So, the war is on! The traditional stores are facing a stiff competition with e-commerce companies. Analyzing on a general basis, we can say that, yes, e-commerce companies are the future or there will be an amicable combination of both the channels for the customers. But, as business management graduates, it becomes important to compare the business model and understand its sustainability. Clearly, sustainability comes from keeping your stakeholders not only happy but also locked-in your eco-system. Does it happen or will it happen with e-commerce companies? Let us see by comparing the following:
- Customer preferences and format of delivery,
- Supplier relations
- Discounts for the customers
- The joy of shopping
Customer preferences and format of delivery:
E-commerce:Customer preferences for e-commerce have been towards Cash-on-delivery but is COD an advantage for e-commerce companies? Definitely not, because the money is collected by the distribution companies (also known as e-kart companies) who deposit a security amount with the e-commerce firm. Thus, in case the e-kart company cannot reconcile the account, the uncollected amount which e-kart company owes to the e-commerce firm is deducted from the security deposits.
Thus, one of the principal partners of value delivery, the process of reaching the customers,is played by the e-kart companies which are unhappy since they are getting penalized for an event for which they are not responsible. Thus, if one of the essential stakeholders is unhappy then service delivery will suffer which will result in a bad customer experience, which is not good for a service company. Therefore, e-commerce companies will have to build an actuarial system having an information repository of successful transactions and failed transactions. It will be done location wise and they will identify the good customers and the bad customers. Now, if there are good customers in bad locations, then they will get penalized. Thus, in both the cases, you are actually penalizing the wrong person, first the e-kart company and second, the good customers at bad locations.
Brick and Mortar:In traditional brick-and-mortar stores, cash on demand happens across the counter and it is a norm. Thus there is unlikely to be any slippage as in the e-commerce case. One form of slippage can be in terms of counterfeit notes but that has been prevented with machines that help identifying such notes. The other form of slippage can be in terms of debit cards/credit cards but that also hasbeen taken care with Safe-POS machines. Thus, efficient transaction and the firm being responsible for money collection and service delivery keeps the service experience also intact.
E-commerce:The e-commerce firms are holding just a list of names (websites/platforms/customer data) to their chest and the suppliers are directly supplying the material to the e-kart companies on the basis of customer orders. The money reconciliation happenswhen the suppliers when the e-kart company hands over the money to e-commerce firm which thereby hands over the money to the supplier. Now we can see that there is an additional agent in the system whose core strength is handling the customer data. But, they are an intermediary in money circulation. Thus, more the no. of intermediaries, the higher is the inefficiency of the system. Thus, the suppliers will ideally like to by-pass the e-commerce companies but that is not happening because they are holding the list of customers and the products. At the same time, e-commerce companies will eliminate COD and to sustain their positon, e-commerce firms will promote wallet systems. Now, introducing wallets such as Paytm will be to support future competitors and substitutes. So, Paytm has their own list of customers and products and what they need to do is to aggregate with suppliers and replace e-commerce firms. Essentially, why did e-commerce companies aggregated with suppliers, that was because they wanted to keep the system lean and not hold inventory following the Japanese Toyota Production System (TPS) in which all the cost of holding the inventory is borne by suppliers but TPS and Toyota’s plan worked because they had a strong culture which is trust-based where they never shifted to another OEM. But here we can evidently see a lack of culture and an implicit trust relationship among suppliers and the e-commerce firm which leads to lower switching costs. Thus, it makes sense for suppliers to aggregate and by-pass the intermediary. Thus, instead of managing and having a bargaining power on suppliers and e-kart companies, they might get sandwiched between the two.
Retail:In the retail channel, the shop-owner keeps his stock at his own warehouse. This carries huge costs and holding the inventory is a concern but over the time they have learned ways to minimize both. The logistics is apparently invisible from the point of view of the customer and a critical success factor is managing the logistics. The number of channels of customer reach are under the control of the retailer such as the store experience, managing the variety and product assortment, etc. There is a trust relationship between the supplier and the retail shop owner as well.Thus, these heavy fixed investments and proper protection of logistics, stores, and customer value proposition which can be a sustainable advantage for the retail store. Also, the supplier is not waiting for the money to be collected from a third party as in the case of e-commerce business model leading to an effective transaction.
Thus, after elaborating on two of the four aspects to be discussed, I leave it to the students to analyze it more till the time we discuss the other two aspects of comparison, i.e., discounts for the customers and the joy of shopping in the next part of the article.
The article is written by Prof. Shubhabrata Basu, faculty in the domain of Strategic Management of IIM Indore.