Management View: Changing E-Commerce Models

TORONTO (06/28/2000) - From the way some of the dot-coms babble on, you'd think changing e-commerce business models was as easy as changing your shirt. Of course, anything's possible in a company with six twenty-somethings. But what if you're running a large company trying to grow its e-commerce business? How do you keep up? Without tearing the rest of your company apart, I mean.

Let's take a simple example. You've been running a national retail chain of 250 luxury leather-good stores. Your business model marries a traditional distribution system with a Web site used principally to let the manufacturers of the products you sell provide visitors with information on the goods you carry and to collect marketing data. You advertise your sales on the site, list your store locations and a 1-800 number customers can call to query product availability and buy goods using their store accounts or credit cards.

Now you want to change that model so that you'll be able to sell from your Web site the full range of products your suppliers produce, even those products your stores haven't been able to carry because of space restrictions. A classic case of trying to extend the scope of your operation without expanding its scale.

To complement this initiative, you're going to install Internet access in each of your shops so that walk-in traffic can also access your Web site and order those products you can't carry or are out of stock on. If they choose, they can pre-pay for the products they decide to order while at the store and have them delivered at no charge.

Let's look at just two of the challenges you're going to have to address as you move forward with this initiative. This isn't the whole story, of course, but botching either of these will put your initiative in the dumpster in double-click time.

WHO OWNS THE CUSTOMER?

Three of your major suppliers already have their own Web sites, although they don't yet sell anything on them for fear of losing their channels. Your initiative sends a clear signal that you're going to keep and expand the customer base in a direct sales relationship.

But what about their brands? What happens to customer loyalty to the brand when customers can send out MySimon Inc. for a price comparison on your most popular CAN$1,200 Fendi bag? How will the cachet of your Prada leather skirts hold up when someone can buy them on www.buy.com for less than anywhere else in the world?

Time to sit down with the suppliers. Pick up the tab at a nice resort in California. Bring your clubs.

FULFILMENT

The suppliers aren't going to want to get into a one-to-many relationship with the customers. That's why they ship to you and your competitors in the first place. And while outsourcing fulfilment to FedEx may seem like a good idea, running the products through a national or global logistical system may add more than a tad to the price points your customers are used to, even with the new volume discounts your suppliers will have to give you to maintain margins.

Of course, none of this works unless your suppliers agree to crank up production to meet the increase in demand and to ship volume to Federal Express Corp. warehouses for storage and onward shipment. Can you carry the inventory costs of a global distribution network of high-priced leather goods? And what about the burden all of this will put on your current resources? Are you going to double-task all of your back-office staff on the order processing and invoicing?

Better ask the suppliers to bring their wives to the meeting in California.

It's going to be a hard slog.

Changing e-commerce models in a bricks-and-clicks retail company is a really big deal, principally because in almost every case such change confronts established positions in an existing supply chain. While I've provided an overview of two factors, I haven't touched on other areas of equal importance such as the impact of such change on the management culture, your existing technology architecture and your lines of credit.

Chuck Belford is president of Management Smarts Inc., a Nepean, Ontario-based management consulting and training company. He can be reached via e-mail at cbelford@managementsmarts.com.

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