Customer relationship management

I originally wrote this article, “Customer relationship management” in November 2003. A systematic process is used to prepare a comprehensive proposal to a sponsor for approval to implement a Customer Relationship Management (CRM) System in an organisation. The proposed system introduces a new information system and improves organisational productivity. The sponsor is a financial institution. The information system supports the strategic goals of the organisation where it will be implemented. A systematic approach was followed to identify the opportunity and the choice of proposed system is justified. A feasibility study for the system is proposed, including system investigation and the preparation of functional specifications for the intended system (from a managerial viewpoint) and a system implementation plan is given.

SUMMARY

An investment is proposed for the implementation of a customer relationship management (CRM) system within the client company over a six month period. It is the optimum solution to the client’s problem of how to achieve their sales revenue growth requirement for the next five years.

The proposed system has a good fit with the six strategic goals of their business. In particular, it meets the need to secure lifelong customers who buy the most profitable products using the client’s unique service.

The  problem of achieving sales revenue growth is solved using a systems approach. First, we established that the problem has the four components of; creating customer awareness, encouraging sales, maintaining repeat custom and deciding upon the marketing mix.

Six alternative solutions to the problem are appraised. Mass marketing, CRM, local distributors, local sales representatives, advertising and the internet are considered. These possible solutions are evaluated againstthe definedproblem, cost, time and the degree of fit in supporting the business goals.

The optimum solution is a CRM system to focus the marketing and sales efforts in the right direction. It is envisaged that the system will help to attract, retain and get customers to spend more with the company. Using a relational database, the system will be used to co-ordinate the direct mail and telemarketing campaigns.

A feasibility study is required during the systems analysis and conceptual design phase to ensure that it meets the requirements for data; warehousing,extraction, management, mining, analysis and query. Implementation of the project will proceed only upon a favourable outcome from the feasibility study.

Project implementation is in nine stages. The critical stage is that of training staff in system adoption, data mining, use of technology and in how to get system support.

INTRODUCTION

The client company is a new business venture formed to utilize an opportunity to satisfy a UK demand for Asian products exported from Singapore by air parcel. The target market is small British retailers who already sell antiques, clocks, gifts, handicrafts and home decor. They compete by having product variety, and very few currently sell handcrafted goods from Asia. Their present offerings are either locally made expensively machined products or poor quality imports from wholesale warehouses. The client company offers good quality, high value, low weight, hand-made Asian products by 7 day delivery air parcel for payment by credit card.

STRATEGIC GOALS OF THE ORGANIZATION

The client company has six strategic goals, and they are:

Annual export sales of S$2M in 5 years and 10% net profit after tax - The client company will acquire 500 lifelong European retail outlet customers. The average order value is S$800 per consignment and the client company will receive bi-monthly or quarterly orders from each customer. Gross margin for the cost of goods sold is 50% and the cost of doing business is such that net profit after tax is 10%.

The client company’s customers have high inventory turnover - The order quantity requirements are smaller than that of the client company’s competitors and reduce the amount of cash tied up in the customer's inventory. The customer's higher inventory turnover enables them to place smaller orders which are delivered more often. Their risk of holding low demand products is reduced.

The client company’s value chain is shorter than that of their competitors - The value chain is shorter than that of the competitors because UK wholesale warehouses are eliminated. The client company’s customer is the retailer, not the wholesaler, and deliveries are door-to-door from Singapore to Britain by air parcel - not container ship.

The client company’s goods have a money-back guarantee - Credit is not offered to customers and all order payments are made through Visa and Mastercard credit card companies. However, the credit card companies give 4 to 7 weeks free credit to customers and the client company is paid monthly by the credit card companies, who dictate the money-back guarantee.

The system of competing is unique, integrated and not easily imitated - The client company only sells products to the target market that fits their particular business model. The minimum order value is S$750 and each consignment weighs less than 15Kg. Goods within each consignment are high value, have a high price to weight ratio and are only sold to the target market of small UK retailers who sell antiques, clocks, gifts, handicrafts and home decor.

Competition with the small British retailer is not promoted - The Asian product mix is not readily available in Britain and there are very few competitive outlets already in existence which specialize in similar products. Administration costs are minimized by having a minimum order value of S$750 and, by this mechanism, not selling direct to British end-users. Additionally, substantial discounts are not offered for larger order quantities because this leads to lower retail prices and a perceived lowering of product quality.

SYSTEMS APPROACH TO PROBLEM SOLVING

An approach is used, as described by O'Brien (1999:p.80), to systematically solve the problem in 5 steps:

Recognize and define the problem using systems thinking
Develop and evaluate alternative system solutions
Select the system solution that best meets the requirements
Design the selected system solution
Implement and evaluate the success of the designed system

Problem definition

The problem of acquiring 500 lifelong customers is identified as having the four key components of; creating customer awareness, encouraging sales, maintaining repeat custom and having the right marketing mix.

Customer awareness - How does the client company make UK retailers aware that their company and marketing mix exist? The client company has just recently created their new business venture and, until they can reach their customers, nobody knows who they are, what we sell, where they are located and why they should do business with them.

Encourage sales - If the client company manages to reach their target market then what can they do to encourage customers to place orders with their company? Customers may be aware that their company exists but inertia, tradition or apprehension may influence their buying decision process and divert custom away from their company.

Maintain repeat custom - Having secured their first order from a customer, how do they achieve 'lock-on' and create a lifelong customer? If a customer doesn't enjoy a good experience with the company during the first transaction then the relationship may end after one sale.

Marketing mix - How does the client company know that the product mix is priced correctly through the right distribution channel and that the promotion tactics work? Is there a market demand for the initial offering? Is the end-user willing to pay the retailer the recommended price? Is the marketing campaign investment giving the required return? Are small UK retailers the best distribution channel?

Evaluation of alternative systems

Six alternative solutions have been developed to solve the problem:

Mass marketing
Customer Relations Management system
Local UK distributors
Local UK sales representatives
Advertising
Internet site only

Problem	Mass marketing	CRM system	Local UK distributors	Local UK sales representatives	Advertising	Internet site only
Customer awareness	Very low response rate	Low response rate	Low incentive to promote client’s products	High cost and time to establish contacts	Very high cost and very low response rate	Low cost but no response
Encourage sales	Very low probability of obtaining orders	Moderate probability of obtaining orders	Moderate probability of obtaining orders	High probability of obtaining orders	Low probability of obtaining orders	Very low probability of obtaining orders
Maintain repeat custom	No relationship building	High relationship building	Moderate relationship building	Very high relationship building	No relationship building	Very low relationship building
Marketing mix	Very low customer feedback	High customer feedback	Moderate customer feedback	High customer feedback	No customer feedback	Low customer feedback
Cost	Moderate	Moderate	High	Very high	High	Very low
Time	Quick	Moderate	Slow	Slow	Quick	Quick
Degree of fit in supporting business goals	Low - not target market and could promote competition to small retailer	High - meets all business goals	Low - extra stage in value chain and not unique selling system	Moderate - reduced profit	Low - not target market and could promote competition to small retailer	Low - not target market and sales goal not possible

The six alternatives solutions have been evaluated as to how they fit in supporting the business goals and solving the problem:

Our development and evaluation of the six alternatives gives the optimum solution to our problem of acquiring 500 lifelong customers profitably as being to implement a customer relationship management system.

PROPOSED SYSTEM

The proposed customer relationship management system has the benefit of facilitating the business goals at a reasonable cost. This represents a saving on the appointment of UK sales representatives to achieve comparative results.

The CRM system will focus the client company’s marketing and sales efforts in the right direction, allow statistical analyses of the marketing campaigns and fit the business goals.

The client company’s revenues will not be enhanced by selling more core items but by increasing the amount of spending customers do with the client company. The system will enable the client company to monitor and enhance the longevity, depth, breadth and diversity of spendingby their customers. It will identify customers with opportunities, as well as customers at risk. The system will allow the client company to understand the differences among customers, particularly the nature and intensity of the relationship they currently have with the client company, so the depth, breadth and the length of their relationship can be improved. By developing a multi dimensional customer typology (segmentation scheme), the client company will select segmentation variables which show customer's preferences for products and the intensity (magnitude and frequency) of their relationship with the client company. It can be determined what the most profitable customers look like, who the high-risk customers are and describe customers who have a high propensity to buy certain products.

A proprietaryrelational database will be populated by client company staff with 10,000 to 30,000 small UK retailers who already sell antiques, clocks, gifts, handicrafts and home decor. Basic information for the target market is available from UK regional Chambers of Commerce, trade directories, Yellow Pages, etc. Commercially available data bases are avoided because they are notoriously unreliable and very expensive. Weekly regional direct mail campaigns will target London, followed by Birmingham, Leeds, Sheffield, Bradford, Liverpool and Manchester. Each batch of direct mail is to be followed by telemarketing calls from the single point-of-contact staff at the client company’s call centre.

The business goals of the client company will be supported by the CRM system. Their sales and profit goal will be made possible by getting direct mail I telemarketing response rates better than the 2 to 3% achievable by direct mail alone. This will assist the client company to get a critical mass of customers locked on and will create a platform from which to stretch their product range into the many areas of their end-users' lives. The customer benefits of a high inventory turnover, money-back guarantee and 'small retailer only' target market will be explained by the client company’s telemarketers to potential customers and their responses will be recorded into their database for analysis. High value to weight products, for low shipping costs, will be selected to match the particular requirements of individual groups of customers, from their database response records, to further focus on market niches.

FEASIBILITY STUDY

A feasibility study is required within the systems analysis and conceptual design phase of the client company’s implementation plan. The implementation of CRM within their company is a major undertaking and they need to make sure that they have sufficient resources and are able to integrate this system with their other management information systems. This will involve the development of many processes within their business model. Hardware, software and resource costs and the time taken to implement the CRM system need evaluating to verify that the project is feasible.  The implementation plan will proceed only if the results of the feasibility study are positive, thus enabling the project to be completed.

It needs to be determined if, within the business constraints, it is viable to implement:

Data warehouse information - customers calling the client company, their purchases, transaction history, complaint history, data archaeology, contact, customer business, group, history, promotion, product purchases, survey and customer response data, customer interaction data.

Data extraction and cleansing

Data management and storage - logical stores of information

OLAP or data mining applications

Data analysis and query tools - sliced and diced system reports

These are the main features required of the CRM if implementation is to proceed and the project is practical.

IMPLEMENTATION

Implementation of the CRM system is in the eight stages of strategic planning, research, system analysis and conceptual design, design, construction, implementation, maintenance and documentation, adaptation.

Strategic planning - complete business process analysis, identification of  customer interaction points and decision support requirements.

Research - assessment of market conditions, business resources and possible technological means of meeting business needs.

System analysis and conceptual design - user interaction, software and hardware vendor assessment, data design, scalability and feasibility study.

Design - detailed specification, selection of specific software packages and core technologies.

Construction - execution of design plan

Implementation - training program for staff in; system adoption, support     seeking, technology, data mining techniques.

Maintenance and documentation - system performance evaluation, data quality, data quantity, confirmation of meeting DSS needs.

Adaptation - modifications to the system to match changes in the market and business.

A phased roll-out is planned, commencing with a pilot program.

CONCLUSIONS

The client company’s first strategic business goal of annual export sales of S$2M in 5 years is achievable with the proper management tools. The proposed CRM system is one of those tools. It’s not pretended that use of this technology will solve all of the problems. It is the people within the company, using this technology, that will determine the success of the venture.

List of references

Q'Brien, J.A. 1999, Management information systems: managing information technology in the inter-worked enterprise, 4th ed., Boston, Irwin McGraw Hill.

Enterprise resource planning

I originally wrote this article, “Enterprise Resource Planning” in October 2003 when I analysed the Fast Food Industry’s business models using the competitive forces and value chain analysis models.  I explained that an Enterprise Resource Planning System would provide a good solution to McDonald’s challenges.  The critical success factors driving technological were identified and reasons for the failure of information systems, within the fast food industry, were given.  The managerial, organisational and technology factors that caused these problems were explained.  The role and impact of alternative information systems development projects were evaluated in terms of the future strategic directions to be taken by McDonald’s and Burger King.  The undertaking of risk evaluations are recommended with each project.  Finally, I recommended an approach to prevent the negative impact of technology upon the people concerned, including the financial performance of the stock.

BUSINESS MODEL ANALYSIS

Competitive forces model

The competitive forces within the fast food Industry can be analyzed using Michael Porter's competitive forces model, described by O'Brien (2003:p.42). These forces are the bargaining powers of customers and suppliers, competitor rivalry, new entrant threats and the threat of substitutes.

Customer bargaining power is high and created by fast food outlets being located in close proximity to each other. Prices are readily displayed, giving the customer a real choice of which outlet to buy from.

Supplier bargaining power is low because of the concentration of suppliers and the availability of substitute suppliers.

Competitor rivalry is high because it is difficult for fast food companies to distinguish themselves from their competitors, so the challenge has intensified.

The threat of new entrants is caused by the relatively low entry barriers into the fast food business. MOS Burger and Wendy's are examples of new entrants.

The threat of substitute fast food products is affected by trends, such as increased health consciousness, and cost changes.

Using Michael Porter's above model; competitive strategies of cost leadership, differentiation, innovation, growth, alliances and other tactics are used in the fast food industry to counter the actions of the above competitive forces.

A cost leadership strategy used by fast food companies requires efficient facilities, cost reduction programs and tight cost control by a structured organization with defined responsibilities.

An example of a differentiation strategy is that used by McDonald's to distinguish it's products and services from Burger King, etc. by introducing wholesome foods, re-introducing hostesses to carry trays and exploiting the Ronald McDonald mascot for the brand experience.

Innovative strategies employed by fast food companies include; operating units in non-traditional markets, dual branding, food science experimentation and test marketing of new products to adjust to the consumer's changing food tastes. For example, on 8th October 2003, McDonald's appointed a Director of Worldwide Nutrition to help guide McDonald's nutrition and active lifestyle initiatives, McDonald's (2003c).

The growth strategies of a fast food business expand the company's ability benefit from the economies of scale, product integration and global expansion. Both McDonald's and Burger King see the Eastern Hemisphere as a place to expand and compensate for the more saturated market in America and Europe.

Alliance strategies are becoming more prevalent in the fast food industry. Competitors like KFC and Pizza Hut share common locations and home delivery services. McDonald's have more than 800 restaurants in Wal-Mart stores.

Another strategy used by McDonald's to counter competitive forces is sponsorship. For the first time, the company became the exclusive worldwide sponsor of the Olympic Day Run, in addition to being committed to the International Olympic Movement for more than 30 years, McDonald's (2003b)

Value chain analysis model

The business model within the fast food Industry can also be analyzed using Michael Porter's value chain analysis model, described by Kotler (2003:p.70), as a tool for identifying ways to create more customer value. The primary activities in the generic value chain are in bound logistics, operations, outbound logistics, marketing, sales and service. The support activities are firm infrastructure, human resource management, technology development and procurement.

Using McDonald's as an example of a fast food business, the primary activities of logistics and operations are decentralized whereas sales, marketing and service are centralized, according to Lorentzen (2000). Each region of restaurants manages its own supply of materials and operational efficiency to create customer value, but sales, marketing and service are centralized.

The fast food business support activities are usually centralized, with the exception of procurement. McDonald's implements a centralized Supplier Social Accountability Program and Supplier Product Quality Program, reports Beurskens (2002), as a condition of doing business with the company. However, whilst a supplier is in compliance with these procurement programs, buying from these suppliers is controlled regionally.

An ERP as a good solution to McDonald's challenges

McDonald's has 10 challenges:

Customer satisfaction - McDonald's has been ranked the worst company for customer satisfaction in America for a decade.

Franchisee monitoring standards - The company has no system for monitoring standards, so as to avoid trouble with the franchisees.

Investor relations - McD's share price has underperformed the S&P500 for several years. Investors want a tighter, more centralized McDonald's.    Instead of aggressive expansion, investors want the company to concentrate on the profitability of existing stores, The Economist (2001).

Threat of substitutes - The future of fast food may be congee, tofu and roast duck as Chinese will displace the burger and pizza, says The Economist (2002a). The Economist (2002b) reports that sales at McDonald's and Burger King are declining and 'fast casual' gourmet sandwich, salad and soup chains are taking market share. McDonald's offering looks increasingly outdated.

Changing customer eating habits - “The world has changed. Our customers have changed. We have to change too", says McDonald's CEO, Jim Cantalupo, in The Economist (2003). There are too many confusing meal choices and variety will be reduced and salads, yoghurts and sliced fruit introduced.

Growth - The company no longer aims to be bigger than everybody else in the fast food industry, just better. A decade of stagnant US store sales was followed by declining sales in 2002. like Coca-Cola or Disney, McDonald's is in the maturity stage of it's life cycle and, as a cash cow, needs milking.

Capital investment - The company massively misallocated capital for decades, according to The Economist (2003), and slashed capital spending by a third, to USD1.2 billion, for2003.

Out-of-date strategies - The Economist (2003) quotes an analyst as saying that McDonald's top management, shaped by previous out-of-date strategies, lacks the vision or stomach to make the necessary changes."

Decentralization - The company decentralized operations in 1998 to rebuild tattered relationships with franchisees. However, this caused reduced service, quality and cleanliness standards. McDonald's new CEO promises improvements in franchisee restaurant management.

Franchisee alienation - The poorly executed and imposed 'Made For You' kitchen initiative had an adverse effect upon franchisee revenue growth and profits.

An enterprise resource planning (ERP) system would provide a good solution for McDonald's 10 challenges.  The company's internal businesses would be integrated and improved through a framework. This would enable monitoring of franchisee standards and increase customer satisfaction. An ERP would increase efficiency, thereby reducing costs and improving investor relations. Quick access to sales information would allow the company to develop menus to match the changing eating habits of customers, counter the threat of substitutes and make informed capital investment decisions. The decision support from an ERP would also enable strategies to be adjusted and brought up-to-date. Centralization of the many regional and departmental existing information systems would give greater agility to McDonald's.

Burger King's ERP system, reports Malcom (2003), enables the company to analyze sales trends and track food costs on a daily basis and is also used by marketing to analyze the product mix. A growing number of fast food companies, like Burger King, are standardizing their systems on packaged ERP systems, according to Songini (2002). Burger King uses Microsoft's “Business Solutions” says iStart (2003)

CRITICAL SUCCESS FACTORS

Critical success factors driving technological change

The 'Investor Fact Sheet, McDonald's (2003a) defines the company's critical success factors as being those of McCarthy's Four P Components of the Marketing Mix, Kotler (2003:p.16), plus people - Product, Price, Promotion, Place and People.

The product variety needs to match changing customer tastes and swift fast food outlet feedback is necessary to drive the changing product mix. Product quality requires controlling and customer service needs improving.

The food price is determined by market forces, so costs need reducing through greater operational efficiency. Operating profits and returns on investment call for improvements.

Promotion of McDonald's brands needs re-building to differentiate its products and service from competitor offerings.

The place where customers dine, the McDonald's restaurant, has lost it's status as the gold standard for clean restaurants. It needs re-imaging, rebuilding and renovating.

The people who produce the restaurant food require training to deliver better customer service and educating in the use of technology for logistics, production and sales.

Reasons for failure of IS within the fast food industry
The 6 reasons for failure of IS within the fast food industry are; project cancellation, user resistance to IS, system crashes, user lack of understanding IS, bad system performance and IS not meeting expectations.

Management, organizational, and technology factors

Poor management can cause IS project cancellation. McDonald's wrote off $170 million already spent on a project in 2002 when they unexpectedly realized that the final cost would exceed $1 billion.  Taylor (2000) identifies scope management as the leading management activity leading to IS project failure. Companies tend to underestimate the planning complexity, development and training required to change business processes. Compressing new IS roll-out periods, an over reliance upon expensive and external ERP consultants and overstated expectations also contribute to IS failure.

Organizational factors in the fast food industry contribute to IS failure, especially if corporate IT systems are linked to individual stores or franchises that have workers who are relatively unfamiliar with technology, according to Computer Weekly (2002). The non-involvement of affected workers in development and insufficient employee training in ERP can also cause IS project failure.

Technology factors are the least cause of IS failures. Technology problems are only responsible for between 12 and 15 percent of projects that don't work, says Everett (2002).

ALTERNATIVE IS DEVELOPMENT PROJECTS

Role and impact of alternative IS development projects

The role of alternative IS development projects in the fast food industry is to increase revenues and reduce costs.

McDonald's has tested automated order taking machines, using paper money only, says Belilos (1999).

The VISA quarterly report (2002) describes how Burger King and VISA are developing cashless payment.

Contact-less, cashless payment, according to Longini (2002) and Kuykendall (2003), is accepted at certain fast food outlets, e.g. McDonald's in Chicago in the form of a car key fob.

Centralized management of HVAC, lighting and food processing energy conservation systems, reports Sheehan (2001), is being tested by McDonald's at their restaurants in Atlanta, Chicago, Colorado springs and San Francisco.

Ewalt (2002) and Hamblen (2002) say that Burger King uses Palm-100 PDA programmed warming bins in 500 company-owned restaurants and is transitioning to all of it's 8,000 outlets.

McDonald's is looking at putting in an electronic invoicing system that will be integrated into it's network, reports Newman (2002).

Singer (2003a), Black (2003) and Krane (2003) report that McDonald's unveiled wireless hotspots at 10 restaurants in New York and plan to "unwire” 300 restaurants by the end of the year. The New York launch was followed by a similar launch in San Francisco, according to Singer (2003b), and subsequent openings in Chicago, Canada and Australia, reports Kaye (2003).

Burger King, according to Hulme (2003), uses identity and access management systems at a cost of $5 to $25 per employee to protect access to it's systems because of rapid staff turnover.

The impact of automated order taking and cashless payment is to reduce order processing times and cash handling costs. Energy conservation, programmed warming bins and electronic invoicing all reduce operational costs. The impact of WiFi is to increase sales revenue by attracting new customers or retaining existing customers who might be tempted to use the facility elsewhere.

If McDonald's and Burger King choose the strategic directions of cashless payment to reduce costs and WiFi to increase sales revenues then substantial capital investment is required.

Risk associated with each project

Risk evaluation is required at the beginning of each project to evaluate the risk probability and magnitude of effect of the occurrence of the risk associated with each project.

The risks associated with ERP and operational efficiency systems implementation vary according to whether the project has a piloted, phased or 'big bang' roll-out. Risks connected with existing legacy systems, crash contingency plans, stoppages etc. need evaluating. Floyd (2000) says that "the obvious places to start a phased migration are with the 'easy' modules, like Fixed Assets and General Ledger.

Cashless payment IS project risks include system crashes, software and hardware bugs, card theft, communication problems and employee training.

Prevention of negative impact of technology

Technology is prevented from having a negative impact on the people concerned by involving them from conception to completion of each project. Users need to be involved in project development and they need to be trained. Pilot programs require assessing and investors should be kept informed of the hefty financial commitment before the first cheque is written.

McDonald's have introduced e-Ieaming tools in restaurants to bridge the technology skill gap of franchisee employees required to use new information systems. Jones (2001) quotes McDonald's as saying, "This is not a white collar tool. This is a business tool”.

Customer and employee acceptance of new technology can be assessed using pilot programs. For example, a new POS contact-less smart card has been tested by McDonald's and Mastercard in Orlando, says Lingblom (2003).

The financial performance of the stock can be protected by making provisions in several years of accounts for investment in IS. The total costs must be realistic and must include all costs for data conversion, employee training, software, hardware, implementation, maintenance and a risk contingency

List of references

Belilos, C. 1999, 'Technology enhancing service at MacDonald's', CHIC Hospitality Consulting Services, 16th August 1999. Retrieved: from http://www.easytraining.com on 1 th October 2003.

Beurskens, F. 2002, 'Value of Supply Chain Management Issues from the Customer's Perspective', Corn Utilization and Technology Conference 2002, 3rd June 2002. Retrieved: from www.agribiz.com on 1ih October 2003.
Black, J. 2003, ~The Magic of Wi-Fi', Businessweek, 18th March 2003. Retrieved: from www.businessweek.com on 17th October 2003.

'Burger King standardizes ERP menu', Computer Weekly, 9th July 2002. Retrieved: from www.computerweekly.com on 17th October 2003.

Cantalupo, J. 2003, 'McDonaJd's eMac Digital News', McDonald's Corporate Press Release, 20th May 2003.
'Did somebody say a loss?', The Economist, 10th April 2003.

Everett, C. 2002, 'Special Report - The slings and arrows of CRM', Akibia, 18th July 2002.

Ewalt. D. M. 2002, 'PDAs get more innovative, from food-service to life-saving functions', Informationweek, 9th September 2002. Retrieved: from www.informationweek.com on 17th October 2003.

Floyd, T.H. 2000, 'Phased ERP Implementation instead of "The Big Bang"', ERP World West, Anaheim 2000. Retrieved: from www.supgrp.com on 17th October 2003.
Hamblen, M. 2002, 'Field Report: Want Fries With Your PDA?, ComputelWorfd, 29th July 2002. Retrieved: from www.computerworld.com on 17th October 2003.

Hulme, G. V. 2003, 'Companies can cut costs significantly by implementing software that manages users' access to applications', Informationweek, 20th January 2003. Retrieved: from www.informationweek.com on 17th October 2003.

'Investor Fact Sheet', McDonald's, May 2003a. Retrieved from www.mcdonalds.com on 1th October 2003.

Jones, M. 2001, 'Comdex E-Ieaming experts call for knowledge management rethink', Infoworld, 15th November 2001. Retrieved: from www.infoworld.com on 17th October 2003.
'Junk food?', The Economist, 5th December 2002a.

Kaye, T. 2003, 'Will you be having a McWiFi with that, sir?', Australian IT News, 26th August 2003. Retrieved: from www.australianitnews.com.au on 17th October 2003.

Kotler, P. 2003, Marketing Management, 11th ed., Prentice Hall, New Jersey, USA.
Krane, J. 2003, 'Burgers, Fries, And Wi-Fi', Informationweek, 11th March 2003. Retrieved:
from www.informationweek.com on 17th October 2003.

Kuykendall, L. 2003, 'Will Contactless Payments Prove Sticky?' I American Banker, 9th June 2003. Retrieved: from http://aO-gateway.proquest.com.ezproxy.scu.edu.au on 17th October 2003.

Lingblom, M. 2003, 'Mastercard puts contactless smart card to the test', CRN.Jericho, 3rd March 2003, Iss. 1035; p. 55. Retrieved: from http://80-gateway.proquest.com.ezproxy.scu .edu.au on 1ih October 2003.

Longini, P. 2002, 'Models for Internet Success and Failure', Techyvent, 7th January 2002. Retrieved from www.imakenews.com/techyvent on 17th October 2003.

Lorentzen, 1.2000, tlmplementing multi-site ERP projects: centralization and decentralization revisited', Department of Sociology, NTNU Inform. Science, Norway.
Malcolm, A. 2003, 'Aussie burger chain gains Kiwi smarts', IDG Communications Ltd, 24th January 2003. Retrieved: from www.idg.co.nz on 1 ih October 2003.

'McDonald's Announces Worldwide Sponsorship of Olympic Day Run', McDonald's Corporate Press Release, McDonald's 16th June 2003b.

'McDonald's Corporation Announces Worldwide Nutrition Director' I McDonald's Corporate Press Release, McDonald's ath October 2oo3c.

'Microsoft Business Solutions delivers for Burger King', iStart Limited, February 2003. Retrieved: from www.istart.co.nz on 17th October 2003.

Newman, K. 2002, 'McDonald's seeks closer electronic relations', iStart Limited, August 2002. Retrieved from www.istart.co.nz on 1ih October 2003.

'Not so fast', The Economist, 5th December 2002b.

O'Brien, J. A. 2003, Management Information Systems, McGraw Hill, New York, USA.

Sheehan, M. 2001, '10 Ways to Cut The Cost of Energy', H T Magazine, March 2001. Retrieved from www.htmagazine.com on 1ih October 2003.
Singer, M. 2003a, W-Fi Gets 'Super Sized", IT Management, 11th March 2003. Retrieved: from www.itmanagement.earthweb.com/erp/article.php/2107771 on 17th October 2003.

Singer, M. 2003b, 'McDonald's Serves Up Wi-Fi in SF', Jupitermedia Corporation, ath July 2003. Retrieved: from www.cioupdate.com on 17th October 2003.
Songini, M. L. 2002, 'Burger King Upgrades to mySAP.com', Computerworld, 15th July 2002. Retrieved: from www.computerworld.com on 17th October 2003.

'Spotlight: Burger King Pilot', Visa Quarterly Report, Visa, August 2002. Retrieved: from www.visa.com/usnewsroom on 17th October 2003.

Taylor, A. 2000, 'IT Projects: Sink or Swim', The Computer Bulletin, January 24-26. 'Where's the beef, The Economist, 1st November 2001.

Online retail

I originally wrote this article, “Online retail“ in April 2003.  The effectiveness of the marketing and operations management of Amazon.com are discussed and changes are suggested to improve the management of these functions.

Introduction

Amazon.com is an international business with operations in Asia, Europe and the US.  Using the latest internet technology, the company trades in goods online and provides services to other companies. Amazon.com owns several patents based upon internet technology.  'Amazon.com Reports Second Profit Ever' (2003) describes how the company's revenue for 2002 was $1.43 billion, up 28% from 2001's figures and annual sales for 2003 are expected to increase by 15 percent upon sales for 2002. Net income for the company in the last quarter of 2002 was $2.7 million, down 48 per cent from the same period in 2001. A $40.6 million exchange rate loss in the euro contributed to this fall as Amazon's $2.15 million borrowings are in this currency.  However, euro fluctuations in 2001 gained the company $16.3 million.

International sites in Japan, Germany, France, UK and Canada provided the company with the largest growth during 2002.  The annual revenue for each international site increased by more than 60% in 2002. This created a 76 per cent annual increase for the international business, outside the US, to $461.4 million.

The company was founded in 1995 by Jeff Bezos and Schepp (2002) describes how Jeff attributes continuous improvements in computer and internet technology as being key to the success of his operations. According to Moore's Law, a doubling of speed in computing technology takes place every year. Lower prices, faster delivery and new web-site features have been achieved by Amazon as a result of this.

International marketing business strategies

Amazon's SEC report ‘Annual Report Persuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31,2002' (2003) includes their mission statement, “We seek to offer Earth's Biggest Selection and to be Earth's most customer-centric company, where customers can find and discover anything they might want to buy online. We have designed our Web sites to allow millions of new, used and collectible products to be sold by us and by other businesses and individuals worldwide. A product on our Web sites may be listed for sale simultaneously byseveral different sellers. For instance, a product may be offered by us, by a participant in our Merchants@ program and by a business or individual selling a new, used or collectible version of the product through Amazon Marketplace, zShops or Auctions. We also offer certain e-commerce services to other businesses through our Merchant.com and Syndicated Stores programs." The expansion of Amazon's product and service range appears to be getting to a stage where either the company should consolidate its position within the market or split up the company. There is a danger that customers and management will find it hard to focus and identify with the aims of a company with such a diverse product I services mix.

Cost leadership is the international business strategy adopted by Amazon.  Additionally, the company also adopts a strategy which attempts to differentiate its products and services from that of its competitors. The product range is greater than that of high street book sellers. Promotion of Amazon's products is online rather than in-store and distribution is centralized via courier, rather than personal pick up of the product from the retailer. However, with such a variety of products, its competitors are not now just the booksellers. It is any company that sells any of its products either offline or online.

To attain synergy and competitive advantage, Amazon has strategic alliance partner networks with other retailers. Jeff Bezos' goal is to provide customers with a single source of supply. "Our vision is to become a one-stop shopping place for anyone to buy anything. It will be done not exclusively by us alone but in conjunction with what will ultimately be thousands of partners. The benefit of which is lower prices and better selection for Amazon customers“. I would recommend that the book sales business be separated from the 'one-stop shopping place'. Amazon have good experience with book sales but could jeopardize the success of this portion of Amazon by diluted efforts.

Last year, Amazon opened its fifth international business operation and expanded into the Canadian market. Amazon saw it as a natural choice as Canada was served by only one major online retailer, Heather Reisman's Chapters - Indigo. I consider that the choice of Canada for the latest international site was a mistake. Canadian law prohibits direct management of the operations and the company is in danger of losing control of its operations which are entirely subcontracted to third parties.  Additionally, the total population and population density of Canada isn't amenable to providing a wide variety of products with a quick delivery service.

Think global, act local

Amazon's marketers had to decide between an ethnocentric, polycentric or geocentric approach to their international operations.  They chose geocentric marketing and operations management. To the international consumer, it appears to be a polycentric company. Each website, for countries whose first language is not English, is available in that country's language and English.  However, Amazon achieves this "think global, act locally" approach through the clever use of software.  They have developed a single piece of global software which can handle any language. This reduces their entry costs into further international markets.

Foreign pricing laws

Amazon's international pricing policy is influenced by the laws and regulations of host countries. For example, there is no law against price fixing in Japan. Publishers in Japan do not allow retailers to discount prices on their books. This means that Amazon's strategy is modified for the Japanese market.  Only books in non -Japanese language and other products are discounted.  List price is used for Japanese books. I recommend that Amazon focus on the product, promotion and place in countries where laws dictate list price. A larger product collection, online promotion and same day delivery would differentiate Amazon from its competitors in densely populated cities of certain countries.

Cultural differences

Soto (2002) describes how mobile phones are heavily used by the Japanese for online purchases. They spent $19.2 million for online purchase of books and music, via mobile phone in early 2002. Amazon lags behind its Japanese competitors, such as Kinokuniya, in the use of mobile technology for online purchases.  However, Amazon state that they expect only a small proportion of their sales income growth through mobile devices, compared with internet access through computers.

American culture and products are popular in Japan. Amazon bought 9% of the shares of a US company that specializes in assisting companies to expand into international markets using multi-lingual software.

Japanese preferences for payment methods has also affected another of Amazon's strategiesin this country. The payment method to Amazon for goods, used internationally, is by credit card. However, the Japanese don't normally use credit cards for payment of goods. Amazon has changed its payment policy in Japan and offers cash on delivery, to suit the local market.

Branding

Amazon expects growth in its international markets to exceed growth in its domestic market. High international brand recognition is assisting this growth. For example, the market in Japan was developed prior to the company starting operations there.  Tens of thousands of Japanese customers were already patronising Amazon's other international sites, based upon the high brand recognition.  After commencing operations in that country, the Japanese web site now has revenues in excess of $100 million.

Yamada (2000) reports that three years ago, complaints started to be made about Amazon's alleged practice of dumping liquidated, discontinued, damaged, returned or overstocked products on its auction sites. Questions were asked as to whether this strategy conflicted with Amazon's quality branding image. In response to this criticism however, the company gave 'money back' guarantees for purchased items to a value of $2,500. I'd recommend that Amazon separate these business activities from its core business an operate them under a different company name to preserve their brand image in online book sales.

Pricing

Amazon's sales volumes increase yearly. The sales are driven by lower prices and Jeff Bezos claims that Amazon is lower in price because it can afford to be. 'Chewing the Sashami with Jeff Bezos' (2002) reports that although one of Amazon's long standing goals had been to reduce prices, it was only in 2002 that they were able to do so. A re-arranged cost structure from years 2000 to 2002 allowed the company to achieve this goal. Price reductions were achieved in three stages. Firstly, a 30 percent discount was offered on all books over $20. This was followed by free or discounted shipping. Most recently, the 30 percent discount was extended to books over $15.

Retail prices are discounted by 20 per cent to 80 per cent for liquidated products sold online by Amazon. This compares to 40 per cent to 80 per cent discounts offered by traditional liquidators. Amazon receives 5% sales commission for these products and the company's aim is to provide a better return than traditional liquidators can achieve. I'd recommend that liquidated products be sold by the company under a name other than 'Amazon' to preserve brand image.

Market pricing

Amazon's Canadian operations, which began last year, has adopted market pricing.  It discounts its top 40 bestsellers in Canada by 40%. Amazon's Canadian competitor, Indigo, was forced to adopt the same strategy. This form of geographic market pricing is necessary to compete in local markets.

Product prices can be adjusted to match changing geographic, demographic or economic market conditions using web-based systems. In 2001, Amazon tested market pricing but had to abandon the test after five days because of customer resentment.  I'd recommend that the company only use market pricing geographically.

Advertising

Amazon's expenditure to retain existing customers and to acquire new customers is very large. Advertising costs in 2003 will exceed $100 million.

The company has developed software that analyses the purchasing patterns of individual customers. It then recommends complimentary products based upon that particular buyer's previous buying history. According to Jeff Bezos, “The goal here is not rampant consumerism. The idea is to use technology to capture information about customers and their interests and match individuals with other products they might like, including products they don't know even exist."  I'd recommend that Amazon spend more effort in re-assuring the customer of how this information is exactly used to prevent mistrust.

Sales promotions

Soto (2003) reports that Amazon's free shipping promotion will cost the company $100 million in 2003.  Free shipping commenced at the end of 2002 and the campaign has proved to be so successful that the promotion will continue throughout 2003 for orders above $25 in the US and £39 in the UK.  Amazon attributes a 28 percent sales increase as being a result of the free shipping promotion. Free shipping is also offered at its international sites in Japan and Europe throughout 2003.  Sales volumes in the UK rose 32 percent for the end of 2002 as the British operations shipped 6.2 million products. The free shipping promotion contributed to a sales growth of 76 percent for its international operations at the end of 2002.  I'd recommend that Amazon use quantitative analytic techniques on a regular basis to match sales promotion expenditure with increase insales revenue and make sure that it is a profitable activity.

‘Jeffrey P. Bezos' (2002) describes how Amazon offers a 15 percent commission to other companies whose web sites link a customer to Amazon, resulting in a sale. The web sites can recommend Amazon books and tens of thousands of these affiliate sites are linked to international Amazon sites.  I'd recommend that Amazon be selective in the frequency of payments to affiliates. Only a few hundred affiliates with large commissions due should be reimbursed monthly, the remainder being paid yearly.

International operations management

The international operations management is now organised on a geocentric basis.  The company merged the management of its US home country business with its international business operations in November 2001.

Supply chain management

Jeff Bezos states that the distribution philosophy at Amazon is different from traditional retailers. Amazon uses a centralized distribution system. The inventory is much reduced when compared to that of high street retailers. Jeff Bezos expects that this business decision will ultimately lead to a very high return upon the capital investment.

International couriers, international and national postal services are used by the company for distribution of its products to customers. Urban property identification is very different in Japan, when compared to Europe and the US. Many streets don't have names and there is often no sequence to property numbers. Amazon aligned with Nippon Express for customer deliveries to benefit from their 'in country' knowledge.

Amazon was taught a lesson from its distribution centre mistakes in the US and applied its learned experience in Europe. The company had previously constructed too much warehouse capacity in the US and was forced to close one warehouse. They built five automated warehouses but only actually required four.  After this, international depots were designed more efficiently.

International business accounts for one-quarter of Amazon's sales. However, much of this business doesn't involve products crossing borders.  For example, the business operation in Germany deals mainly in books produced in the German language. These books are published and distributed within the same country.

Supply problems have created difficulties for Amazon in Canada. The relatively small population leads to smaller stocks of fewer titles being held by the publishers.  It’s not economically viable to maintain huge stocks in Canada and this has lead to customer complaints of late deliveries. The business in Canada was created to alleviate the problems experienced by Canadians when they orders goods from the US.  High shipping costs and adverse exchange rates are avoided.  However, low warehouse stocks levels in Canada create the situation whereby it’s still quicker and cheaper for Canadians to order from Amazon's US operations. "It’s hard to come out of the gate perfect," acknowledges Amazon spokesperson Kristin Schaefer. "It’s difficult to know how to accurately manage and stock inventory until you know what customers are buying."

International logistics

Amazon ships products to 220 countries. Products are shipped to customers entirely domestically within international operations or via international inter-company transfers. Shipping times have been reduced by two-thirds and growth has been achieved in both international internal markets and export markets.

International distribution is offered to customers in three tiers. Customs clearance charges and import duties are the responsibility of the customer. Firstly, using DHL Worldwide Priority Express, products can be shipped in one to four business days.  Secondly, using DHL World Mail, products may be shipped in 7 to 21 days. The slowest shipping method is by surface mail and the shipping times are; 3 weeks to Canada, 6 weeks to the UK, 8 weeks to Australasia and 12 weeks to Brazil. Tracking of shipments from Amazon is available over the internet. I'd recommend that Amazon consider undertaking delivery to densely populated cities within the world through their own organisation, without subcontracting to third parties. This would provide a complete service to millions of customers and customs clearance would be facilitated.

International service operations

Amazon has international service operations where it derives income from partnerships.  Retailers use the international Amazon web sites as portals for purchase of their products. Borders, CDNow and Toys"R"Us are some of Amazon's partners. This exploits the benefits that Amazon receives from internet traffic.

The role of government

As well as crossing national borders, Amazon's business also crosses national laws.  Two interesting cases have arisendue to differences in US law and UK law.  Courts in the UK issued an injunction against the distribution of a book defaming the founder of a religious sect. The book was removed from all of Amazon's international websites. A huge protest ensued by the global public who criticized Amazon for globally applying UK law. The book was returned to Amazon's selection, except for the UK web site. Courts in the UK also issued another injunction against the distribution of a book defaming a political activist in the Northern Ireland dispute. The book was withdrawn from the UK website and sales from the US website are not allowed to residents of the UK. I'd recommend that Amazon pay more attention to the consequences of their actions with regard to the differences between the laws of different countries.

Europe is a large market for online shoppers but it is a collection of many individual countries, each having their own laws. There are common EU directives on e-commerce but irregular execution of these laws in member countries may splinter Europe into several different markets. Asbo (2003) reports Amazon as noticing that the value of transactions within the EU is growing alongside the increase in online trade. The company would like to see legislation keep pace with the technological advances being made. I'd recommend that Amazon continue to be involved, along with other e-commerce companies, in the harmonization of national laws.

Wolverton (2002) states that two of Amazon's technology patents were published by the US Patent and Trademark office last year. They were related to their particular system for online payment. Previous patents from Amazon were for its purchasing process, affiliates programme and recommendation service.  The company has lodged these patents for a particular reason. The techniques described within the patents are not particular technological breakthroughs. However, the processes are critical to the business of the company. Having the patents in the name of Amazon prevents any other company from suing Amazon or from threatening the core operations of the business.  Indeed, many other companies utilize the same techniques patented by the company. Amazon choose not to litigate against these other companies as evidence of their intention to use the patents purely in a defensive manner. This was a good tactic by Amazon to counter any potential legal threat to the operation of its core business.

Canadian lawrequires book retailing companies in Canada to have a minority of foreign ownership. Amazon expanded into the Canadian market, with books in the English and French languages, last year but had to adjust the operation to comply with Canadian law. It has accomplished this by using Canadian registered companies to provide supply and distribution services. However, a similar previous arrangement tried by Borders was disallowed by the Canadian Booksellers Association. Borders challenged the legality of Amazon's operations in the Canadian courts but lost.  As Amazon doesn't have an office in Canada, it works through partner companies and the Canadian government ruled that the Investment Canada Act did not apply.

References

'Amazon. corn Reports Second Profit Ever', Associated Press, January 24,2003. Retrieved: April 3, 2003 from http://www.tallahassee.com/mld/tallahassee/news/

'Annual Report Persuant to Section 13 or 15( d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31,2002' United States Securities and Exchange Commission, February 19,2003. Retrieved: April 3, 2003 from http://phx.corporate-ir.net

Asbo. P. 2003, 'Amazon exec warns that legal uncertainties hinders Eurpoean e-ommerce', europemedia.net, February 20, 2003. Retrieved: April 3, 2003 from http://www.europemedia.net

'Chewing the Sashimi with Jeft Bezos', BusinessWeek online, July 15, 2002. Retrieved: April 3, 2003 from http://www.businessweek.com

'Jeffrey P. Bezos', METU Industrial Engineering Department, Ankara, Turkey, 2002

Schepp, D. 2002, 'Amazon's Bezos pushes growth', BBC News, June 3,2002. Retrieved: April 3, 2003 from http://news.bbc.co.uk/1/hi/business/

Soto, M. 2002, 'Amazon faces big test in international markets', The 8eaftle Times, April 22, 2002. Retrieved: April 3, 2003 from http://seattletimes.nwsource.com /htmllbusinesstechnology/

Soto, M. 2003, 'Earnings: Amazon posts second net profit', The 8eaftle Times,
January 24,2003. Retrieved: April 3, 2003 from http://seattletimes.nwsource.com
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Wolverton, T. 2002, 'Amazon seeks patent for payment system', CNET Networks, Inc., September 23, 2002. Retrieved April 3, 2003 from http://news.com.com

Yamada, K. 2000, 'Shop Talk: Amazon.com's junkyard strategy', RHC Media, Inc., June 2, 2000. Retrieved: April 3, 2003 from http://www.redherring.com/insider/