Electronic Marketing and Purchasing

In the past thirty years, we have moved from the traditional exchange models of “explaining” and “managing” to the phenomena of the electronic revolution in buyerseller networks, the development of network formations, and the impact of electronic communications such as electronic data interchange (EDI) and the internet on electronic commerce. These network approach models emphasize “understanding” and “developing” relationships in business networks (Johnston and Lewin 1996). Van den Poel and Leunis (1999) studied the capabilities of the World Wide Web (WWW) as a new type of non-store retailing in which the Internet is a direct link between the consumer and the retailer or producer, bypassing the traditional store. Although retailers typically have lower costs of operating a commercial activity on the Internet compared with a brick-and-mortar store, non-store buying is perceived to be more risky than retail store buying (Van den Poel and Leunis 1999; Spence et al., 1970; Festervand et al., 1986). One main reason for this is that customers are often unable to physically inspect products before the purchase. Their research confirms earlier findings that money-back guarantee is the most important risk reliever, followed by offering a well-known brand and a price reduction for Internet shoppers. However, firms are seeing the value in customer account relationship management even for small customers. Oliver (1997) points out that everybody is not "technothrilled." Some customers do not mind paying a premium to keep the personto-person contact when shopping (salespeople, clerks, and cashiers). Thus, when emarketers obtain customers they must be proactive to keep the customer from “clicking-off” their site. Oliver also suggests that electronic shopping might be context-dependent. The electronic experience is preferred at different times for different products. Oliver’s context-dependent model for purchasing goods and services conceptualizes three levels of commerce ("marketplace" where personal interaction, ritual and sense of community predominate; “marketspace” which includes things that can be digitized and/or have strong brands that can be easily described and understood by vendor and purchaser; and “customerspace” where customers create their own goods or level of service. All three levels fall under the electronic market umbrella. In turn, a growth in the functions of “butlers,” “intelligent agents,” and “gatekeepers” will prevail (Oliver 1997). The “butler bundles the inputs of the person being served and delivers them completed – not the ingredients of a meal, but the meal itself. “Intelligent agents” are electronic versions of butlers. The intelligent agent is a search-and-find tool for the Internet or other electronic shopping service. The challenge in marketing, as it always has been, is to give the customer what he, she or it wants whether it is the product or service, or the ability to create the product or service. The purpose of this paper is to contrast the old models of dyadic and network marketing to the electronic marketing and purchasing paradigms that are emerging. Buyer-seller relationships will be transformed. Networks will be electronically wired to rapidly communicate end consumption through out the entire value chain. A great deal of the existing marketing infrastructure will be disintermediated and left obsolete. It is also possible that industrial marketing and purchasing, as we know it will vanish. The terms customer relationship management and enterprise resource planning may completely replace the terms of marketing and purchasing. Introduction In the past thirty years, we have moved from the traditional exchange models of “explaining” and “managing” to the phenomena of the electronic revolution in buyerseller networks, the development of network formations, and the impact of electronic communications such as electronic data interchange (EDI) and the Internet on electronic commerce. These network approach models emphasize “understanding” and “developing” relationships in business networks (Johnston and Lewin 1996). Networks or alliances have become increasingly important due to competitive forces, technological innovations, and the need for resources (Johnston, Lewin, and Spekman 1998; Hamel, Doz, and Prahalad 1989; Ohmae 1989). The impetus to understand buyer-seller relationships increased in the 1960s as was embodied in the Robinson, Farris and Wind (RFW 1967) model, the Webster and Wind (1972) model, and the Sheth (1973) model. Johnston and Lewin (1994) compared these three original models of industrial buyer behavior and extended them into an integrated model which includes nine explanatory constructs representing various stages of the organizational buying process (environmental, organizational, purchase, group, participant, seller, informational, and conflict/negotiation characteristics), along with four additional variables (decision rules, role stress, buyerseller relationships, and communication networks). Johnston and Lewin (1994) proposed that organizational buying behavior is related to the levels of risk associated with a given purchase situation. They acknowledged that many variables contribute to the level of risk, among which include environmental uncertainty, buyer competencies, type of product being purchased, complexity, novelty, and importance. Notwithstanding the fact that existing buyer-seller relationships tend to influence the perceived level of purchase risk, Johnston and Lewin's (1994) review revealed that as the risk associated with an organizational purchase increases, the following tendencies can be seen: • The buying center becomes larger and members are more educated and experienced in their area of expertise • Sellers offering proven products and solutions are welcomed, even though information search will be actively used in seeking a variety of information sources • Within the buying center, conflict will increase and a "bargaining" (tit-for-tat) negotiation strategy might be employed, whereas, the collaborative or problemsolving negotiation strategy approach might be used more within the buyer-seller dyad • Established communication networks between buyer-seller dyad members facilitates information exchange and fosters cooperation. The three original models viewed organizational buying behavior as a process. Important influences were categorized as environmental (referred to as "situational" in the Sheth model), organizational, and buyers' characteristics. To understand these influences and their potential impact on the buyer-seller dyad in purchase situations, a breakdown follows: Environmental influences Physical, political, economic, suppliers, competitors, technological, legal, and global aspects Organizational influences Size, structure, orientation, technology, rewards, tasks, and goal aspects Buyers' Characteristics Education, motivation, perceptions, personality, attitude toward risk, and experience aspects The RFW and Sheth models have two other constructs in common namely, purchase (or product) characteristics and seller characteristics. Purchase (product) characteristics are delineated as buy task, product type, perceived risk, prior experience, product complexity, and time pressure. Seller characteristics encompass price, ability to meet specifications, product quality, delivery time, and after-sale service. Another construct, "Group Characteristics," is included in the Webster and Wind model. Dimensions in this category include size, structure, authority, membership, experiences, expectations, leadership, objectives, and backgrounds. The Sheth model also includes informational and conflict/negotiation characteristics. Informational (search) characteristics (which include sources and types of information) are salespeople, conferences and tradeshows, word-of-mouth, trade news, direct mail, and advertising. The conflict/negotiation characteristics are those employed in joint decision making (adopted from March and Simon 1958) such as problem-solving and persuasion, bargaining, and politicking. Johnston and Lewin (1994) extended the models at both the intra-firm and inter-firm level. Herein. we will concentrate on the inter-firm level from which the "buyer-seller relationships" and "communication networks" emerge. Frequent variables used to examine buyer-seller relationships in the Johnston and Lewin (1994) study are power/dependence, behavior/performance monitoring, cooperation/trust, adapatability, commitment, and communication. The buying center and selling center concepts surround those purchasing activities that occur on the buying side and selling side of the dyad, respectively. Interdependent Relationships Tikkanen (1996) and Brandenbury and Nalebuff (1996) concentrate on understanding focal nets, value nets, and holistic network perspectives. Their points of departure from the previous managerial approaches lie in the conceptualization that business networks have become important due to relationships, positions, structures, and the integration of business processes in the overall value system. They suggest looking at business relationships, interactions (e.g., the electronic revolution), and interdependence from a less dichotomous view of buyer-seller relationships, and more from a comprehensive, subjective systems approach. Networks such as the Internet can be viewed at both an organizational level and at an individual level. The organizational level encompasses the commercial and legal constraints of buying and selling products and services on certain terms. Whereas, at the individual level, personal contacts and individual relationships are established, which are beneficial to the involved actors. Interdependence implies that the actions of any participating actors can produce changes in the actions and behaviors of the other actors (Buchanan 1992; Gundlach and Cadotte 1994; Kumar, Scheer and Steenkamp 1995). A network of inter-organizational contacts, formal and informal, exists which includes many functions at different hierarchical levels within the participating organizations. These networks are rich, global, complex and boundless. Companies today are establishing priorities and developing action plans that reflect the unique emerging relationships for buyers and sellers. Many of these relationships are designed to bring greater value to the customer by eliminating time, cost, inventory, and other inefficiencies in the supply chain. Electronic communications such as Electronic Data Interchange (EDI), Standard Interchange Language (SIL), DSD are strategies for pursuing this increase in efficiency. To form a successful partnership or alliance, a strong, interdependent relationship is established to facilitate the flow of information, eliminate duplication, and streamline product delivery. EDI (electronically sending and receiving business documents between two different business management systems) as employed by some firms, reduces costs, time delays, and errors associated with paper-based information (Kurt Salmon 1996). These firms rely on EDI for accurate merchandising decisions, lessening out-of-stocks and adjusting shrinkage accordingly, whereby controls are put into place to account for the growing trend toward a consumer-focused economy. Activity-based costing (ABC) is useful as a tool for understanding the true costs of moving products through the supply chain. Once the major activities are determined, and the drivers of those activities identified, information is used to make informed merchandising decisions. Products vary tremendously in the amount of activity and costs required in bringing them to the customer. Thus, ABC associates costs with products to determine a measure of profitability. EDI streamlines the functions of assortment, promotion, and distribution that can reduce new product introduction costs as well as product extensions. Any direct route that shortens (or disintermediates) the channel from the manufacturer to the consumer results in tremendous benefits from the synchronization of activities, reduced processing time, and the elimination of redundant and non-essential activities. However, firms and consumers must be equipped with the technology to accommodate electronic communications. Point-of-Sale (POS) data can be used to develop strategic category plans, monitor space allocations, and measure performance. Continuous replenishment of inventory, demand forecasts, and other predetermined information is monitored to improve inventory turns, decrease cycle times and out-of-stocks. Grönroos (1990) defined (relationship) marketing as: Marketing ... to establish, maintain and enhance relationships with customers and other parties at a profit so that the objectives of the parties involved are met. This is done by a mutual exchange and fulfillment of promises.” Gummesson (1994) perceived the shift in the marketing paradigm to be one from which the 4Ps were the founding parameters to one in which the 4Ps are contributing parameters to relationships, networks, and interaction. Thus the move towards an interaction/network theory is timely. Studies of companies’ links and positions within channels, and competition and complementarity within networks, is clearly a significant, emerging concept (Brandenbury and Nalebuff 1996). The impacts of interdependence and information flows are becoming more emphasized, particularly in light of researchers' and practitioners' interests in relationship quality and long-term marketing relations or relational exchanges (Buchanan 1992; Gundlach and Cadotte 1994; Kumar, Scheer and Steenkamp 1995; Dwyer, Schurr, and Oh 1987; Heide and John 1992). Interdependence is conceptualized maximally in an electronic data interchange context. Organizations (both individuals and groups) are interdependent. Their interests and goals are related. This is a critical link between the structural and behavioral aspects of interdependence and the subsequent cooperation of organizations (Tjosvold 1986) that is necessary in a network context. Though this study is limited to buyer-seller networks in large-scale operations, the need for becoming electronically wired is ever increasing. Bob Howe, president of Scient (an e-business systems innovator) claims that it can build a large-scale “.com” e-business from scratch in six to eight months, i.e. before the CEO of a business even knows what he or she really wants (The Economist 1999). Businesses can quickly create sustainable competitive advantages over slower-moving rivals. A case in point, Burger King put an SQL Server database in every hamburger store, but they still couldn’t answer the question, “How many whoppers are we selling each day” (The Economist 1999)? The Economist further points out that General Electric (GE) has developed The Trading Partner Network, a web-based link to its suppliers enabling them to quickly and easily make bids for GE components contracts. Prominent features of this system are an electronic catalogue, the ability to make electronic purchases and the option of paying online with an electronic credit card. Procurement cycles have been cut in half, processing costs by a third, and the cost of goods purchased by 5-50%. The number of GE suppliers has come down and the remaining ones have become tremendously efficient. But, all companies are not jumping on the bandwagon to EDI and ECR activity. The basic thrust that some of the large companies will have to deal with is merging the back-office (EDI) with the frontoffice (Internet impact). Wal-Mart thus far has steered clear of the Internet as a major way for customers to procure. We turn now to a look at the basic features of the actors, their roles, activities, and resources in the business context of an electronic revolution. Wiring the Network The overall structure of the network evolves from a focal net. The focal net is defined as a part of the greater industrial network structure that the focal firm is acting in and perceiving as relevant and meaningful. The focal net contains both direct and indirect relationships. Timely and efficient dissemination of key information is a major impetus for network formulation. A good example of an industry where this new type of business-tobusiness and consumer interconnectivity is beginning to emerge is the grocery industry. The term being used in this industry for electronic linking of the supply chain members is efficient consumer response (ECR). Under this approach, distributors and suppliers work together to add greater value to marketplace offerings for the end-consumer. The focus is on the "efficiency" of the total supply system and not on the efficiency at each link in the chain. This strategy reduces total system costs, inventories, and physical assets. It also improves the end consumer's choice of high quality products. Efficient Consumer Response (ECR) ECR is more than just EDI and bar coding, although both are essential to the process. ECR really begins with a commitment on the part of distributor and supplier to reengineer their business processes to make them more efficient and to manage products by category rather than by brand. Automation (via EDI) is then utilized to reduce time required to share information and lower costs. The network approach describes this contemporary interorganizational exchange process very efficiently. The concept of industrial networks allows us to move beyond the dyadic relationship to model system-wide effects, and adds to the interaction approach the knowledge that a relationship cannot be “managed in isolation” from other relationships and represents a conduit to other relationships through which resources are accessed (Easton, 1992). The development of mutually beneficial, cooperative networks of business relationships as suggested by Dwyer, Schurr, and Oh (1987) helps overcome the primary difficulties such as technological and economic aspects of ECR. The changing competition from wholesale clubs has reshaped supplier-distributorretailer-consumer relationships – focused SKUs (stock keeping units), streamlined logistics, and efficient in-store operations and mass merchants with broad SKUs at sharp EDLP (every day low prices), world-class logistics, customer service, and excellent management. In the typical distributor and supplier relationship without ECR, demand information available to the supplier is highly distorted by many factors not having much to do with actual consumer demand. The information may be of little value for production planning decisions. Suppliers may even have to purchase information about consumer buying from other sources such as point-of-sales data from 3 parties. Suppliers carry high levels of safety stock to compensate and incur high warehousing and inventory carrying costs. ECR enables a timely, accurate, paperless information flow with a smooth, continual, product flow from supplier via distributor and retailer to the consumer household. There are four value-adding processes of the supply chain on which ECR focuses. Each of these core processes creates value by satisfying consumer needs for product, convenience and price. These four Key ECR business process strategies are: efficient store assortment, efficient replenishment, efficient promotion, and efficient product introduction. Taken together, these four processes have the estimated power to lower costs to the end consumer by 11 percent; save the industry $30 billion; and lower the overall system inventory by 40 percent (Kurt Salmon 1996). It is not a project, program, nor technology, rather it is a set of tools that must be developed and adopted in conjunction with other firms as partners. An obvious truth about ECR is that any company without the active participation of a majority of its suppliers or customers cannot realize the full benefits. In the network approach, reality manifests itself as human intentionality. Human behavior is basically voluntaristic and intentional. Most network theorists share some common assumptions about the nature of contemporary business environments and the behavior of the business enterprise as it relates to interorganizational relationships (Pfeffer and Salancik 1978). Primarily, the market is perceived as a process of networking, linking market actors and their activities and resources. A process is set in motion because of the limited knowledge of the market actors. This knowledge is limited, bounded, subjective, and imperfect. The market process additionally is competitive, but predominantly cooperative. An important aspect to be discussed in the next section is the context of the business enterprise, i.e., the portion of the network relevant for its activities, or its focal net. What is perceived as relevant in a network is dependent upon the perception and interpretation of the context by the network actor(s). The context of the business enterprise is textured, with many actors of various behaviors, evolutionary patterns, and constant change with undetermined outcomes. While systems, technology, and data integrity are extremely important, the ultimate success depends upon managing the people and processes that do the work. When a product goes out of stock, no one can blame the computer; it’s knowledgeable people that handle business problems. There is an increased need for cross-functional teams that focus on the best way to get products from the beginning to the end of their company’s segment of the distribution pipeline. To move forward requires significant partnering, trust, and information sharing . These values have not typically characterized historical relationships. Significant process, organizational, and technological changes must be managed and internalized. Close collaboration is also required between players in the marketplace. Significant communication and commitment strategies are needed for start-up. The elimination of trust barriers is a must. Finding goals of commonality and compatibility is the basis of starting a mutual trust. Understanding each partner’s business is crucial. Time and perserverance will also be key. Sacrificing short-term profits for long-term gains demands the partners have a long range view (Macneil 1980). Context, Time And Space Of Information Fundamental sources of wealth in millenium-driven economies are knowledge and information. Companies all over the world have access to the same market of bright employees, market research departments are more or less equal, and the competitive nature of industry makes it certain that rivals’ products and processes are examined rigorously. For companies, the focal question is: “What information is needed to effectively manage our business processes so that we keep an advantage over our competitors?” Three important types of information (historical, factual and operational) and their interconnectedness are discussed. The Trio of Information To manage anything, you need three types of information: historical (“where have we been?”); factual (“where are we now?”), and operational (“where are we going?”). Coopetition (Brandenbury and Nalebuff 1996), when applied properly helps achieve the ECR objective of a timely, accurate, paperless information flow characterized by smooth, continual product flow matched to consumption. Historically, Controlling product flow necessitates knowing how well your company is doing – that is, how well did your last sales promotion perform? Have you exceeded your sales targets and/or improved service to your customers? Precise, accurate and timely historical information is vital to decide where to focus your business processes. Knowing what happened in the past (such as can be provided from valuable census store scan data) allows you to fix it today. Factually, where are you today? When your promotions are over, do you know whether you are underor over-stocked? If so, by how much, and in which stores? These answers are needed quickly and accurately for further deployment of resources on a continual basis, over existing functional boundaries. Are your systems delivering you enough accurate information today that you know you have enough money in the bank to cover tomorrow’s payroll? Operationally, the moment you know both where you’ve been and where you are today, figure out where you’re going (your paths forward). Knowing when the shipment is needed allows you to manipulate your resources to get the work done and to keep your customers satisfied. Profit is calculated from the management of this information component. Substitution of Information for Inventory The substitution of information for inventory is a driving force. The elimination of purchase orders and invoices in many businesses is just the beginning. Value chain players have the capability to integrate their distribution systems from retail point-ofsale terminals up through suppliers’ manufacturing facilities for development of a world-class distribution system. Knowing ahead of time what your customers really want enables you to produce products as needed, and to reduce uncertainty and inventories made up of safety stock. In this vein, superior operational information about customer needs substitutes for inventory. It is a total waste for materials to arrive per agreed-upon schedule, in the right quantities, just to have the material sit on the factory floor waiting for capacity to be freed for production. No one wants to hear, “We were ready to ship, but there were no trucks available.” Retailers, wholesalers/distributors, and manufacturers have powerful information in their hands when they answer two critical questions: What will I need on the shelf? and What will I need to produce? Information and the Retailer Participating in co-opetition arrangements allows retailers to predict stockouts and how to avoid them. Transportation of products and working capital decisions can be proactively managed for profit optimization. Information and the Wholesaler/Distributor Wholesalers and distributors need not fear their position in the chain due to increased direct linkages between retailer and manufacturer. The strategic position that wholesalers and distributors occupy lends itself to unique custom packaging and delivery services, retail shelf replenishment services, cross-docking, and other information and transport services. For instance, manufacturers could ship products in bulk (unpacked bottles of good ‘xyz’), then have the wholesaler/distributor provide the value-added service of delivering to the retail store, units of the product packaged to meet the shelf replenishment supplies for each individual retail outlet. Distribution Resource Planning (DRP) provides the necessary data for developing such profiles of retail stores. This new, unique significant role can reduce retail inventory, increase velocity across channels, and free valuable shelf space for other goods. Manufacturers can synchronize their logistics and manufacturing resources closer to their retailing and wholesaling co-opetitive partners. Full truckloads mixed with products from several manufacturers can be visualized to aid material handling, inventory investment, demand-smoothing, and transportation and warehousing savings. The Value Net The key is to share this timely and accurate information with suppliers and other members of your Value Net. The Value Net is a schematic map to visualize your competitors, customers, suppliers, and resources (Brandenburger and Nalebuff 1996). In terms of viewing, the customers and suppliers are along the vertical dimension. From the customer viewpoint, an actor is your complementor if customers value your product more when they have the other actor’s product than when they have your product alone. From the supply-side, a player is your complementor if it's more attractive for a supplier to provide resources to you when it's also supplying another actor than when it's supplying you alone. FIGURE 1THE VALUE NET* * Adapted from Brandenburger and Nalebuff 1996. The Value-Net reveals two fundamental symmetries in the game of business. Vertically customers and suppliers are equal partners in creating value. Traditionally, we’ve listened to the customer "You've got the specs, you don't need to know what the product's for. Just give it to me on time at the lowest price.” Now, it’s time to listen to the supplier. Employees, too are suppliers, providing expertise, labor, and time. And as Brandenburger and Nalebuff (1996) suggest, we may be playing "catch-up" in our thinking about suppliers. Brandenburger and Nalebuff (1996) provide several more illustrations of their idea of co-opetition in the following passages: McGraw-Hill CEO Joseph Dionne said when confronted with the question of whether there would be less demand from paper-print copies with the emergence of on-line, "In ten instances when they create an electronic version of the print edition ... [demand for] the print version grows, too.” Other scenarios such as the Jekyll & Hyde of computers and paper also illustrate the point. When computers were introduced, there was much talk about the "paperless office." However, the advent of computers has complemented far more than competed with paper, and at a substantial rate. Originally, cable television was narrow caste and complemented network TV now, they are competitors. Trade-offs may be that competitors can co-locate next to each other. It is probably true that competitors divide up the market, but they also share in creating the market. Utilities and phone companies today run phone and electric wires over a common set of poles. Strategy experts Gary Hamel and C. K. Prahalad in "Competing for the Future" (1995) say “Become more inquisitive and question why things are the way they are. Only then can you compete for -and win the future.” Companies must adapt to their competitors as well as to their co-opetitors. The other symmetry is on the horizontal dimension for competitors and complementors. The "mirror image" of competitors is complementors. A complement to one product or service is any other product or service that makes the first one more attractive i.e., computer hardware and software, hot dogs and mustard, catalogs and overnight delivery service; red wine and dry cleaners. The Value Net helps you understand your competitors and complementors "outside in." Who are the Suppliers Competitors Complementors Customers