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Operational Excellence in Hybrid Business Models [1]

Abstract

How can existing businesses, which have a physical infrastructure, become more efficient by utilizing the Internet? Our research goal is to uncover the underlying principles through which hybrid e-commerce approaches add value. We limit this paper to companies that interweave the physical and virtual channels to produce the cheapest product or service (operational excellence). We distinguish four perspectives: the customer, the Internet strategy, the online- and offline customer interaction and the employee. For each perspective, a proposition is formulated. The case studies are used to discuss the propositions. Our conclusions are that organisations deal with the same customer over the direct as well as the indirect channels. Customer data is collected to gain sales leads. The organizations use the Internet to streamline and optimise the business processes. Operational processes, which do not add value, are dealt in the direct channels while the tactical processes, e.g. expert advice, are dealt in person. The Internet is used for routine, simple, low risk transactions. Complex transactions do need manual assistance and are addressed to the physical channel. Channel conflicts need to be solved to integrate the channels. Incorporation of the Internet in the company follows a migration path, first an Internet mirror shop is established but to gain better integration the synergy and anti-mirror strategies are implemented. Employees need to be well educated and highly flexible to deal with these complex transactions.

Introduction

“A well-established network of physical assets may no longer be of much use – indeed, it may even hinder speedy strategic reconfiguration” (Angehrn 1997). Angehrn wrote this only four years ago. The dot.com’s, i.e. the Internet pure plays, where ruling at that time. However the dot.com’s came in trouble because they need to build a company from scratch where ‘old-economy’ companies can build further on their assets. Physical assets can give a competitive advantage over web-based competitors who do not have a physical presence in a given location (Gulati and Garino, 2000 Maruca, 1999, Steinfield, Mahler and Bauer, 1999, Steinfield and Whitten, 1999). Our contention is that organisations that combine their physical assets and the Internet can have a competitive advantage over web based and physical organisations. To state this popular, the choice is not ‘click’ or ‘brick’, but ‘click and brick’. We call organisations that combine Internet and physical assets hybrid organisations. The hybrid organisation can use the Internet to: improve customer relationships, for collaboration, to create communities, to gain access to markets, for cost saving, and to optimise business processes (Keen 1999). Our main question 'How can the existing businesses become more efficient by the utilization of the Internet?’ The goal is to uncover the underlying principles through which hybrid approaches add value. In prior research, little attention is paid to this topic.

We limited this paper to organisations which use the Internet to lead in price and convenience. Tracy and Wiersema (1993) call this strategy operational excellence. Implementation of electronic commerce requires a proper fit between the customer needs (external) and the organisation. The hybrid organisation also needs a good fit between physical presence and Internet. On a more detailed level we look at the interaction the customer has in the shop and Internet. The tasks of employees are changing. Therefore, we distinguish four perspectives: the customer, the Internet strategy, the customer interaction and the employee. The perspectives are used to describe background theories and to formulate propositions. Each perspective is used to structure the case information and to discuss the differences between propositions and case data. This paper concludes with advice and guidelines to support the implementation of electronic commerce in an operational excellence strategy.

2 Conceptual overview

Organisational transformation towards the hybrid organisation starts with a vision how to incorporate the Internet. This vision or strategy needs to be implemented. After the implementation, the results are evaluated and the implementation will be changed, reorganised or restructured according to the results (Tidd ea. 1997). Therefore, the innovation process is a continuing cycle of mutual adaptation of technology and organisation (Leonard-Barton 1995). Our focus is not on scanning the business environment for new business opportunities, nor on formulating a strategy. We do not address the question weather or not the strategy is the best possible strategy. Our focus is on how organisations that use the Internet to improve their operational excellence strategy, implement electronic commerce.

2.1 ICT/ Internet innovation driven by a business strategy

ICT cannot be seen in isolation from the business in which it is embedded. Electronic business is not only a matter of design and implementation of ICT but plays a role in shaping business activities and interactions. However, not for its own sake, so one should approach it from the business context in which it is developed and used. This requires a business-driven approach. Business conditions and motivations should be leading. It is well known that introduction of technology without change of business barely leads to productivity improvement (Davenport et al. 1990).

Tracy and Wiersema (1993) describe three major visions – or organisational strategies - to keep or get a competitive advantage. The three strategies are: product leader, customer intimacy and operational excellence. Key in the strategy is the way the organisation produces customer value. The product leader offers customers leading-edge products and services. The organisation improves its products faster than its competitors do. In the customer intimacy strategy the organisation segments target markets precisely and tailors the offerings to match exactly the demands of those market niches. In the third strategy, called operational excellence, the organisation provides customers with reliable products or services at competitive prices delivered with minimal difficulty. It is a strategic approach to production and delivery. The objective of operational excellence is to lead in price and convenience. Minimising overhead costs, eliminating production steps, reduction of transaction costs and optimisation of business processes contributes to reach this goal. An example is Dell computers; Michael Dell saw the chance to outdo both IBM and Compaq by focusing not on the product but on the delivery system. Tracy and Wiersema (1993) state that an organisation should focus on only one strategy while meeting industry standards in the other two, just a handful of companies can master more than one discipline. This paper focuses on hybrid organisations that utilize the operational excellence strategy.

2.2 Customer perspective

Operational excellence works best with customers who select the product at the lowest possible price and with the least hassle (Tracy and Wiersema 1993). The customer is the homo-economicus. The organisational reaction to this kind of customer is to lead in price and convenience. In an operational excellence strategy there is no need for the organisation to know the customer in detail, customer data is not collected nor distributed. In the operational excellence strategy the organisation uses the Internet to address the present – and same – customer as in the shop.

Internet Strategy

Tasks need to be divided between the shop and the Internet. Venkatesh (1999, as mentioned in Steinfield ea, 2000) mentions six different strategies to divide tasks between the Internet and the shop.

• Pure physical: Firms that explicitly choose to avoid developing an Internet-based channel to their customers or other trading partners.
• Mirror: 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. They do little to exploit the new capabilities of the web or to seek out any synergies that might exist between the virtual and physical channels.
• Synergy: A synergy strategy is one where firms explicitly link their virtual and physical presence, exploiting the strengths of each 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.
• 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, because of the firm's virtual channel development.
• 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 unique capabilities of the Web.
• Virtual: In virtual models, firms forsake their physical presence, and pursue an all-virtual channel strategy.

This categorisation is useful, because it highlights the main differences between synergy-oriented strategies (synergy, mirror, anti-mirror) and those that do not seek to exploit complementary between physical and virtual activities (pure physical, parallel and virtual). Synergy and Anti-Mirror models are strategies that integrate shop and the Internet. These two strategies add value for customers in ways that the two channels separately could not achieve and are therefore suitable in an operational excellence strategy.

The physical- and the virtual infrastructure need to be integrated. Channel conflicts are due to arise if the shop and the Internet channel are competitors e.g. when both have a sales and profit target. To implement operation excellence successful channel conflicts need to be solved.

2.4 Customer interaction

The organisational goal in an operational excellence strategy is to improve profit and to transform the capital and cost structures by slashing general selling and administrative expenses. The number of production steps can be reduced by addressing profitable tasks or services to the physical channel, and address the loss making tasks, which can be performed by the customer, to the Internet. Profitable tasks are low volume/ high dollar. The high volume/ low dollar transactions are mostly loss making. In an operational excellence strategy, the organisation pushes the interface back towards the customer – back-office processes are put on display (Angehrn 1997). With these tasks, the old way of communication like fax, telephone, or in person is replaced with direct interaction with the back-office database system without human intervention.

Figure 1

When virtual and physical channels are harmonised effectively, a number of potential savings become possible, particularly involving labour costs. Many pre- and post purchase activities, for example, that formerly required the time of a sales person could be handled via the Internet. In essence, these labour costs are switched (or outsourced) to customers 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 centres) to order generation or higher-margin sales activities. 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 with a physical outlet in the community can offer goods with no delivery charge, using their physical presence as the pick-up location. (Steinfield ea. (2000). We recognise four stages where the customer interacts with the organisation. In the first stage the customer collects product information. In the second stage, the customer negotiates with one supplier. In the third stage, the purchase will be settled: the customer pays for the product, and the supplier delivers, the after-sales are dealt within the last stage.

Figure 2

The result is a division of tasks between the online- and the offline channel. The customer will perform transactions as search for product data, enter order data, or check status information. Addressing profitable tasks or services to the physical channel, and addressing the time consuming tasks to the Internet, where the customer will perform them is a suitable division of levering online and offline.

2.5 Employee perspective

Many process innovations represent major changes in ‘the way we do things around here’ (Voss, 1986). Implementation is about managing change, overcoming resistance, and overcoming conflicts. Managing organisational change is largely problematic because human beings are programmed to resist or at least be cautious about change. Change is often perceived as threatening, painful, disruptive and sometimes dangerous (Tidd ea. 1997). It is known that most organisations do have a severe difficulty embracing change, and are remaining constrained by traditional approaches to exploit technology, by legacy investment and organisational culture. Therefore organisations have difficulty to embrace new times, the fundamental change which is taking place in the nature and applications of technology in business (Tapscott 1993).

In an operational excellence strategy, the organisation pushes the interface back towards to customer. Therefore, employee tasks will shift towards more complex services. This requires a shift in employee attitude and tasks.

3 Research

We rely on a series of case studies to study hybrid organisations. Twenty companies were selected that have a retail or other physical presence in the Netherlands, and which initiated e-commerce activity to make use of both physical and virtual assets. The physical presence in the market can consist of shops or consultants. The companies are active in a number of different fields: books, music, travel, groceries, telecom, cars, banking, biking and Internet hardware. The selected companies sell physical as well as informational products. Business to business as well as business to consumer organisations and large as well as small companies are studied in several product/ industry areas. We classified five out of the twenty cases as implementing an operational excellence strategy. This limited number of cases makes our findings anecdotal.

We held a semi-structured interview with one or more mangers most responsible for e-commerce of the selected company; we consulted web sites, collected additional information etc. In the interview, the following topics were addressed: the industry-value chain, the online and offline customer interaction, the Internet use, the outcome of e-commerce, and a view on the future. At least two researchers attended each interview, and a transcript of each interview was produced. All transcripts were reviewed by the interviewee.

4 Case descriptions

4.1 The Bank case

The Bank is one of the largest banks in the Netherlands. 400 local – independent – banks are used to server seven million customers. More than one million customers use the Internet to deal with bank products. The current customer is addressed over the Internet, new customers are directed to a local bank to sign up. The customer can deal with 25 non-complex products over the Internet, this are high volume/ low dollar transactions. Examples are payments, savings accounts and simple insurance; these products have a low risk profile. The bank losses money when dealing with these non-complex products manually. The Bank offers incentives (better interest rates, lower fees) to encourage customers to use direct services. Direct services are telephone and the Internet. The Internet is used to generate sales-leads for the 125 complex products. The customer requires an immediate response from an Internet transaction. But due to inaction from the bank 20% of the Internet sales leads was lost. The solution was that the central call centre will make an appointment with a local advisor. The local bank will concentrate the in person activities to higher margins services. A problem that arises at this time is that complex information products are free. The Bank is would like to get paid for these services and advice. A strategic aim is to enhance the relation with the customer, to maintain or even increase customer satisfaction. The high volume/ low dollar transactions are not profitable; these transactions are now being addressed to the Internet thereby freeing the local banks from these tasks as a consequence the local banks provide support. The local banks promote the direct channels (Internet and call centre) and encourage the customer to use online services. Channel conflicts are even more reduced with ‘kick back fees’; fees derived from online banking are shared with the local bank who send the customer to the direct channel. The direct channels are a partner not a competitor. To enable customers without Internet access to use the Internet the bank experiments with Internet booths in the banks. The local bank will deal with the more complex products; this requires more educated and knowledgeable staff. We classify the Internet strategy for the Bank as operational excellence because it is characterised by cost reduction although the Bank is not a discounter. The desire is to lower the high costs of maintaining banks and keep competitive.

4.2 The Telecom Business case

Telecom Business provides telecom services in fixed telephony. Telecom Business is market leader in the Netherlands. They own 33 Business Centres. The market is divided according to customer size: corporate accounts (top 55 customers), major accounts (6000) and SME’s (900.000). The SME market is targeted with multi-channels: the Internet and call-centre. The goal of Telecom Business is to reduce costs by internal streamlining and automating manual tasks. The Internet channel is recognised as a low cost alternative to other channels. Part of the outlet activities will shift to the Internet and call centre. The shop inventory will be reduced and the web inventory will be broadened, the idea is to have 20% of all available products in shop stock, all other products have to be ordered over the web. The shop will become a value-adding channel which gives advice, immediately product pick up and servicing product defects. Routine tasks will be reduces, this will give employees time for more proactive relation management. Personal sales is repositioned to become a ‘relationship channel’ and the Internet and call-centre channels as ‘transaction channels’. For the future the aim is to increase customer satisfaction. The employee advice skills need to surpass the level of purely selling. To maximise the opportunities for selling, self-service web kiosks in the shops can help. Telecom Business actively migrates customers to the Internet. One of the ways to stimulate this is that sales representatives get bonuses for their customers who order online. At this time co-operation across channels is virtually not developed. The employees currently feel that Internet sales cannibalise their own turnover. So far, no solution for this problem is found. One of the problems now at hand is the integration of a number of web initiatives of the past.

We classify the strategy of Telecom Business as operational excellence the aim is to reduce costs by internal streamlining and automating manual tasks, streamlining business process and inventory reduction. The shop will become a value-adding channel that gives advice, immediately product pick up and servicing product defects. For the future the target is to increase customer intimacy.

4.3 The Telecom Consumer case

Telecom Consumer provides the end-customer with telecom services, although sometimes a small business slips in. The sales outlet is the primary point of customer contact. There are 140 sales outlets; about 60 shops are franchised. Products are home usage telephones, mobile telephones and Internet – multimedia products. Sales outlets cannot be reached by telephone; incoming calls are dealt with the call-centre. Telecom Consumer uses the Internet for cost reduction, although at this moment the Internet is an information medium. Telecom Consumer uses three distribution channels: shops, call-centre and the Internet. The organisational structure did not change so far. Over the Internet, the same products at the same prices are sold. In the Telecom Consumer shops, no information about customer preferences is gathered. There is no reward and therefore no reason to collect customer information. Each Telecom Consumer shop is responsible for its own turnover; targets for employees are set accordingly. The aim of the shop is therefore to keep as many customers as possible in the shop. Customers are not directed towards other channels, because that will reduce shop turnover. There is a problem when a customer orders goods online, and complains, asks questions or returns the product in a shop. Employees are not happy dealing with these customers, especially the franchisers. The Internet sales are low at this time, but if they rise, there is a potential channel conflict. Late 1999 there was an experiment in which the shops got a bonus for products picked up in the shop and ordered over the Internet. This experiment ran very well. The management from Telecom Consumer does not see the potential risk of channel conflicts; they see the Internet as a complementary channel next to the other channels. The Internet is seen as a way to complete the business formula. Telecom Consumer is working hard to build a proper e-commerce site. The strategy is operational excellence, because the aim is cost reduction. The main aim at this moment is to integrate the 60 sites in one large organisational site.

4.4 The Internet Network Hardware Provider case

The Internet Network Hardware Provider is the world market leader in Internet hardware. They do not have shops; large customers are directly addressed by consultants, small and medium enterprises are addressed by independent distributors. The Internet Network Hardware Provider addresses the same customer over the Internet as with physical consultant’s contact. The distributors are independent. The Internet is used for cost reduction with tools for: order entry, order status information, pricing information, configuration assistance. These tasks would normally take a lot of manual (consultant) time. The consultants, who first dealt with orders manually focus at solving customer problems, give advice and direct customers towards new products. The consultants do not have a sales target, but do have a customer satisfaction target, due to the Internet tools the turnover for each consultant increased 300%. The role of the consultants shifted from managing orders to solution providers. Consequently, the customer’s satisfaction increased. The consultant’s job changed dramatically, routine tasks are automated with Internet technology. Therefore, the Internet Network Hardware Provider only hires highly qualified staff who can learn and change fast. The culture is one of constant change. Consultants target specific customers and are therefore knowledgeable about the customer needs. Channel conflicts did not arise, because the Internet Network Hardware Provider grew so fast. Only with help of the Internet, it was able to maintain the rapid growth. The Information Technology department works closely together with the business units to avoid information ‘islands’. The company channel strategy is an integral part of the company business strategy. The initiative is tied to measurement instruments as productivity, customer satisfaction, revenue and fulfilling market needs. The organisation is a matrix organisation; each employee resorts under a (vertical) business unit and under a (horizontal) tuning/-integrating manager. The channels are highly integrated.

The Internet Network Hardware Provider is one of the rare companies who are successful in mastering two disciplines: operational excellence and customer intimacy. They increased profits by cost reduction, maintain organisational growth, and an increase in customer satisfaction as the result of the Internet strategy.

4.5 The Office Supplies case

Office Supplies sells to the business market. Sales done be catalogue and telephone and are now shifting to the Internet. In 95% from the orders, Office Supplies is the preferred supplier to known customers. Office Supplies sells non-production goods, order value is low, while order costs are high. To solve this problem Office Supplies started an e-procurement initiative; this gives them the opportunity to streamline the operational purchase of office supplies. The most important benefit is order cost reduction for the customers. The products for sale have the same price online and offline. The same product supply is available over the Internet. The Internet will streamline the operational purchase process with less manual tasks involved. Channel conflicts are not foreseen. Tasks from Office Supplies sales representatives changed from operational routine tasks towards the tactical level; their task will become to negotiate contracts. The strength of Office Supplies is within logistics. Delivery times will get shorter. The organisation has changed to even quicker order fulfilment. The strategy is operational excellence. Cost reduction to keep competitive, gain and maintain the market share.

The main case findings are summed up in the table below.

Table 1 Case summaries