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Leveraging Physical and Virtual Presence in Electronic Commerce: The Role of Hybrid Approaches in the New Economy

Charles Steinfield

Dirk de Wit

Thomas Adelaar

Arnout Bruins

Erwin Fielt

Markus Hoefsloot

Alko Smit

Telematica Instituut

Harry Bouwman

Delft University of Technology

Author contact information:

steinfie@msu.edu

Presented to the International Telecommunications Society,

Buenos Aires, Argentina, July 2-5, 2000.

Introduction

A recent trend in electronic commerce is the recognition that, at least in many traditional product markets, having some physical infrastructure is necessary to effectively meet customer needs (Economist, 2000a; Lindsay, 1999). Indeed, as the so-called all Internet "pure-plays" (cite) continue to rack up large losses, many e-commerce observes are refocusing their attention on hybrid "click and mortar" strategies as the likely winner in the new competition between traditional and virtual firms. This stands in stark contrast to the initial expectations that surrounded the emerging Internet-based economy. Rather, it was assumed that older firms would face stiff competition from more nimble virtual players who were not saddled with the higher costs associated with buildings, large and duplicated inventories, and other vestiges of the "old economy (Steinfield, Mahler and Bauer, 1999)."

To date there has been little research on click and mortar approaches (see Steinfield and Klein, 1999; Steinfield and Whitten, 2000). We suggest here that hybrid e-commerce strategies can take many forms, ranging from approaches with limited interaction between the physical and virtual entities to those in which the two modes are tightly coupled. We refer to these tightly coupled approaches as synergy models, where e-commerce applications and physical infrastructure jointly meet consumer needs. In this paper, we provide investigate the theoretical strengths of synergy models, present a series of case studies illustrating different synergy approaches in diverse industries, and draw some conclusions about the types of synergies that exist and how they may relate to firm and industry characteristics.

Electronic Commerce Models

In developing an Internet strategy, firms can choose among many alternative approaches, including those that are explicitly linked to their existing physical presence in a market and those that are not. Following Venkatesh (1999), in this section we introduce six types of Internet strategies. This categorization is useful, in that it highlights the main differences between synergy-oriented strategies and those that do not seek to exploit complementarities between physical and virtual activities. (synergy, mirror, anti-mirror) and those that are not (parallel, virtual). Venkatesh's (1999) six categories are:

• Pre-Internet: Firms that explicitly choose to avoid developing an Internet-based channel to their customers or other trading partners fall into this category. This may be due to lack of resources, but can also be a rational strategy for firms that believe having a Web channel adds little value to their current distribution channels. There may be little added value for those firms who cater to a geographically local market (with a service consumed on premises, for example, such as hair cuts) when there is little to no Internet penetration among their target market (as in some countries). Some firms may also be attempting to differentiate their product or service by emphasizing richer, in-person channels, and may feel that developing a Web channel would harm their image.
• Mirror: Often firms that do develop a Web channel to their customers or trading partners elect to make this channel resemble their physical channels as closely as possible. For example, a firm might establish a Web store that has the same look and feel as their physical outlets, offering identical goods and services. It is, in essence, a mirror-image of their physical outlets, but does little to exploit the new capabilities of the Web or to seek out any synergies that might exist between the virtual and physical channels. Catalogue firms often developed a Web channel that duplicated their existing mail order and phone channels, but did not interact with these earlier modes of customer contact.
• Parallel: Firms that develop an Internet channel that is explicitly separate from, and unrelated to, their physical channels are following a parallel strategy. Firms may choose this approach because they believe that the Internet enables them to offer a different set of goods and services, or to reach an entirely distinct customer base (either geographically or demographically) due to the Web's unique capabilities. They may feel that it is necessary to avoid explicit reference or linkage to their physical outlets, perhaps because they seek to convey a new or different image in their Web channel. In some cases, small firms may tried to mask their limited size, and develop an Internet brand to compete against larger, more established firms.
• Synergy: A synergy strategy is one where firms explicitly link their virtual and physical presence, exploiting each channel's strengths. Firms may, for example, rely on their physical outlets to establish trust, while extending service and convenience through their virtual channel. In true synergy models, the two channels interwork and complement each other in various ways. A firm may allow customers to gather information and to order products online, and then pick up or obtain after-sales service at the physical store.
• Virtual: In virtual models, firms forsake their physical presence, and pursue an all virtual channel strategy (perhaps outsourcing the distribution of physical goods to courier services). Although it is largely the new digital actors that typically start with this approach, there are examples of firms that have relinquished their physical presence for the lower costs they believe they will find on the Internet.
• Anti-Mirror: An anti-mirror strategy is one in which firms develop an Internet channel, and remake their physical presence to take better advantage of the capabilities of the Internet. This may involve restructuring business processes in their physical outlets to make them more "Web-aware." The important distinction here is that the physical presence is fundamentally altered as a result of the firm's virtual channel development.

Of the categories proposed by Venkatesh, three describe electronic commerce approaches where firms seek to leverage prior investments in physical assets and presence with their virtual presence. These are, in essence, hybrid physical-virtual models. At the simplest level, mirror approaches leverage physical investments by capitalizing on customers' recognition of a Web site's similarities to an established physical entity. Essentially, we can consider this a hybrid approach that relies on consumers' familiarity with an existing physical establishment to encourage greater trust and reduced perception or risk when accessing their Web channel. Synergy and Anti-Mirror models are more sophisticated strategies, which not only gain from greater trust and reduced perception risk, but also use their combined physical and virtual presence to add value for customers in ways that the two channels separately could not achieve. In the following section, we develop the theoretical rationale for the strength of these latter hybrid approaches.

Theoretical Background

Transaction Cost Economics and Electronic Commerce

Analyses of the economics of electronic commerce often rely on a transaction costs perspective to identify the advantages virtual firms have over physical/traditional firms (see Choi, Stahl and Whinston, 1996 for an overview of e-commerce economics). Transaction costs include those associated with pre-purchase (e.g. search and evaluation), purchase (e.g. negotiation and settlement), and post-purchase (e.g. after-sales service) activities. Networks reduce the constraints imposed by distance by permitting the rapid exchange of information between distant buyers and sellers (Malone, Yates & Benjamin, 1987). For many economists, lower transaction costs associated with electronic commerce in particular make it easier for buyers to find new sellers and for sellers to access new markets (Malone et al., 1987; Wildman & Guerin-Calvert, 1990). As a result, according to the prevailing wisdom, the Internet is reshaping all industries by stimulating the rise of electronic marketplaces. These new marketplaces are characterized by strong price competition and greater choice for buyers (Bakos, 1997; 1998; Smith, Bailey and Brynjolfsson, 1999; Economist, 2000b; The New York Times, January 18, 2000). At the same time the Internet enables the producers of goods and services to develop more direct relationships with their buyers, bypassing most former intermediaries (Wigand and Benjamin, 1995, Choi et al., 1996). Moreover, it supports the provision of goods and services at a lower cost, but it can potentially enable greater customization to the needs of individual buyers (Choi et al., 1996; Kalakota & Whinston, 1996). As the argument typically goes, physical proximity to buyers becomes irrelevant for goods and services that can be produced anywhere and either delivered electronically or physically by courier to buyers. Ultimately, it is argued that relatively low cost of creating a Web presence, which is then accessible to those connected to the Internet worldwide, enables firms to use their electronic site as a surrogate to establishing a physical presence in a local market.

Steinfield and Whitten (1999), in explaining why firms seek to shift to the Internet as their distribution channel, offer the following list of advantages that Web-based businesses are perceived to hold over those confined to physical channels. Many of these advantages are based upon a transaction cost perspective.

• Access to a wider potential market.
• Lower sunk costs because a building or rented space in each market is not required, and they may operate with less or no inventory, while still offering much higher depth of product selection than any physical firm.
• Better economies of scale arising from a larger customer base, and consequent volume discounts on inputs.
• Ability to set up facilities near important factors of production, which would not be available to an "offline" physical business in a given community.
• Lower costs due to the ability to bypass many of the intermediaries in the retail distribution value chain (Wigand & Benjamin, 1995; Wigand, 1997).
• A higher degree of transaction automation, leading to improved service and lower labor costs.
• Ability to rapidly respond to changes in the market, through price adjustments which can be almost in real time (Bailey, 1998), and well as changes in product mix and marketing approach.
• Ability to easily capture and use market relevant data generated during routine interactions with customers (Steinfield et al., 1993).
• Ability to add value to products and services by offering links to complementary producers (Steinfield et al., 1993).
• Ability to offer 7 day by 24 hour access with little additional cost.
• No limitation on the depth of information provided to customers, which can aid in product selection and potentially reduce return rates (New York Times, August 23, 1999).

These economies can potentially enable Web-based retailers to easily undercut the prices of local retailers who formerly faced little or no competition. Despite some empirical evidence to the contrary (Bailey & Brynjolfsson, 1997; Palmer, 1997), there is a general expectation that prices will be lower on the Web (Bakos & Brynjolfsson, 1999; Smith, Bailey and Brynjolfsson, 1999).

Despite these potential advantages for the all-virtual firms, the preceding analysis suffers from taking too limited a view of the types of costs that consumers face in the marketplace. For example, it is often pointed out that a significant inhibitor for electronic commerce growth is the lack of trust consumers have towards Internet merchants (Palmer, Bailey and Smith, 2000). The potential risk associated with the opportunistic behavior of suppliers is a traditional cause of higher transaction costs in the market, and illustrates the need for e-commerce approaches that build trust. The previous analysis further ignores important aspects of consumer needs and behavior that may neutralize many of the hypothesized competitive advantages of virtual firms. For example, consumers who need immediate gratification may be reluctant to rely on electronic commerce vendors who ship goods by courier. The next section elaborates the theoretical advantages of hybrid (i.e. physical and virtual) approaches to electronic commerce.

Hybrid Electronic Commerce Approaches

As discussed earlier, hybrid electronic commerce involves the use of both virtual and physical presence to meet the needs of buyers. By physical presence, we include any assets that enable potential buyers to interact in person (i.e. not via the Internet, although perhaps at a call center) with a firm's personnel or on a firm's premises in the support of an economic exchange. This is similar to, but slightly broader than the definition of local electronic commerce developed by Jupiter Communications (Swerdlow, Kim, Cassar and Johnson, 2000), which includes any exchange where the fulfillment of either local or national brands is handled within ten miles of a consumer's home or workplace. Our broader definition of physical presence can include, for example, instances such as catalogue firms or traveling sales representatives, which may not involve local fulfillment, but do utilize existing (pre-Internet) physical assets as sales channels.

There are a number of reasons why we might expect hybrid electronic commerce to be more successful than either purely physical or purely virtual approaches to the market. An earlier analysis by Steinfield and Whitten (2000) focused on the opportunities for firms to combine their physical presence and e-commerce channels to 1) build trust, 2) meet diverse consumer needs and preferences, 3) exploit natural complementarities between virtual and physical capabilities to enhance value for buyers, and 4) use their greater knowledge of the local community to offer more targeted products and services. The various strategies can be broadly categorized into four groups: 1) cost reduction strategies, 2) trust building strategies, 3) value-adding strategies, 4) market extension strategies. Each category is briefly described below.

• Cost reduction strategies: When virtual and physical channels are harmonized effectively, a number of potential savings become possible, particularly involving labor costs. Many pre and post purchase activities, for example, that formerly required the time of a sales person can be handled via the Internet. In essence, these labor costs are switched (or outsourced) to consumers for such activities as looking up product information on their own, filling out forms, and relying on online technical assistance for after-sales service. Customers are willing to take on these tasks for the increased convenience and control that the virtual channel offers. Sales personnel can then shift their activities from order taking (e.g. as in typical call centers) to order generation or higher-margin sales activities. For catalogue firms, shifts to the Internet offer very real cost savings, since Internet orders are far cheaper than telephone orders and there may be savings from needing to print fewer catalogues (New York Times, May 15, 2000). Another area of cost savings includes opportunities to reduce local inventory for infrequently purchased goods, while still offering them on a delayed (that is, via the Internet channel) basis. Finally, in terms of delivery costs, hybrid firms have a cost advantage over all virtual firms. The hybrid firm with a physical outlet in the community can offer goods with no delivery charge, using their physical presence as the pick-up location. If they do offer delivery, there may be some savings if the delivery is initiated from the local point of presence.

• Trust building strategies: Hybrid firms have enhanced opportunities to build trust due to their physical presence in the markets they serve. A commonly cited impediment to online shopping is consumers’ lack of trust in the legitimacy of the Web-based store (Bollier, 1995; Coates, 1998). The fact that there is a recognized physical entity reduces the perceived risk that the virtual site is a fake. Moreover, consumers' perceived risks may be lower since there is an easy to access location to which goods can be returned or complaints can be registered. Additionally, businesses in community can be embedded in a variety of social networks (e.g. in the chamber of commerce, or as a sponsor of youth organizations), which can enhance trust (Steinfield, Mahler and Bauer, 1999; Steinfield and Whitten, 2000). According to Granovetter (1985), such embeddedness is often considered a problem by economists, who argue that when economic exchange is determined by social relations, inefficient allocation of resources can result. However, he also notes that social relations often facilitate trust, permitting exchanges without expensive contracts or legal fees and thereby reducing costs. DiMaggio and Louch (1998) show that, particularly for risky transactions, consumers are likely to rely on social ties as a governance mechanism. Social ties create obligations that can be a powerful force for controlling opportunistic behavior. Consumers in their study were willing to limit their choice of suppliers for highly risky purchases in order to purchase from someone with whom they knew or who was recommended by someone they knew. To the extent that such personal relationships are more likely to exist between geographically proximate buyers and sellers, this may be a countervailing force in electronic commerce, resulting in a preference for doing business with firms that are already physically present in the local market, at least for high risk transactions. Hence, hybrid firms that pursue this approach would rely extensively on their physical presence and social embeddedness to build trust, and would feature these forms of community connection prominently on their virtual channels.

• Value adding strategies: Physical and virtual channel synergies can be exploited in various ways to help differentiate products and add value in various ways without necessarily increasing costs. The end result of these strategies is both to retain customers and hopefully to increase revenue. Many opportunities for differentiation arise from the use of the virtual channel to offer information and services that complement the goods and services offered in physical outlets. Offering pre-purchase conveniences such as the opportunity to make advance orders and reservations can, depending upon the product or service, help to enhance value for customers. Moreover, allowing customers to have virtual access to their account information (e.g. online account management) eases access to the firm. Virtual channels may offer complementary new services (e.g. based on organizing and synthesizing data on purchase histories) that not only make it easier to for customers to manage their own activities, but that also bring in revenue. There are also many ways to actively use each channel to promote traffic in the other. Cross promotions can include advertising as well as the provision of incentives (e.g. coupons, credits towards future purchases) to use the opposite channel. Various forms of after sales service (e.g. installation and repair, accessories, instructions and tutorials for effective use, etc.) and loyalty programs also can differentiate one provider from another while increasing lock-in.

• Market Extension/Reach: A particular set of value-adding strategies emphasizes the use of the virtual channel to help extend the reach of a firm beyond their traditional physical outlets. The role of the Internet in making it possible to access new geographic markets is widely recognized. Virtual channels can also extend the product scope and product depth of physical channels. These uses of the virtual channel complement and strengthen rather than compete with the physical channel by allowing firms to make offers to new customers, and to offer new products to existing customers. It also enables firms to continue serving customers who move outside the reach of existing physical channels.

Based on this conceptual overview, we next turn to an empirical analysis of several cases of firms that effectively illustrate a synergy approach between their virtual and physical channels. In the next section the methods and results of the PLACE (Physical presence and Location Aspects of e-Commerce Environments) project of the Telematica Instituut are described.

Cases

In the spring of 2000 we conducted several of case studies of firms in the Netherlands that had established an electronic commerce channel with the goal of exploiting synergies with their existing physical market presence. We chose three firms to present below that illustrate varying click and mortar approaches. The firms were selected based upon news and trade journal reports highlighting their e-commerce undertakings. Interviews with executives in charge of Internet strategy in each firm were conducted during March, April and May of 2000. We also reviewed each firms' web site to verify that their case would help to illustrate hybrid e-commerce strategies. For each case, we briefly describe the firm, its e-commerce strategy, and the ways in which it is attempting to leverage its physical and virtual presence.

Bruna. Bruna is a large book retailer selling general interest books, magazines, newspapers, software, and assorted writing supplies. Bruna bookstores are located in all major Dutch cities. They are affiliated with the Dutch Post Office and all major train stations in the Netherlands have Bruna bookshops, with many shops offering postal services as well. This location strategy means that Bruna benefits from the generated traffic of those using rail and post services. Other stores are generally in the shopping areas of the city centers, also near high pedestrian traffic zones. An important aspect of the Bruna organization is that the shops are normally franchises managed by independent shopkeepers. Hence a parallel e-commerce approach (where the virtual and physical channels are separate and in competition) would be difficult to establish due to potential cannibalism from the Web channel on franchise sales.

In 1996, in the face of skepticism and some resistance by shopkeepers, they began to develop their e-commerce applications. They attempted to create a strategy that explicitly avoided cutting out the local Bruna shops, and indeed, helped to increase traffic at the physical points of presence. First, all books ordered on the Bruna Web site (http://www.bruna.nl) can be picked up and paid for at any Bruna shop. This is particularly useful for people passing by Bruna shops in the train stations on their way to and from work. Approximately 50% of the book orders made on the Bruna site are picked up at a local Bruna shop. This has two benefits. Not only does it attract purchases even from those who are reluctant to make payments over the Internet, it brings additional traffic into the store where customers may purchase other items in addition to the ordered book. A second hybrid strategy explicitly integrates the physical shop with the virtual offerings. At a number of Bruna shops, a kiosk called the Infopoint has been placed. Customers can search for and order books from the database right in the store. This gives customers access to a larger inventory of titles than is available in the shop. The third hybrid strategy is the use of mobile e-commerce. Bruna offers their web services through the Wireless Application Protocol (WAP) to reach customers with suitably equipped mobile phones. Not only does this allow customers in transit to more easily order books, but it will provide a short message indicating that an ordered book is ready to be picked up at the preferred shop. All three access methods rely on the same back-office system, and so represent an integrated channel to the customer.

A fourth strategy is being developed that will further enhance the integration of e-commerce and the physical Bruna shops. Bruna plans to offer "printing-on-demand" services for their on and offline patrons. This can be particularly useful for out-of-print books. Excerpts may be offered online as a marketing strategy.

Free Record Shop. Free Record Shop is the largest music and entertainment retailer in the Netherlands with 162 shops under this label. They sell music CDs, DVDs, computer games, and various accessories. They also have several other store brands catering to diverse target markets. As with Bruna, many Free Record Shops are located at major train stations, due to a joint venture with the Dutch National Railway. They have expanded to several other international markets. Unlike Bruna, Free Record Shops are wholly owned by the parent organization and are not franchises. However, they still explicitly are pursuing a hybrid e-commerce strategy.

Free Record Shop (FRS) began their e-commerce Web service in 1998, focusing on complementarities with their physical outlets in various ways. As with Bruna, FRS uses their Web presence (http://www.freerecordshop.nl) to attract more customers to their shops. They also allow customers to make their orders online, but with in-store payment and pickup. The Web site identifies the closest FRS by post code. FRS ships all orders from their central distribution center to the desired store on the following day. This encouragement for customers to pick up the product and pay for it in the store benefits the individual shop managers, who receive credit for the sale, and earn bonuses based upon the amount of store sales. There is some element of channel conflict, however, in that online orders that are delivered to the customer's home bypass the shops entirely. This is less of an issue, though, because the shops are owned by FRS.

FRS plans to integrate the databases of each local shop's inventory with their online database. In this way, they hope to speed up fulfillment, while still making use of the physical shop. Customers would be able to check online if a desired product is in the preferred shop. This capability would also benefit fulfillment of home delivery orders as well, by allowing the delivery service to begin from the closest FRS.

FRS plans to introduce various "on-demand" services in their shops in the near future. In the near term, they hope to install CD recorders in their shops, so that customers can, either from home or in the shop, legally assemble their own CD from FRS' available titles. The rights to use these titles will have been acquired by FRS from the music publishing companies. This has several advantages for the physical shop. It allows them to offer buyers a customized product, differentiating their store from others. It also enables stores to offer a wider and deeper selection with less in-store inventory. In the long term, as technology permits, they hope to provide the same on-demand service for video products.

FRS estimates that approximately 20% of their online shoppers come from outside the Netherlands. They noted, however, that many of these are purchasing Dutch titles and so are likely to be Dutch expatriates living or working abroad. This suggests that an important effect of the Internet for FRS is to retain customers who have moved away from the Netherlands. They cannot easily find Dutch titles while abroad, and obviously cannot personally visit a physical FRS.

Rabobank. Rabobank is one of the largest banks in the Netherlands. They have a particular structure, in that it is a cooperative banking network, with independently owned branches sharing the Rabobank brand name, supported by a common central organization. The independent banks are owned by their members, who are not shareholders as in a traditional corporation. Profits are not redistributed to the members, but are used to extend additional services and reduce the cost of banking services to all clients. A critical issue is that these banks have very strong ties to the communities in which they are located. Indeed, profits are reinvested into the communities to maintain their economic health. Rabobanks are often the sole bank located in small farming towns, and were started by farmers who had a difficult time gaining access to credit. This history explains the strong desire by the central Rabobank organization (Rabobank NL) to develop e-commerce in such a way that it does not harm the physical community banks.

There are 439 local member banks, including 1789 branches serving 7 million clients in the Rabobank group. E-commerce activities are managed by the central organization, Rabobank NL, which includes an information technology support organization called Rabofacet. They established an Internet site at the beginning of the Web, mainly as an information site.

Their synergy approach began when they established a series of locally-oriented portal sites focusing on the regions surrounding member banks. They essentially used these sites to provide an Internet presence for their business clients, helping them to enhance their own e-commerce activities. These sites, called Trefpunten (Meeting Points)(http://www.tref.nl), highlighted local information and local activities extensively. The Rabobank functioned as the Internet Service Provider for their local clients. The goal of Trefpunt was to have an indirect revenue model, improve ties to the local community, and strengthen relations with clients. A secondary goal was to derive direct revenue from the use of online banking services. Rabobank banking services such as direct payments from clients' bank accounts for online purchases were available. Trefpunts, due to their early introduction before significant Internet penetration and e-commerce development, were only marginally successful.

Today, Rabobank NL offers a variety of centralized online banking services (http://www.rabobank.nl). Their synergy strategy is based on the desire to lower the high costs of maintaining branches, enabling them to keep community-based bank offices open. They do this by offering mass market online services, which are today provided at a loss in the physical branches. These are banking services that are low in complexity and do not require the advice of a financial service professional (e.g. such as payments, deposits, etc.). The banks themselves have asked for the central organization to offer these services online. However, users are all clients of a particular Rabobank, and any fees derived from online banking are shared with that bank. Hence, local banks benefit from the ability to offer services at a lower cost without losing revenue from their clients. If someone wishes to open an online account, they are always directed to their local Rabobank (based on their address) to first establish an account there. Because it is in the interests of all players to have most mass market transactions completed using automated channels, Rabobank will offer incentives (e.g. better interest rates, lower fees) to encourage their clients to use these online services. They do not wish to enforce it by closing branches as that would harm their relations with the community. Bank personnel are also cross-promoting the online banking services by showing customers how to make routine transactions by the various direct channels (online and phone).

The physical branches will concentrate more on providing advice-sensitive services that Rabobank feels people will not wish to undertake online. This includes estate planning, mortgages and other services where trust and complexity play a role. These are higher margin services, making it easier to justify the expense of maintaining personnel in physical branches.

Intermediate services, such as stock purchasing, will increasingly occur online because of the lower transaction costs. These services may be also be provided in the banks, particularly for those who wish to have personal advice. This creates interesting competitive dynamics in the channel.

Lessons

We can derive a number of lessons from these cases. They each illustrate specific synergy strategies that fit the four categories provided above: cost savings, trust building, added value, and market extension.

Cost savings was evident in each of the cases. FRS plans to use e-commerce to lower local inventory, without diminishing customer's access to the full range of products. Rabobank hopes to reduce their costs for handling mass market banking services by migrating high overhead transactions to the Internet. Bruna lowers costs by giving customers advice and access to book inventory without taking up the time of store personnel.

Trust building is also clearly evident in each case. FRS and Bruna reduce customers' perceived risks by allowing online ordering with payment and pickup at the shop. Rabobank has clearly pursued a community involvement strategy, using e-commerce in their Trefpunt program to strengthen customer relations. They all exploit their highly visible brand name, and did not elect to establish a parallel Web brand.

Value adding strategies included the expansion of inventory (both product scope and product depth) by FRS. The added convenience of a 24 hour channel, of course, is an additional value for consumers, and can bring in new revenue. For the Rabobank, this may be of particular importance for stock trading on global exchanges. The integration with WAP, both for ordering and pickup notification at Bruna are value added services that will potentially grow in-store traffic. New products, such as customized CDs by FRS also illustrate how the virtual channel can directly be exploited by the physical shop.

For all of the cases, of course, the Web site enables an extension of their reach into new markets. We can see, particularly from the FRS example, however, that an important aspect of this market extension is the ability to retain former customers who have moved beyond the reach of physical outlets. Each of the cases can also easily use their virtual channel to serve markets where they had limited prior physical presence in the Netherlands.

The cases, however, also suggest that synergy strategies require explicit attention. Each had to develop policies that helped to avoid conflicts in their channels. For example, the decision by Rabobank to require online customers to have an account in a local member bank, and the reallocation of fees back to the member bank avoids the impression of bypass. Each recognized that the virtual channel offered cost savings, and therefore provided some opportunities for differentiation of product offerings by channel. Of course, this means that in the long run, it may be difficult to avoid conflicts. FRS, for example, may ultimately offer music and video over their Web channel for home downloading. More and more financial services may be handled by the Rabobank Direct Channels. In this case, the smaller outlets may not survive. This is clearly a policy-relevant research issue.

The cases also suggest that synergy approaches may be more common with larger chains, who can capitalize on their convenient physical access. FRS and Bruna both illustrate the importance of having locations that were frequented by customers. It is not clear that the pick-up strategy would work without this accessibility.

Finally, some emerging synergy approaches are dependent on the development and deployment of new e-commerce infrastructures. The creative uses of mobile e-commerce will depend upon the continued deployment of Internet-capable mobile networks and devices at costs that encourage widespread penetration.

Conclusions

In summary, we believe the e-commerce pendulum has shifted away from pure digital e-commerce actors, and parallel Internet strategies, to an increasing reliance on hybrid approaches. These approaches have strong advantages, in terms of cost reduction, trust building, opportunity to offer value-added goods and services, and market extension. They illustrate that contrary to the former e-commerce rhetoric, distance is not dead and geography still influences much e-commerce retail activity. Electronic commerce therefore does not have to be a threat to local communities, but can be used in a way that enhances economic activity.

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