E-Commerce the Impact of E-Commerce

e-Commerce

The Impact of e-Commerce on Mass Customization and Revenue Growth

The progression of e-commerce continues to result in more innovative concepts, frameworks, and models of process integration and improvement being developed. One of the most fascinating is the ability to use e-commerce as the basis for fulfilling unique, one-of-a-kind customer requirements for products through mass customization while at the same time attaining profitability across an entire organization. For e-commerce to make significant contributions to interprocess efficiencies there needs to be integration at the system and process levels. The success of e-commerce systems and their accompanying strategies also rely directly on the extent of knowledge management integration as well (Helms, Ahmadi, Jih, Ettkin, 351). As e-commerce strategies that include mass customization and product configurators increase in use and popularity companies are turning to data mining of their website traffic by product to better align product configuration options to customer's interests (Song, Shepperd, 622). This further underscores how critical it is to have a high degree of system and process integration throughout any e-commerce system, as it enables a much greater level of focus to the specific services, products and options for configuration offered. Product configuration is an enterprise-wide strategy that relies on the integration of e-commerce systems, processes and strategies with the enterprise-wide systems including Enterprise Resource Planning (ERP), Customer Relationship Management (CRM), pricing, logistics and service (Aldanondo, Vareilles (et.al). When e-commerce is combined with mass customization and product configuration, supply chains benefit in the form of increased visibility of unique, customized orders (Sharif, Irani, Lloyd, 1239, 40). This is at times called demand visibility and has been shown to increase the efficiency and profitability of an organization's supply chain overall (1241).

The intent of this paper is to evaluate how e-commerce has enabled mass customization strategies, including product configuration and quote-to-order, to contribute a higher percentage of profitable growth to the companies relying on them. Creating an e-commerce strategy based on mass customization leads to significant gains in operational performance within companies that choose this strategy. In addition, by adding in product configuration and quote-to-order strategies to their e-commerce systems and go-to-market strategies, companies have been able to attract new customers they otherwise would not have. The intent of this paper is to evaluate and provide insights into how e-commerce systems and their resulting strategies are augmented and strengthened by mass customization's most prevalent implementations, product configuration and quote-to-order.

Introduction

To the early adopters of e-commerce, mass customization represented an opportunity to take their unique, highly differentiated business models and propagate them globally. From PC manufacturers including Dell, Gateway, IBM and others to consumer good producers including Nike with their NikeID project, to financial services firms (Turowski, 69) mass customization allowed companies to sell online while also tailoring products and services to the unique needs of their customers. Across these industries the lessons learned from using e-commerce as the strategic platform for launching mass customization strategies online globally form the foundation of this analysis. Mass customization as a strategic initiative has been implemented using the product configuration, quote-to-order and guided selling Web-based applications and techniques as defined in this paper. When these e-commerce strategies were combined with analytics and an analysis of clickstream data (Song, Shepperd, 622) it was possible to personalize the shopping experience online with cross-sell and up-sell strategies that often resulted in incremental sales over the specific item being customized and ordered online (Dellaert, Dabholkar, 43). In conjunction with this lesson learned as the recognition of how critical it is to devise e-commerce system integration strategies that could support multiple channels through multi-channel management portals and websites. In order for these e-commerce system integration strategies to be successful it was critical that Web-based e-commerce systems need to be integrated into legacy pricing, manufacturing, Enterprise Resource Planning (ERP), and customer service systems to be able to scale over the breadth of transaction complexities on the one hand, and the sheer number of transactions globally occurring simultaneously on the other. Scalability of e-commerce systems has continually been a counterbalancing factor relative to increased functionality in the applications and e-commerce platforms themselves.

Developments in e-Commerce Systems as They Relate to Mass

Customization

The catalyst of e-commerce revenue in the context of mass customization and product configuration is transitioning away from purely a product focus to one based on delivering experiences and services as well (Pine, Gilmore, et.al). At the forefront of this shift is the development of more personalized shopping experiences and services online through more integrated e-commerce systems. As e-commerce sites transition away from being purely focused on product catalogs and enabling transactions to delivering experiences the need for fundamentally re-ordering mass customization to be more agile as a process is also critical (Salvador, de Holan, Piller, 71). The ability of companies to create e-commerce strategies that deliver experiences have also been shown to increase profitability over time as well (Dellaert, Dabholkar, 43). Factors that contribute to the growth of profitability based on e-commerce strategies that deliver experiences over merely transactions are the increase in customer loyalty, the support of a greater breadth of product lines, and increased process improvement over time.

All of these factors of profitability emanating from successful e-commerce systems are also directly attributable to how effective companies are at understanding the many variations in how their customers want to buy as well. The shift by customers as to their preferences for purchasing products or obtaining services through one channel or another is continually in a state of flux. Depending on the specific products, their lifecycles, and the experiences they deliver, the shift in channels relied on for purchasing them will shift accordingly. This is a critical point for any e-commerce strategist to keep in mind, as their served customers are continually shifting and changing their approaches to purchasing products or services. In fact part of the process of staying in alignment with customers' needs must begin with a thorough focus on how to best listen to them over time.

The growth of social networking is proving to be a catalyst for giving e-commerce strategists and their companies a better opportunity to stay in touch with their customers' changing needs and preferences over time. The growth of Web 2.0 technologies has been graphically represented by Tim O'Reilly, founder and CEO of O'Reilly Media. These Web 2.0 technologies are communicative and conversational in nature which is fundamentally re-ordering how e-commerce strategies are planned, implemented and evaluated. In effect Web 2.0 technologies are making it possible for e-commerce strategies and marketers to have a much more clear, concise and succinct conversation with customers as it relates to their present and future needs in online e-commerce. The use of Web 2.0 technologies is also serving as the basis for more effectively listening to customers' needs as it relates to the development of product configuration strategies as well.

The growth of Web 2.0 technologies defined by O'Reilly (2005) is re-ordering the dynamics of e-commerce globally. Figure 1 is the map O'Reilly and Battelle created showing how both market and user dynamics are defining Web 2.0 and social networking (O'Reilly, 2005. et.al.). Table 1 provides an analysis of each of the technologies that comprise Web 2.0 and serve as the foundation of social networking.

Figure 1: Web 2.0 Explained

Inherent in the user dynamics of the map completed by O'Reilly and Battelle are the theoretical foundations of how e-commerce is becoming more experiential (Pine, Gilmore, 37, 38) in addition to more socially oriented and interactive, and more communicative and collaborative in nature. There is a rapidly evolving level of transparency, trust and interactivity with e-commerce customers than has been the case in the past which is attributable directly to the en masse adoption of social networking as a means to communicate with them.

Table 1: Web 2.0 Applications

Applications

Descriptions

Blogs

Online diary or journal entry on the Internet, which primarily supports text, photo (photoblog), video (vlog), and audio (podcast) formats

• Google, AOL, and Yahoo offer free blogging platforms

Mashup

• Web service that gathers related content from more than one source

• IBM's mashup applications enable project managers to match team resources with a map to identify the geographical locations of the resources

Peer-to-Peer Networking

• A technique for effectively sharing music, audio, and text files

• Napster and Gnutella are popular peer-to-peer networks

Real Simple Syndication (RSS)

• Feed-based technology that, with the aid of an RSS reader, enables users to subscribe to newly released content such as text, Web pages, sound files, photos, and video

• RSS feed may contain the full content, for example a podcast, or simply a link to the content

Social Media

• Encompasses all online tools (blogs, podcasts, Wikis, social networks, vlogs) and Web sites enabling people to share content, such as text, audio, picture s, and videos

• Popular social media sites include YouTube (video) and Flickr (photos)

Social Networking

• Web sites that permit users to create online networks and communicate with friends and colleagues

• Social networking sites include MySpace, Friendster, Facebook, and Friends Reunited, and business networking sites include LinkedIn and Ryze

Tagging

• Allows users to bookmark or rate online content to share their recommendations with other online users

• Typically used by publishers of media sites attempting to benefit from users' recommendations

• Popularized by sites such as Digg and del.icio.us, which enable users to publish, categorize, and share their bookmarks

Wikis

• Enables users to create and edit the content of a Web site, leveraging the expertise of online users

• Consumer Wikis enable users to comment on content, in addition to editing content

• Wikipedia, a community Wiki encyclopedia, includes approximately 1.3 million English-language articles

Sources: (Bernoff, Li, et.al)

This is revolutionizing the role of e-commerce today and leading to much faster rates of response to strategies, tactics, and mass customization strategies overall. As the speed of response has grown exponentially, it has been critical to manage credibility and seek to continually gain and keep the trust of customers through consistency of e-commerce strategies. It is in fact infeasible to discuss e-commerce today without taking into account the fundamentals of social networking (Bharadwaj, Al-Shamri, 37). When combined with the concepts of mass customization and the delivery of experiences through the use of product configurators, the potential exists for greater tailoring of customer experiences as well (Bharadwaj, Al-Shamri, 39, 40).

Web 2.0 technologies and the social networking applications they support can also aid in the development of e-commerce strategies that are profitable as well. One of the most difficult challenges in creating a product configuration strategy that addresses the needs of prospects and customers is in anticipating which product features to add, which services at which cost, and how the entire purchasing and product use experience can be optimized. In the optimization of these three factors is the essence of creating profitable product configuration strategies. The analyses and research of how social networking is contributing to increased product customization accuracy and resulting increases in profitability is seen in case studies presented across industries (Bernoff, Li, 37, 38). In the research completed by Bernoff & Li (et.al.) the inherent value of collaboration is quantified and shown to be critical to excelling at e-commerce strategies. Taking collaboration a step forward and bring it into the context of listening to customers from an e-commerce standpoint, then integrating the lessons learned into product configuration forms the basis of e-commerce strategies that deliver financial results. This essential link of e-commerce systems and the strategies they enable being able to deliver not only increased sales, but process-related improvements are what is revolutionizing this field today. The delivery of experiences, tailored to the specific expectations and requirements of customers, is also progressing and is the next phase of growth of e-commerce globally as has been discussed by Pine and Gilmore (39). Looking at how the leaders in e-commerce who have created successful mass customization strategies illustrates how e-commerce can be both a revenue generating strategy and one that also leads to process improvement over time.

Evaluating the e-Commerce Strategies of Dell Computer and How They Make Mass Customization Pay

Dell is a global leader in the selling, manufacturing and servicing of laptop, desktop, server, storage area networks, and enterprise-class rack-mounted systems for both the consumer and business markets. Dell is also a recognized leader in the sales of Intel-based systems of all types to educational and government institutions. The company rose to prominence in this industry due to its unique direct selling model combined with build-to-order manufacturing that is considered the most efficient in this industry (Liu, Mackie, et.al.). This highly customized approach to attracting, selling, and serving customers requires the Dell e-commerce and broader IT systems to have a very high level of integration and synchronization around the customers' specific needs. Dell pioneered this aspect of e-commerce, specifically the area of integration between e-commerce systems and ERP, pricing, manufacturing and logistics systems (Sharif, Irani, Lloyd, 2007).

Dell's approach to IT specifically supports e-commerce strategies that are tied to and measured by a series of Key Performance Indicators (KPIs) or metrics of performance. Dell has a very metric-driven corporate culture as a result. This is one of their core strengths and also useful in seeing how IT systems support the mission statement, and in Dell's case their focus on attaining a higher number of inventory turns every quarter and year is a critical metric of how well their supply chain systems are managing to support Vendor-Managed Inventory (VMI) strategies and initiatives. Dell relies on VMI-based strategies with suppliers and the synchronization of their Supply Chain Management system, to their ERP systems so that orders, or signals of demand, are captured and planned for every two hours. This gives visibility into and makes the overall systems more aligned with the inbound orders from multiple channels, all of which sell build-to-order product configurations. Presented below in Table 2, Analyzing Dell's KPIs Relative to the Quote-to-Order Process, illustrates how the analytically intensive culture of Dell quantifies the contribution of e-commerce on the most essential business strategies that emanate from the company's mission statement of providing exceptional experiences to every customer (Columbus, et.al.). This ability of Dell's internal system to track internal process efficiencies while also concentrating on providing exceptional experiences to customers through the quote-to-order and product configuration processes is symptomatic of how e-commerce is fundamentally changing.

Table 2

Analyzing Dell's KPIs Relative to the Quote-to-Order Process

Areas of Measurement

Baseline: What is Measured

Dell's Accomplishments

Company-specific

Project costs and expenses

Use as a baseline for defining ROI

Number of orders per year

Determine configuration's impact on inventory turns

Current inventory and costs

Inventory turn savings

Customer Data

Lifetime cost per customer; avg. deal size by customer

Sales

Order cycle time

Order cycle times reduction of 35% or more recorded with mftrs contacted

Cost of Sales

Days Sales Outstanding reduction from 55 to 23 days on average

Cross-sell and up-sell revenue

Increase of 46% on aggregate

Average sales price per order

Increase from 7% to 29%

Quote and Order

Average costs to complete an order

91% reduction in cost per order

Special Pricing Requests

Over 92% ROI on automating Special Pricing Requests

Bad or incomplete orders

Incomplete order reductions of 30%

Customer Service

Number of customer complaints

89% reduction in cost of simple requests

Revenue lost to churn

69% when cross-selling is used with quote-to-order

Number of calls on order status

Median level of 15,000 per week to 200

Warranty and Returns

Reduction in warranty cost on customized products

14% reduction at a minimum

Labor cost reductions

Decrease order re-work from 18% to 1%

The high level of integration requirements necessary for the Dell business model to consistently deliver product orders on time, in the right configuration, to the right location necessitates a multiple of systems working on synchronization with one another (Sharif, Irani, Lloyd, 2007).

The ability to ship orders accurately, on-time with no errors is critical to the company's e-commerce strategy generating profits over time as well, as it is for the managing and exceeding of expectations. In fact the entire e-commerce strategy of Dell is predicated on meeting or exceeding expectations on a continual basis to earn customer loyalty and trust

Figure 2 graphically illustrates the Dell Computer Corporation e-commerce system requirements overlaid to their most critical IT systems. This graphic illustrates how e-commerce plays a critical role in their business model. One factor contributing to Dell's success in the market is their ability to align IT resources to their supply chain and e-commerce system requirements, all in support of the company's mission of delivering profitable experiences to customers globally.

Figure 2: Analyzing the e-commerce topology of Dell Computer Corporation (Columbus, et.al.)

Not shown in Figure 1 but equally important are the many customer service, pricing, customer relationship management (CRM) and pervasive use of the Dell Premier Page extranets. Dell considers Premier Pages to be a highly effective IT strategy that has delivered major competitive gains in enterprise-class, small and medium businesses, and in many state, local and federal governments. While Dell is understandably reticent to discuss this major competitive advantage the company has, it did at one time quote the figure of 50,000 of these extranets being in existence, in 14 languages (Liu, Mackie, 299, 300).

The criticality of IT systems and their integration to e-commerce systems, their critical role in executing Dell's strategies have proven invaluable in making the company more competitive selling over the Internet, linking its quote-to-order processes into the many systems shown in Figure 2. The role of the quote-to-order process is also critical from the standpoint of being able to accurately sense customer demand and respond to it efficiently globally through the company's e-commerce systems. All of these integration points have in turn allowed Dell to create dashboards based on the KPIs and metrics as shown in Table 2.

In conclusion, Dell shows how difficult it is to create the level of interprocess integration that is critical for e-commerce strategies to succeed while also managing e-commerce strategies to deliver experiences, not just transactions. Their major competitor and one of the companies who has also pioneered the development of e-commerce strategies based on mass customization is Gateway Computer, and their lessons learned also provide a useful framework for this analysis.

The use of e-Commerce Strategies At Gateway To Deliver Exceptional Experiences

Like Dell, Gateway began their initial company business model with the concept of mass customization strategies including build-to-order systems for businesses and consumers. Unlike Dell however, Gateway continued to focus only on the consumer and educational markets in the U.S., and as a result has not effectively moved into the mid-range and larger enterprise market. Dell on the other hand has made significant gains in this area of the market, pioneering many of the B2B innovations in e-commerce as a result. Gateway is currently generating the majority of sales coming domestically in the U.S., through a combination of indirect and direct channels. This has forced the use of e-commerce strategies that are more Business-to-Business (B2B) focused.

As Gateway continues to redefine itself strategically, the role of e-commerce systems become even more critical from the standpoint of supporting key business processes that must remain agile while at the same time being reliable enough to realize revenue and cost efficiencies. Figure 3 provides a graphical representation of the value chain and e-commerce systems that Gateway relies on, with orders inbound from the consumers and SOHO segment on the one hand, and the Business Customers on the other. The company's struggles with aligning e-commerce resources between a direct and indirect strategy are clear when the value chain shown in Figure 3 are examined from a systems strategy and broader e-commerce infrastructure perspective.