makeup, and fragrance business sec- something that does not happen very often. Note
tor, is significantly increasing its global online that Amazon.com and other e-tailers have
presence and its e-commerce analytics to optimize started charging sales tax in many U.S. states for
online performance of its trading platform. Its digital downloads (see taxes.about.com/od/
brands, such as Clarins, and Azzaro, are advertised statetaxes/a/sales-tax-for-digital-downloads.
and sold on websites using the EC vendor htm; updated April 28, 2014).
Intelligent Trader, in more than 15 countries, while A major financial barrier to global EC is elec-
the challenges of multichannel, multilanguage, tronic payment systems. To effectively sell online,
and multicurrency are addressed. EC firms must have flexible payment methods
that match the ways people in different countries
Web Localization pay for their online purchases. Although credit
Many companies use different names, colors, cards are used widely in the United States, many
sizes, and packaging for their overseas products European and Asian customers prefer to complete
and services. This practice is referred to as local- online transactions with offline payments. Even
ization. In order to maximize the benefits of within the category of offline payments, compa-
global e-commerce, the localization approach nies must offer different options depending on the
also should be used in the design and operation of country. For example, French consumers prefer to
630 13 EC Strategy, Globalization, and SMEs

pay with a check, Swiss consumers expect an

invoice by mail, Germans commonly pay for Yahoo! has a specific website for Japan:
products only upon delivery, and Swedes are “Yahoo! Japan;” yahoo.co.jp); products
accustomed to paying online with debit cards. are priced in local currencies; and local
Pricing is another economic issue. A vendor terms, conditions, and business prac-
may want to price the same product at different tices are based on local laws and cul-
prices in different countries based upon local tural practices.
prices and competition. However, if a company • Think globally, act consistently. An
has one website, differential pricing will be dif- international company with country-
ficult or impossible. Similarly, what currency specific websites should be managed
will be used for pricing? What currency will be locally and must make sure that areas
used for payment? such as brand management, pricing, ad
design, and content creation and control
E-Commerce in Developing Countries are consistent with the company’s
Economic conditions determine the degree of the strategy.
development of countries. Some developing coun- • Value the human touch. Human trans-
tries are using EC as a springboard to improve lators are preferred over machine transla-
their economies (e.g., China, Malaysia, India). tion programs. The quality of translation
Other developing countries are making strides. is important because even a slight mis-
For a discussion, see Sanayei (2011). translation may drive customers away.
• Clarify, document, explain. Pricing,
privacy policies, shipping restrictions,
Breaking Down the Barriers to Global contact information, and business prac-
E-Commerce tices should be well documented,
located on the website, and visible to the
A number of international organizations and customer.
experts have offered suggestions on how to break • Offer services that reduce trade bar-
down the barriers to global EC. Some of these riers. It is not feasible to offer prices
suggestions are: and payments in all currencies, so pro-
vide a link to a currency exchange ser-
vice (e.g., xe.com) for the customer’s
• Be strategic. Follow the entire strategy convenience. In B2B e-commerce, inte-
life cycle. A company must consider what grate EC transactions with the account-
countries to target and which languages, ing/finance information system of the
and how the users in the target countries major buyers.
will react. These considerations need to
be included in the strategy.
• Know your audience. Consider cul- SECTION 13.8 REVIEW QUESTIONS
tural issues and legal constraints, which 1. Describe globalization in EC and the advan-
vary around the world. tages it presents.
• Localize. Websites need to be localized, 2. Describe the major barriers to global EC.
as described in Chapter 8. In certain 3. What can companies do to overcome the bar-
countries (e.g., Japan, China, Russia), riers to global EC?
local languages are essential (e.g., 4. Discuss the pros and cons of a company offer-
ing its website in more than one language.
13.9 E-Commerce Strategy for Small and Medium-Sized Enterprises 631

of knowledge or IT expertise in the SME, and

13.9 E-COMMERCE STRATEGY limited awareness of the associated opportunities
FOR SMALL AND MEDIUM- and risks. As a result, many SMEs create static
SIZED ENTERPRISES websites that are not used for selling. However, a
growing number of SMEs are adopting the EC
E-commerce can be one of the most effective busi- strategy. Arceo-Dumlao (2012) provides an over-
ness tactics for small and medium-sized enter- view of how digital marketing helps small busi-
prises (SMEs). The potential for SMEs to expand nesses to grow.
their markets and compete with larger firms In her article, Burke (2013) describes how a
through EC is enormous. Some of the first compa- 15 year old girl created a successful business
nies to take advantage of Web-based e-commerce inventing special flip-flops, which are now sold
were small and medium-sized enterprises (SMEs). online, in various offline boutiques, and at
While larger, established, tradition-bound compa- Nordstrom. For the future of EC for small busi-
nies hesitated, some forward-thinking SMEs initi- nesses, see Mills (2014).
ated online presence and opened webstores Choosing an EC approach is a strategic deci-
because they realized there were opportunities in sion that must be made in the context of the com-
marketing, business expansion, cost-cutting, pro- pany’s overall business strategy. On the positive
curement, and a wider selection of partner alli- side, the nature of EC lowers the barriers to entry,
ances. An example of an active SME is: The and it is a relatively inexpensive way of reaching
Mysterious Bookshop (mysteriousbookshop. a larger number of buyers and sellers who can
com). more easily search for, compare prices, and nego-
Clearly, SMEs are still finding it difficult to tiate a purchase. However, there are also some
formulate or implement an EC strategy, mainly inherent risks associated with the use of EC in
because of their inability to handle large volumes SMEs. Table 13.6 provides a list of major advan-
of inventory, limited use of EC by suppliers, lack tages and disadvantages of EC for SMEs.

Table 13.6 Advantages and disadvantages of EC for small and medium-sized businesses
Advantages/benefits Disadvantages/risks
• Inexpensive sources of information. A Scandinavian study • Lack of funds to fully exploit the potential of EC
found that over 90% of SMEs use the Internet for
information search (OECD 2001)
• Inexpensive ways of advertising and conducting market • Lack of technical staff or insufficient expertise
research. Banner exchanges, newsletters, chat rooms, in legal issues, advertising, etc. These human
and so on are frequently cost-free ways to reach customers resources may be unavailable or prohibitively
expensive to an SME
• Competitor analysis is easier. A Finnish study found that • Less risk tolerance than a large company. If
Finnish firms rated competitor analysis third in their use initial sales are low or the unexpected happens,
of the Internet, after information search and marketing the typical SME does not have a large reserve
of resources to fall back on
• Inexpensive ways to build (or rent) a webstore. Creating • When the product is not suitable or is difficult
and maintaining a website is relatively easy and cheap for online sales
(see Online Chapter 16)
• SMEs are less locked into legacy technologies and existing • Reduced personal contact with customers
relationships with traditional retail channels
• Image and public recognition can be generated quickly. • There is an inability to afford entry, or purchase
A Web presence makes it easier for a small business enough volume, to take advantage of digital
to compete against larger firms exchanges
• An opportunity to reach worldwide customers. Global
marketing, sales, and customer support online can be very
efficient
632 13 EC Strategy, Globalization, and SMEs

If Judy Can – You Can Too!: The Story 3. Setting the retail price for each item.
of Blissful Tones Webstore 4. Grouping the products into “collections.”
Blissful Tones blissfultones.com sells antique These are pages that hold similar products,
Tibetan Singing Bowls, Nepali jewelry, and med- such as large singing bowls, medium bowls,
itation items such incense, mala, tingsha, and and small bowls.
prayer wheels. It is a tiny online business, hosted 5. Creating additional pages for customer ser-
by Shopify.com. Creating the website on Shopify vice, “about” Judy the store owner, and educa-
involved the following process: tional videos and other material about the
1. Creating a welcoming home page for the site, history and use of singing bowls.
with a description about the company and Another task involved setting the shipping
products. prices for various items, so that the shipping cost
2. Uploading all product images and descrip- is automatically added to the item price when a
tions (see Figure 13.5). buyer checks out. The choice for Blissful is USPS

Figure 13.5 Screen shot of BlissfulTones.com

13.9 E-Commerce Strategy for Small and Medium-Sized Enterprises 633

Priority Flat-Rate shipping boxes in small, way, but even then, SMEs are more likely to
medium, and large sizes. Free shipping is offered purchase globally than to sell globally. In the
for all orders over $100. June 2010 “The State of Small Business Success”
For marketing the site, Judy is using the Constant (was available at networksolutions.com/small-
Contact e-mail database with nearly 1,500 names. business/wp-content/files/Network_Solutions_
Judy occasionally sends occasional discount offers Small_Business_Success_Index.pdf), the incidence
and notifications of new products. In addition, of global purchasing by SMEs showed an
Google Ad Words is used to promote the site, increase in the first six months of 2010 from 11 to
which has proven to be a great success. Judy is cur- 18%. On the other hand, global selling of prod-
rently planning marketing campaigns using social ucts and services by SMEs decreased in the same
media. time period. Despite this, SMEs doing business
When a customer places an order, the Shopify globally report that EC has a “major impact” on
system offers several payment options: PayPal, their ability to operate on a broader scale. EC
credit cards, or cash on delivery. Judy opted to activities that SMEs engage in globally include
use the first two options so the income would be communicating with global customers (41%),
credited quickly. A small fee is deducted from the buying supplies (31%), and selling their products
customer’s payment for credit card or PayPal globally online (27%).
fees. Shopify deposits the payments directly into
Judy’s bank account.
When a customer places an order, Shopify Resources to Support SME Activities
sends an e-mail alert to Judy’s e-mail address. in EC
This way, she can go online and find the custom-
er’s specific order and mailing address. SME owners often lack strategic management
Order fulfillment is a more difficult task. The skills and consequently are not always aware of
packaging involves using bubble wrap and changes in their business environment with
Styrofoam peanuts to protect the merchandise. respect to emerging technologies. Fortunately,
Shopify has a special page for “orders” where the SMEs have a variety of private and public sup-
customer’s order, address, and e-mail address are port options (e.g., sba.gov, business.gov.au).
kept. Judy labels the package with the customer’s In addition, vendors realize that the large
address and her return address, adds a special number of small businesses means an opportu-
thank you note inside, and takes the packages to nity for acquiring more customers. Thus, many
the post office. Once Judy sends the package, she vendors have created service centers that offer
logs into Shopify and hits the “fulfill” button, and both free information and fee-based support.
types in the package tracking number. Then, the Examples are IBM’s Small and Medium
customer automatically receives an e-mail notifi- Business Solutions (ibm.com/midmarket/us/
cation that the product is in the mail. en) and Microsoft’s Business Hub (microsoft-
Note: After the book was printed Judy decided businesshub.com). Professional associations,
to close Blissful Tones. Web resource services (e.g., smallbusiness.
yahoo.com) and small organizations that are in
the business of helping other small businesses,
Globalization and SMEs go online today.
Resources to assist SMEs in going global are
In addition to increasing their domestic market, also emerging as helpful tools for SMEs that want
EC opens up a vast global marketplace for SMEs, to expand their horizons. For example, the Global
but only a small percentage of them conduct a Small Business Blog (GSBB) (globalsmall
significant part of their business globally. businessblog.com) was created in 2004 by Laurel
However, a growing number are beginning to use Delaney to help entrepreneurs and small business
EC to tap into the global marketplace in some owners expand their businesses internationally.
634 13 EC Strategy, Globalization, and SMEs

A good source regarding SMEs’ use of e-markets Table 13.7 Ten steps to a successful social media
strategy
to conduct international business is emarketservices.
com/start/Case-studies-and-reports/index.html. Step Description
1 Understand what social media is and what the
benefits of using it are
2 Identify the audience you want to reach
SMEs and Social Networks
3 Identify the resources you currently have available
for use
Social commerce is one of the fastest growing 4 Identify the most appropriate technologies to use
EC technologies that is being adopted by SMEs. 5 Start a blog and create a social culture in your
Small businesses can utilize social network business
sites to interact with peer groups outside their 6 Build social media profiles for your business on
immediate geographical area in order to exchange Facebook, LinkedIn, Twitter, and YouTube
opinions about topics of mutual interest and help 7 Make your blog social media friendly
8 Build relationships with your target market
each other solve problems. SMEs can find web-
9 Turn friends and followers into customers
sites that are dedicated to small businesses. These
10 Decide how you will monitor and measure the
sites provide SMEs with opportunities to make performance of your social media initiatives
contacts, get start-up information, and receive
Sources: Based on Gallagher (2010) and Ward (2009).
advice on e-strategies. Not only can sites such as
LinkedIn be used to garner advice and make con-
tacts, they can be used in B2B to develop net-
works that can connect SMEs with other small MANAGERIAL ISSUES
businesses or foster relationships with partners.
Table 13.7 lists 10 steps to success when using Some managerial issues related to this chapter
social media in SMEs. Note that, social networks are as follows:
facilitate interactions and relationship building, 1. What is the strategic value of EC to the orga-
which are very important for SMEs. For tips on nization? It is important for management to
how to use YouTube to promote the online con- understand how EC can improve marketing and
tent of SMEs, see masternewmedia.org/online_ promotions, customer service and sales, and the
m a r k e t i n g / yo u t u b e - p ro m o t e - c o n t e n t - supply chain and procurement processes. More
viral-marketing/youtube-video-marketing- significantly, the greatest potential of EC is
10-ways-20070503.htm. realized when management views EC from a
SMEs are following the growing popularity of strategic perspective, not merely as a techno-
social networking sites and using social media to logical advancement. Management should
build connected networks, enhance customer determine the primary goals of EC, such as new
relationships, and gather feedback about their market creation, cost avoidance and reduction,
services and products (e.g., see Knight 2012). and customer service enhancement.
For implementation issues of social com- 2. How do you relate the EC activities to busi-
merce, see Chess Media Group (2012). ness objectives and metrics? Companies
first must choose objectives and design-
SECTION 13.9 REVIEW QUESTIONS appropriate metrics to measure the goals and
1. What are the advantages or benefits of EC for actual achievement. The companies need to
small businesses? exercise with caution, because the metrics
2. What are the disadvantages or risks of EC for may accidentally lead employees to behave in
small businesses? the opposite direction of the intended objec-
3. What are the advantages and disadvantages tives. The Balanced Scorecard is a popular
for small businesses online? framework adopted to define objectives, estab-
4. How can social networks help SMEs become lish performance metrics, and then map them.
more competitive? EC planning needs to identify what the role
Summary 635

of EC is in achieving the goals in BSC that includes management, employees, busi-

metrics. ness partners, and other stakeholders not only
3. Should the EC activities in a brick-and- produces a planning document that will guide
click company be organized as a separate a business into the future, but also describes to
entity? This is a debatable issue. Sometimes it the participants about where the company is
is useful in eliminating conflicts of prices and going and how it intends to get there. The
strategy. Additionally, using the spin-off as an same can be said for e-business planning – the
IPO can be rewarding. Lotte Department Store process is as important as the plan itself.
in Korea spun off their e-commerce business 7. How can EC go global? Going global with
because of its unique growth opportunity. In EC is a very appealing proposition for compa-
other cases, the spin-off can create problems nies of all sizes, but it may be difficult to do,
and administrative expenses. Walmart, Barnes especially on a large scale or for SMEs that
& Noble, and Sears have suffered from their lack the necessary resources. Companies need
spin-offs and have merged them back into the to identify, understand, and address the barri-
offline part of their companies. ers to globalization such as culture, language,
4. How should the e-business scope evolve? A and law, as well as customers and suppliers.
selling company may handle only one or few An e-business needs to decide on a localiza-
items at the beginning stage. However, the tion strategy. Some companies, such as eBay,
number of items will expand with time, as was acquire or establish local companies to sup-
the case of Amazon.com. As the scope of items port local customers, whereas other compa-
expands, the order fulfillment plan has to nies only support the English language site. In
evolve accordingly, considering an alliance B2B, a business may create collaborative
with partners who have strong sourcing capa- projects with partners in other countries.
bility. Note that the key competitors will 8. How do you manage the EC project?
change as the scope of business evolves. Forming an effective team is critical for EC
Management has to envision the prospect of project success. The team’s leadership, the bal-
e-business that can create justifiable revenue ance between technical and business staff, get-
and profit so that investors can contribute to ting the best staff representation on the team,
the funding and wait patiently for success. The and having a project champion are essential
community in the social network eventually for success. Reconciling the business objec-
needs to be linked with the revenue creation. tives and system design is critical. IT sourcing
5. What are the benefits and risks of EC? needs to be considered, particularly for SMEs.
Strategic advantage has to be weighed carefully
against potential risks. Identifying CSFs for EC
and doing a cost–benefit analysis is an impor- SUMMARY
tant step in developing an EC strategy. Benefits
can be derived not only from the adoption of In this chapter, you learned about the following
EC, but also from the reengineering of tradi- EC issues as they relate to the chapter’s learning
tional business processes. Benefits often are objectives:
difficult to quantify, especially because gains 1. Strategy concepts and competitiveness.
tend to be strategic. In such an analysis, risks Implementing EC projects requires a strategy.
should be addressed with contingency planning A common approach is the use of Porter’s
(deciding what to do if problems arise). Five Forces model and his suggested strate-
6. Why do we need an EC planning process? gies. The Internet affects the competitive
A strategic plan is both a document and a forces and the strategies to deal with them.
process. Former U.S. President Dwight D. 2. The strategy-performance cycle and strat-
Eisenhower once said, “Plans are nothing, egy tools. The five major phases of developing
planning is everything.” A planning process a business strategy are: initiation, formulation,
636 13 EC Strategy, Globalization, and SMEs

implementation, assessment, and performance should improve any performance level over
improvements. The major generic tools for time. One approach is by introducing innova-
strategic management are: the strategy map, tion into the organization. Innovation can be
SWOT analysis, competitor analysis, scenario enhanced by several methods such as
planning, and business plan. crowdsourcing.
3. Strategy initiation. The strategy initiation 8. Issues in global EC. Going global with EC
phase involves understanding the company, can be done quickly and with a relatively
the industry, and the competition. Companies small investment. However, businesses must
must consider questions such as “Should we deal with a number of different issues in the
be a first mover?” “Should we go global?” cultural, administrative, geographic, legal,
“Should we create a separate company or and economic dimensions of global trading.
brand?” and “How do we handle channel con- 9. Small and medium-sized businesses and
flict?” With the proliferation of Web 2.0 tools, EC. Depending on the circumstances, innova-
companies should also consider strategies tive small companies have a tremendous
related to Web 2.0 and social networking. opportunity to adopt EC at little cost and
4. Strategy formulation. In this phase, the strate- expand rapidly. Being in a niche market pro-
gic and tactical planning are executed. Planning vides the best chance for small business to
issues deal with the portfolio of EC projects to succeed. A variety of Web-based resources are
use, the viability of these projects, and the poten- available for small and medium-sized busi-
tial benefits, costs, and risks involved. Issues ness owners to get help to ensure success.
such as security, pricing strategy, and channel
and pricing conflicts are considered in this phase.
5. Strategy implementation. Creating an effec- KEY TERMS
tive Web team and ensuring that sufficient
resources are available initiate the implementa- Business process management (BPM)
tion phase. Other important implementation Business process reengineering (BPR)
issues are whether to outsource various aspects Cost-plus
of the system development and the need to rede- Disintermediation
sign existing business processes. Assessment E-commerce (EC) risk
begins immediately after implementation. Information dashboard
6. Strategy assessment. To assess the success of Key performance indicator (KPI)
a strategy, companies establish metrics against Metric
which actual performance is compared. To do Outsourcing
this, companies need to create a performance Project champion
monitoring system and establish a system of Sentiment analysis (opinion mining)
analytics for the evaluation. Generic tools Strategy
such as scorecards can be used, as well as spe- Strategy assessment
cial tools developed for different EC catego- Strategy formulation
ries. Of special interest is the assessment of Strategy implementation
social media applications. Strategy initiation
7. Performance improvement and innovation. Web analytics
Once performance is recorded and assessed, it
is communicated to management (e.g., via
dashboards). Management needs to take DISCUSSION QUESTIONS
action, not only about increasing inferior per-
formance, but also to take advantage of supe- 1. How would you identify competitors of your
rior performance. Appropriate corrections and small business who want to launch an EC
rewards can be used. In general, companies project?
Topics for Class Discussion and Debates 637

2. How would you apply Porter’s five forces

and Internet impacts in Figure 13.1 to the TOPICS FOR CLASS DISCUSSION
Internet search engine industry? AND DEBATES
3. Why must e-businesses consider strategic
planning to be a cyclical process? 1. Has the availability of EC affected the way
4. How would you apply the SWOT approach we assess industry attractiveness? Develop
to a small bank in your town that is consider- new criteria for assessing the attractiveness
ing e-banking services? of pure online industries.
5. Offer some practical suggestions as to how a 2. Consider the challenges of a brick-and-mortar
company can include the impact of the company manager who wants to create an
Internet in all levels of planning. integrated (online/offline) business. Discuss
6. Discuss the pros and cons of going global the challenges that he or she will face.
online to sell a physical product. 3. As the principal in a small business that
7. Find some SME EC success stories and iden- already has an effective Web presence, you
tify the common elements in them. are considering taking your company
8. Submit three questions regarding EC strat- global. Discuss the main issues that you
egy for small businesses to linkedin.com will have to consider in making this strate-
and answers.yahoo.com. Get some answers gic decision.
and summarize your experience. 4. Examine the seven strategies of Facebook
9. After viewing the video “FiftyOne Global and Twitter at socialmediatoday.com/chris-
E-commerce Demo” (2:08 minutes) at tinegallagher/165536/top-7-facebook-and-
youtube.com/watch?v=2YazivwAm2o& twitter-strategies and comment on them.
fea-ture=related, consider the following: 5. Debate: Is Google Translate effective for the
FiftyOne Global E-Commerce (now called translation of EC websites?
Borderfree; borderfree.com), claims to 6. Is Amazon.com eBay’s biggest competitor?
address all major issues associated with What about Walmart.com? What about
global EC. Check what they do. Alibaba group?
(a) Discuss how a company embarking on 7. Read the paper by Hill (2012) and discuss
global e-commerce would approach each the 10 reasons cited there for Facebook’s
challenge such as payments or logistics, acquisition of Instagram. Which of the rea-
without the assistance of a company like sons make sense to you? Which ones do
Borderfree. not?
(b) Would these challenges be insurmount- 8. Apple has a strategy of having an alliance
able? For each challenge, explain why or with Facebook to integrate the social net-
why not. work into its products. Find the status of this
(c) Would the type or size of a business affect alliance and discuss its value.
whether it could successfully navigate 9. Google is trying to counter Facebook by
these challenges to global e-commerce? offering branding pages through Google+.
Explain your conclusions. Discuss the value of this strategy.
10. Find information about Travelzoo’s strategy of 10. Amazon.com is considering opening physi-
accelerating its audience growth by expanding cal stores. Find the status of this strategy and
its sales force, enhancing product offerings, discuss its logic.
launching local deals in new markets, and con- 11. Apple created its own music streaming ser-
ducting long-term EC projects at the expense vice (iTunes Radio), similar to Pandora. Is
of short-term profits. Discuss this strategy. this a good or bad strategy? Discuss.
638 13 EC Strategy, Globalization, and SMEs

9. Enter lwshare.languageweaver.com and

INTERNET EXERCISES locate its product for language translation for
multinational corporations. Write a report.
1. Survey several online travel agencies (e.g., 10. Enter compete.com and identify all the ser-
travelocity.com, orbitz.com, cheaptickets. vices it provides. Also identify all lists, rank-
com, priceline.com, expedia.com, hotwire. ing, marketing performance, and competitive
com), and compare the business strategies of intelligence reports it provides. Prepare a list
three of them. How do they compete against of the services and comment on their value to
brick and mortar travel agencies? merchants.
2. Enter digitalenterprise.org/metrics/metrics.
html. Read the material on Web analytics and
prepare a report on the use of Web analytics for TEAM ASSIGNMENTS
measuring advertising success. AND PROJECTS
3. Check Internet retailers specializing in the
sale of CDs, music, and movies (e.g., cduni- 1. Assignment for the Opening Case
verse.com). Do any of these companies Read the opening case and answer the follow-
focus on specialized niche markets as a ing questions.
strategy? (a) Why did P&G decide to use a social
4. Enter ibm.com/procurement/proweb.nsf/ media strategy?
ContentDocsByTitle/United+States~e- (b) Does the strategy of moving from TV to
Procurement. Prepare a report on how IBM’s the Internet make sense?
Supplier Integration Strategy can assist com- (c) In what ways do viral videos work?
panies in implementing an EC strategy. (d) Can the large number of video views,
5. One of the most global companies is Amazon. comments, and interactions really increase
com. Find stories about its global strategies sales?
and activities (try forbes.com) and conduct a (e) View one or two videos of Isaiah Mustafa
Google search. What are the most important regarding Old-Spice on YouTube. What
lessons you learned? makes them so attractive? Write a com-
6. Visit business.com/guides/startup and find ment.
some of the EC opportunities available to (f) Why is P&G’s campaign called “the most
small businesses. Also visit the website of the popular interactive campaign in history?”
Small Business Administration (SBA) office 2. Have three teams represent the following units
in your area. Summarize recent EC-related of one click-and-mortar company: (1) an
topics for SMEs. offline division, (2) an online division, and (3)
7. Find out how websites such as Nexus and top management. Each team member repre-
Tradecard (now one company available at sents a different functional area within the divi-
gtnexus.com) facilitate the conduct of inter- sion. The teams will develop an EC strategy in
national trade over the Internet. Prepare a a specific industry (a group of three teams will
report based on your findings. represent a company in one industry). Teams
8. Conduct research on small businesses and will present their strategies to the class.
their use of the Internet for EC. Visit sites 3. The relationship between manufacturers and
such as microsoftbusinesshub.com and their distributors regarding sales on the Web
uschamber.com. Also enter google.com or can be very strained. Direct sales may cut into
yahoo.com and type “small businesses + the distributors’ business. Review some of the
electronic commerce.” Use your findings to strategies available to handle such channel
write a report on current small business EC conflicts. Each team member should be
issues. assigned to a company in a different industry.
Closing Case: Innovative Web Auction Strategy Nets Higher Productivity… 639

Study the strategies, compare and contrast drop by almost 50% from roughly 30 million
them, and derive a proposed generic strategy. pounds of fish a few years ago to the current 10
4. Each team needs to find the latest information million pounds per year.
on one global EC issue (e.g., cultural, admin- There were several reasons the Exchange suf-
istrative, geographic, economic). In addition, fered from this economic distress. Although
check how leading retailers, such as Levi’s, demand for good, fresh seafood is usually high,
serve different content to local audiences, the economic downturn had reduced consumers’
both on their websites and on their Facebook dining out budgets. Furthermore, commercial fish-
pages. Each team prepares a report based on ing is complex and expensive. In addition, rising
their findings. expenses, increasing competition for the limited
5. Google is trying to compete with Amazon.com pool of wholesale fish buyers, and fewer boat land-
by opening Google Shopping Express (google. ings due to the stricter government regulations
com/shopping/express) in selected cities in alerted Bert Jongerden, the general manager of the
collaboration with Target and other retailers Portland Fish Exchange. He recognized the need
(see Santos 2013). Find the status of this strat- to reconsider his existing business strategy to
egy. Examine the capabilities of Google and reduce administrative overhead and increase sales.
Amazon in the various activities of EC. Conduct The need to increase sales was the driving factor
a competitor analysis and prepare a report on for Jongerden to invest between $300,000 and
the possible results of this venture. $400,000 in an IT including e-auctions. Jongerden
6. Compare the services provided by Yahoo!, also believed that the convenience of barcoding
Microsoft, and Web.com to SMEs in the and an online auction system were appealing to
e-commerce area. Each team should take one customers, would save administrative overhead,
company and give a presentation. and increase sales. He wanted to create more
7. Research the topic of going ‘global in the social opportunity for customers to buy fish, leading to
world.’ Start with Adobe (2012). Identify the his decision to invest in IT/EC solutions.
issues and the practices. Write a report.
8. Read the white paper by dynaTrace (2011).
Identify all the suggestions for EC perfor- The Solution
mance improvement. View the demo at
compuware.com/en_us/application-perfor- A Portland Fish Exchange website with an online
mance-management/products/purepath- auction system was developed.
technology.html. Prepare a report. The company began using a warehouse
management system from SeaTrak (built with
Progressive Software’s application development
CLOSING CASE: INNOVATIVE tools and customized by developer DC Systems)
WEB AUCTION STRATEGY NETS that was customized to the company’s business.
HIGHER PRODUCTIVITY The Fish Exchange staff designates barcodes to
FOR PORTLAND FISH EXCHANGE containers of fresh fish directly on the docks.
Using the dock’s PC, the staff prints labels that
The Problem include details on each container of fish (date
caught, weight, the boat that brought it in).
In 2009, the Portland Fish Exchange, owned by Previously, while the Exchange staff sorted and
the city of Portland, Maine, was losing some of weighed the fish each morning, one staff member
its fish-buying wholesalers due to the downturn wrote paper tags to stick on boxes, while a sec-
in the economy. To add to this decline in busi- ond employee keyed in the data at the end of the
ness, stricter federal regulations to protect the auction. The barcoding was the first step in elimi-
ocean population caused the average annual vol- nating “soggy paper.” There was no longer a need
ume of fish handled through the Exchange to for an auctioneer.
640 13 EC Strategy, Globalization, and SMEs

The second step in implementing the improved 5. What risks might have been involved in set-
e-strategy was to deploy an online auction system. ting up the online auctions at Portland Fish
The new system uses a private virtual network (see Exchange?
Chapter 10), so wholesalers, seafood processors,
and other interested buyers can place bids directly
on the secure Web-based auction system remotely. ONLINE FILES
The website lists available fish lots with weights, available at affordable-ecommerce-
prices, grades, and current bidders in a simple textbook.com/turban
table format using no images or graphics. Buyers
and sellers are now connected more efficiently. W13.1 Security Risks in E-Commerce and Social
Commerce and Mitigation Guidelines
W13.2 Partners’ Strategy and Business Alliances
The Results W13.3 Application Case: Mary Kay Combines
E-Commerce Strategies to Revamp Its Business
Revenues are up at the Portland Fish Exchange. Model
Buyers who previously found it too expensive to W13.4 Application Case: Performance at AXON
fly in from Boston or New York to buy fish in Computer (Now Datacraft)
Maine can now purchase from the comfort of W13.5 The Balanced Scorecard
their restaurants and offices. Others have
increased the amount of their purchases and, due
to the laws of supply and demand, the increase in COMPREHENSIVE EDUCATIONAL
demand means that prices are rising. WEBSITES
At the Portland Fish Exchange, three positions
have been eliminated – two on the docks and the bizauto.com/net.htm: Business Automation’s
job of auctioneer. The cost savings of labor five-step approach to success on the Internet.
amount to approximately $80,000 per year, thus net-strat.com/portfolio.htm: Company offering
offsetting the cost of implementing the bar- website design, Internet marketing, online
coding and online auction system. marketing services, and search engine
The types of fish handled at the Portland Fish optimization.
Exchange are not subject to as many federal monitus.com/internet.htm: Company offering
traceability regulations as shellfish are. However, Web design and Internet strategy.
this situation may change. The barcodes and sazbean.com/2008/10/06/creating-an-internet-
online auction system already provide the com- bu s i n e s s - s t r a t e g y - i m p l e m e n t a t i o n :
pany with data that will be necessary to show Comprehensive coverage on developing an
compliance whenever needed. Internet strategy and implementation.
Sources: Based on Nash (2009) and pfex.org/ tutorialized.com/tutorials/eCommerce/
auction (accessed June 2014). Strategy/1: Tutorials on how e-commerce affects
hosting services, businesses, online marketing
Questions strategies, and more.
1. What were the drivers for Jongerden’s ecommerce-digest.com/strategy.html: A detailed
e-strategy? guide to successful online strategy and imple-
2. What makes the e-commerce strategy at mentation.
Portland Fish Exchange effective? informationweek.com: A large collection of
3. Which strategic tools might have been used related material, articles, cases, and videos.
when formulating his e-business solution? blogs.hbr.org/cs/2011/05/introducing_the_
4. In implementing the e-strategy, what issues hbrmckinsey_m-.html: HBR/McKinsey M-Prize
needed to be considered? for Management Innovation.
References 641

sba.gov/content/ecommerce-resources: A large ing phases, and allocating resources to ensure

collection of resources on many topics (e.g., completion of the project, and so forth.
technology, e-commerce, advertising, etc.). Sentiment analysis (opinion mining) Analysis
that aims to determine the attitude of a person
with respect to a particular issue as expressed
in online conversations.
GLOSSARY Strategy A comprehensive framework for expres-
sing the manner in which a business plans to
Business process management (BPM) Activi- achieve its mission, what goals are needed to
ties performed by businesses to improve their support it, and what plans and policies will be
processes. needed to accomplish these goals.
Business process reengineering (BPR) A meth- Strategy assessment The continuous perfor-
odology for conducting a one-time compre- mance monitoring, comparison of actual to
hensive redesign of an enterprise’s processes. desired performance, and evaluation of the
Cost-plus A pricing strategy that determines progress toward the organization’s goals,
the expenses associated with producing a resulting in corrective actions and, if neces-
product (production cost) by adding up all the sary, in strategy reformulation.
costs involved – materials, labor, rent, over- Strategy formulation The development of spe-
head, and so forth – and adding an additional cific strategies and tactics to exploit oppor-
amount to generate a profit margin (a percent- tunities and manage threats in the business
age mark-up). environment in light of corporate strengths and
Disintermediation The removal of intermediar- weaknesses.
ies in the EC supply chain. This occurs, for Strategy implementation The “How do we do
example, when consumers buy directly from it?” phase that includes tactics, plans, sched-
manufacturers. ules, deployment strategies, resource alloca-
E-commerce (EC) risk The likelihood that tion, and project management.
a negative outcome will occur in the course Strategy initiation The initial phase of strategic
of developing and operating an e-commerce planning in which the organization is setting
initiative. its vision, goals and objectives. Looking at
Information dashboard A visual presenta- its environment, strategy initiation includes
tion of data organized in ways easy to read an assessment of a company’s strengths and
and interpret. It is popular user interface. weaknesses, examining the external factors
The information is presented through gauges, that may affect the business.
charts, maps, tables, etc., to reveal the direc- Web analytics “The measurement, collection,
tion and velocity of the measured metrics. analysis, and reporting of Internet data for
Key performance indicator (KPI) A quantifiable the purposes of understanding and optimizing
measurement that is considered a critical suc- Web usage.” (per Web Analytics Association)
cess factor of a company, department or project.
Metric A specific, measurable standard against
which actual performance is compared.
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