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Strategic managementStrategic managementof E-Businessof E-Business

Chapter 7Chapter 7Transforming external relationships Transforming external relationships

with customerswith customersPaula GouldingPaula Goulding

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Focus of chapterFocus of chapter

Importance for organisation to focus on needs, Importance for organisation to focus on needs, wants, preferences and values of customerwants, preferences and values of customer

Use of IT and Internet to cause major Use of IT and Internet to cause major transformation in ways organisations interact transformation in ways organisations interact with customerswith customers

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PreviousPrevious chapter… chapter…

Looked at re-engineering supply chainLooked at re-engineering supply chain– Supply chain can be viewed as extending through Supply chain can be viewed as extending through

organisation and beyond to organisation’s customersorganisation and beyond to organisation’s customers When focus is placed on customer / consumer, and When focus is placed on customer / consumer, and

perspective of looking back towards raw material perspective of looking back towards raw material suppliers, this is referred to as the suppliers, this is referred to as the demand chaindemand chain– Customer demand is seen as driving supply chain activityCustomer demand is seen as driving supply chain activity

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An about face…An about face…

‘‘There is only one boss. The customer. There is only one boss. The customer. And he can fire everybody in the And he can fire everybody in the company, from the chairman on down, company, from the chairman on down, simply by spending his money simply by spending his money somewhere else.’somewhere else.’

(Sam Walton, WalMart)(Sam Walton, WalMart)

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‘‘Present a single face Present a single face

to the customer’to the customer’

An about face…An about face…

Customer focus win and retain loyal and profitable customers

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Advantages of customer focusAdvantages of customer focus

Accurate view of internal operationsAccurate view of internal operations Service to customersService to customers

– InformationInformation Across product linesAcross product lines Across geographic locationsAcross geographic locations Across subsidiaries, business unitsAcross subsidiaries, business units Across multiple channelsAcross multiple channels

Major challenge for most organisations – cross-functional, complex

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Notions about customersNotions about customers

Every 5 yrs, av. US organisation lose 50% Every 5 yrs, av. US organisation lose 50% of customersof customers– Cutting these by 5% double profitsCutting these by 5% double profits

(Morphy 2001)(Morphy 2001)

5% in customer retention av. 5% in customer retention av. lifetime value of customer of between 35-lifetime value of customer of between 35-95%95%

(Reichheld 1996)(Reichheld 1996)

Retaining more customers can have significant impacton organisational performance.

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Why are loyal customers more Why are loyal customers more profitable?profitable?

Potentialcustomer Customer

Loyalcustomer

Formercustomer

Costs

Benefits

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Acquisition costs incurred once onlyAcquisition costs incurred once only Benefits accrue fromBenefits accrue from

– Loyal customers referring other new customersLoyal customers referring other new customers

– Loyal customers tend to purchase more over timeLoyal customers tend to purchase more over time

– Loyal customers are less price sensitiveLoyal customers are less price sensitive

– Loyal customers incur fewer administrative costs over timeLoyal customers incur fewer administrative costs over time

Note also: damage from dissatisfied customers can Note also: damage from dissatisfied customers can escalateescalate

Why are loyal customers more Why are loyal customers more profitable?profitable?

(Cash 1999)

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Customer dissatisfaction escalatesCustomer dissatisfaction escalates

Dissatisfiedcustomers

Share badexperiences with others

Loss ofcustomer

loyalty

Dollars lost compoundover time

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Supplier RetailerDistributorManufacturer

Product / service flows

Customer demand flows

Consumer

Supply chain perspective

Demand chain perspective

Concept of demand chain

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IT enabled demand chainsIT enabled demand chains

Broad aims are to improve customer satisfaction and Broad aims are to improve customer satisfaction and hence loyaltyhence loyalty

Through IT and Internet based systems, aim to collate Through IT and Internet based systems, aim to collate all information regarding a single customer irrespective all information regarding a single customer irrespective of the manner of the interaction with the organisationof the manner of the interaction with the organisation

Enable organisations to present a consistent face to the Enable organisations to present a consistent face to the customercustomer

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Electronic cataloguesElectronic catalogues

Located on company websiteLocated on company website Intergrates ALL cataloguesIntergrates ALL catalogues Allows customers to access product informationAllows customers to access product information

– Complete and up-to-dateComplete and up-to-date

E-catalogues can be integrated with back office E-catalogues can be integrated with back office ERP systems ERP systems – customer can also access inventory information, customer can also access inventory information,

product costs, delivery costs delivery schedules etc. product costs, delivery costs delivery schedules etc. (see customer self-service)(see customer self-service)

Much easier to keep up to date and consistent Much easier to keep up to date and consistent than paper-based cataloguesthan paper-based catalogues

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Customer self-service systemsCustomer self-service systems

Aim to enable customers to access all information Aim to enable customers to access all information needed to do business with organisation on-lineneeded to do business with organisation on-line– Information about products and servicesInformation about products and services– Inventory levels and location of goodsInventory levels and location of goods– Price, qualityPrice, quality– Order formsOrder forms– Ability to transact on-lineAbility to transact on-line– Check management and fulfilment of orderCheck management and fulfilment of order– Help facilityHelp facility– Customer historyCustomer history

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Customer self-service systems Customer self-service systems (cont.)(cont.)

Customers take control of process of orderingCustomers take control of process of ordering– 24 hours/day access24 hours/day access

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Benefits of customer Benefits of customer self-serviceself-service

For the customerFor the customer– View company’s inventory to ensure accurate sales promises View company’s inventory to ensure accurate sales promises

are being madeare being made

– Order goodsOrder goods

– Track order management and fulfilment processTrack order management and fulfilment process

– Track returnsTrack returns

– Access all account information via browser (may be through Access all account information via browser (may be through use of wireless/mobile devices)use of wireless/mobile devices)

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For the companyFor the company– call centre and customer service costscall centre and customer service costs– ease of distribution of marketing ease of distribution of marketing

materials across channelsmaterials across channels– revenues via cross selling revenues via cross selling complementary complementary

products ( order products ( order size???)size???)– new customers, via new markets, ease of doing new customers, via new markets, ease of doing

businessbusiness

IT enabled demand chainsIT enabled demand chains

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Channel managementChannel management

Refer figure 7.5Refer figure 7.5– Multiple channels by which organisation can Multiple channels by which organisation can

interact with customersinteract with customers May increase chances of salesMay increase chances of sales But dramatically increases complexityBut dramatically increases complexity

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Channel management (cont.)Channel management (cont.)

Channel management systems support diverse Channel management systems support diverse activities by which service is provided to activities by which service is provided to customerscustomers– Supports collaborative activity across complex Supports collaborative activity across complex

networks without disintermediation or channel networks without disintermediation or channel conflictconflict

– Use for marketing activities, tracking activities of Use for marketing activities, tracking activities of partners, etcpartners, etc

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Channel managementChannel management– Direct selling via InternetDirect selling via Internet

Disintermediation???Disintermediation??? Channel conflict???Channel conflict???

– Network of dealer activity in sales (invisible to Network of dealer activity in sales (invisible to customer)customer)

– Execute marketing campaigns + measure Execute marketing campaigns + measure effectiveness of campaignseffectiveness of campaigns

IT enabled demand chainsIT enabled demand chains

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Business intelligence, data Business intelligence, data warehousingwarehousing

Internal and external data is gathered, stored and Internal and external data is gathered, stored and analysed to provide important information to analysed to provide important information to support decision making of executivessupport decision making of executives

Provide better forecasts of end consumer Provide better forecasts of end consumer demand, improved understanding of changing demand, improved understanding of changing consumer preferences and wants, and so onconsumer preferences and wants, and so on

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Customer relationship management Customer relationship management (CRM) defined(CRM) defined

Relationship marketingRelationship marketing Customer managementCustomer management 1-to-1 marketing1-to-1 marketing

‘‘Is concerned with the creation, development and Is concerned with the creation, development and enhancement of individualised customer enhancement of individualised customer relationships with carefully targeted customers relationships with carefully targeted customers and customer groups resulting in maximising and customer groups resulting in maximising their total customer life-time value”their total customer life-time value”

(Payne 2000)(Payne 2000)

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‘‘a combination of business process and a combination of business process and technology that seeks to understand a technology that seeks to understand a company’s customers from the perspective company’s customers from the perspective of who they are, what they do, and what of who they are, what they do, and what they like’they like’

(Couldwell 1998)(Couldwell 1998)

CRM definedCRM defined

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‘‘A strategy to learn more about customers’ A strategy to learn more about customers’ needs and behaviours in order to develop needs and behaviours in order to develop stronger relationships with them…there are stronger relationships with them…there are many technological components to CRM, but many technological components to CRM, but thinking about CRM in primarily thinking about CRM in primarily technological terms is a mistake…CRM is a technological terms is a mistake…CRM is a process that will help bring together lots of process that will help bring together lots of pieces of information about customers, sales, pieces of information about customers, sales, marketing effectiveness, responsiveness and marketing effectiveness, responsiveness and market trends.’market trends.’

(Deck 2001)(Deck 2001)

CRM definedCRM defined

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Significance of CRMSignificance of CRM $23b in 2000$23b in 2000

– Estimates of $76b in 2005Estimates of $76b in 2005

Median annual investment ~ $1m, implementation Median annual investment ~ $1m, implementation over 4 yearsover 4 years

Large companies spend ~ $15m Large companies spend ~ $15m –– $30m /year, and $30m /year, and between $60m between $60m –– $130m to full implementation $130m to full implementation

(Gartner Group 2001)(Gartner Group 2001)

But, ~ 30% CRM projects never get finishedBut, ~ 30% CRM projects never get finished– 55% to 75% fail to deliver anticipated benefits55% to 75% fail to deliver anticipated benefits

– 60% of managers view CRM as failures60% of managers view CRM as failures

(Morphy 2001, Kiely 2001)(Morphy 2001, Kiely 2001)

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Perspectives on CRMPerspectives on CRM Movement from mass marketing and transaction-Movement from mass marketing and transaction-

based marketing to more direct 1-to-1 marketing based marketing to more direct 1-to-1 marketing based on customer relationshipsbased on customer relationships– Establishing a learning relationshipEstablishing a learning relationship

Use of modern IT and Internet-based Use of modern IT and Internet-based technologies to support marketing functiontechnologies to support marketing function

Movement from production-centric to customer-Movement from production-centric to customer-centric organisationscentric organisations– Customer centric organisations ~Customer centric organisations ~ 60% more 60% more

profitable than othersprofitable than others

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CRM can thus meanCRM can thus mean– Organisation paying a little more attention to customer Organisation paying a little more attention to customer

service and being enabled in this by some new softwareservice and being enabled in this by some new software

oror

– Complete organisational transformation to customer-centric Complete organisational transformation to customer-centric organisation that practices relationship marketing supported organisation that practices relationship marketing supported by data warehousing, data mining and sales automation toolsby data warehousing, data mining and sales automation tools

Perspectives on CRMPerspectives on CRM

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Commoditisation of mass produced goodsCommoditisation of mass produced goods– Difficult to differentiateDifficult to differentiate

– Vulnerable to price competitionVulnerable to price competition

Modern IT enables interaction(s) with customers more Modern IT enables interaction(s) with customers more cheaply and easilycheaply and easily– Data collection learn more aboutData collection learn more about

Who customers areWho customers are What customers wantWhat customers want What customers are worth to an organisationWhat customers are worth to an organisation

Perspectives on CRMPerspectives on CRM

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Loyal customers contribute disproportionately to Loyal customers contribute disproportionately to profitabilityprofitability

Tailor goods and services to meet the needs of Tailor goods and services to meet the needs of most profitable segment(s)most profitable segment(s)

Perspectives on CRMPerspectives on CRM

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Tenets of CRMTenets of CRM

Customers are assets of a firmCustomers are assets of a firm Customers exhibit differences inCustomers exhibit differences in

– needsneeds– preferencespreferences– buying behaviourbuying behaviour– price sensitivityprice sensitivity

Profitability of customers varyProfitability of customers vary– not all are equally desirablenot all are equally desirable

By on-going learning, organisations can tailor By on-going learning, organisations can tailor product/service portfolio to maximise product/service portfolio to maximise profitabilityprofitability

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Key requirementsKey requirements Focus changes from product-centric to Focus changes from product-centric to

customer-centriccustomer-centric Close cooperation between marketing Close cooperation between marketing

and ITand IT Organisation-wide collection of data at Organisation-wide collection of data at

touchpoints with customerstouchpoints with customers– Organisation-wide transformation impliedOrganisation-wide transformation implied

Change in emphasis from customer Change in emphasis from customer acquisition to customer retentionacquisition to customer retention

Establishment of long term relationshipsEstablishment of long term relationships– Enabled by use of ITEnabled by use of IT

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Role of IT in CRMRole of IT in CRM

Provide interaction opportunitiesProvide interaction opportunities Provide opportunities to customizeProvide opportunities to customize Collection, storage, manipulation of dataCollection, storage, manipulation of data

– User-friendly, real-time analytical toolsUser-friendly, real-time analytical tools

Databasetechnologies

Interactivity•Websites

• call centres

Mass customisationtechnologies

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Makes possible notion of market of 1Makes possible notion of market of 1– Individualised products & services for every Individualised products & services for every

customercustomer

Internet is a networkInternet is a network– Each connection creates potential relationshipEach connection creates potential relationship– IT manages information and relationshipIT manages information and relationship

Role of IT in CRMRole of IT in CRM

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Enhance services to customersEnhance services to customers– timely updates of informationtimely updates of information

delivery schedules, product updates, account delivery schedules, product updates, account informationinformation

– product enhancementsproduct enhancements– rapid resolution of problemsrapid resolution of problems– personalised interactionpersonalised interaction– customisationcustomisation

Cost reduction (?)Cost reduction (?)– cycle timecycle time– cost of transactioncost of transaction

Benefits and challenges in CRMBenefits and challenges in CRM

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Use existing relationships to revenueUse existing relationships to revenue– enhance profitability by identifying, enhance profitability by identifying,

attracting and retaining customersattracting and retaining customers Use information to better serve customersUse information to better serve customers Build customer loyalty through added valueBuild customer loyalty through added value Adopt a proactive, rather than reactive stance to Adopt a proactive, rather than reactive stance to

managing customersmanaging customers

Benefits and challenges in CRMBenefits and challenges in CRM

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Acquire new customersAcquire new customers– offer a superior product/service and excellent serviceoffer a superior product/service and excellent service

Enhance profitability of existing customersEnhance profitability of existing customers– cross-selling and up-sellingcross-selling and up-selling

– enhance value proposition for customersenhance value proposition for customers

Aim to retain profitable customersAim to retain profitable customers– be adaptable to changing requirementsbe adaptable to changing requirements

Benefits and challenges in CRMBenefits and challenges in CRM

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Critical success factors in CRMCritical success factors in CRM

Have appropriate business and customer Have appropriate business and customer strategy in placestrategy in place

Ensure alignment between business Ensure alignment between business strategy, customer strategy and choice strategy, customer strategy and choice of systemsof systems– Develop persuasive business caseDevelop persuasive business case

Manage change in trading relationshipsManage change in trading relationships Be clear on objectives of initiativeBe clear on objectives of initiative

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Concerns with CRMConcerns with CRM

How ethical is CRM?How ethical is CRM?– Suited to all organisations?Suited to all organisations?

Doctors, hospitals, dentists, lawyers?Doctors, hospitals, dentists, lawyers? Who benefits from CRM?Who benefits from CRM?

– You or your customers?You or your customers? Only 8% of customers believe they benefit from Only 8% of customers believe they benefit from

increased contact via CRMincreased contact via CRM– 50% don’t want a relationship, even if it saves them money 50% don’t want a relationship, even if it saves them money

(Kiely 2001)(Kiely 2001)

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‘‘When folks in the industry talk about CRM, When folks in the industry talk about CRM, they really mean extracting time, information they really mean extracting time, information and money from customers. They then call it a and money from customers. They then call it a “relationship”, but really it’s building a system “relationship”, but really it’s building a system that draws those things out of a customer that draws those things out of a customer without giving anything back.’without giving anything back.’

(Yu 2001)(Yu 2001)

Concerns with CRM

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‘Arrogant marketers think customers want a relationship with their products and services. But it’s a one-sided relationship when a relationship is created fundamentally to cross-sell and up-sell products.

(Kiely 2001)

Concerns with CRM