Strategy in e-commerce Dynamic routing instead of Porter s guide

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1 Foto: bluedesign - Fotolia.com Strategy in e-commerce Dynamic routing instead of Porter s guide

2 E-commerce is a disruptive force for established value chains in the marketing of physical and non-physical goods: In each industry the cards are being reshuffled and newly dealt out. E-commerce thus changes established rules of the competitive game. However, the times of self-accommodating two-digit growth rates in online turnovers for retailers and producers are long gone. Today, e-commerce is primarily complex, complicated and expensive. Still, digital customer engagement is a relevant potential bearer or even a last hope for many established business models. 1 However, complicated does not mean impossible with the right approach. 1 Classical business models must even fear for their existence. The latest Dialog Digital Handeln sketched relevant developments and trends as well as discussed possible solutions. Cf. Dialog Digital Handeln 2013, dmc-cc.de/publikationen. Licensed under a Creative Common License BY-NC 3.0 Seite 1/6

3 Why strategy in e-commerce? How does a manager feel when dealing with strategic questions regarding digital commerce? After a recent journey with incorrect GPS-positioning, we are tempted to draw a parallel: Strategy in e-commerce feels like a disorientated navigation system: right now take a left now a right turn around On a daily basis, new topics and technologies hail down on those in charge. Experts voice well-intended advice and publications present them with numerous cases of success and best practice. As a sideline, the daily business has to be conducted to secure and promote the tediously-acquired operational competitive edge. For long-term business success this is merely a necessary, not a sufficient condition: Are you sure your GPS functions correctly and traffic news is processed reliably? When did you last update the maps and software of your strategic navigation system? Our experience shows that from time to time it is necessary to raise one s eyes from the daily operations and survey digital commerce from a strategic perspective. What is strategy in e-commerce? For a business strategy means to be correctly attuned to their context (having the right navigation system with up-to-date software and the right maps). Thanks to Porter we know the ultimate destination of the journey: Competitive strategy is about being different. 2 However, the three generic signposts (cost leadership versus differentiation and niche) do not bring us closer to this destination if the highway code of competition is being invalidated by newcomers from outside this particular industry. This means, strategy is stuck. 3 Especially entry barriers of a market like strong presence of a brand on stationary sales floors, can turn from competitive advantages to dangerous legacies overnight, in case competitors decidedly refrain from implementing these elements in their business models. 4 Thus, above all other things, strategy in e-commerce ought to be dynamic and able to find ever new answers to the following questions: 5 1. Which points of my business model offer the possibility of creating and transporting added value for my customer through e-commerce? 2 Cf. Porter, M. in: Harvard Business Review November-December (1996), What Is Strategy? 3 McGrath, R. (2013), The End of Competitive Advantage, p. XI. 4 The strategic group of established competition driving in convoy are overtaken on the right by business models with a modified added value logic (i.e. Amazon). This exactly corresponds with the Blue-Ocean-argument by Kim and Mauborgne, cf. Kim C. (2005), Blue Ocean Strategy. 5 When operationalizing the strategy in the form of an objectives network with KPIs and an implementations manual, the strategy development becomes firmly linked with the day-to-day routines. This in turn allows the installation of a strategic rapid alert system and improves the strategy development s dynamics in a circuit. Licensed under a Creative Common License BY-NC 3.0 2/6

4 2. Which new or modified business models are being made accessible for me and become relevant for my context against the background of e-commerce? 3. Where does e-commerce make me vulnerable regarding my existing business model and which counteractions are suitable? How to develop a strategy in e-commerce? Devising a successful strategy can neither be described by detailed process manuals nor can it possibly be conducted by a strategic cell or experts behind closed doors. 6 Strategy development is much more characterized by a highly creative process which not necessarily forces one to use LEGO bricks, but that must by all means be designed together with all executive performers. Only they can contribute the essential details regarding the numerous aspects of the strategic context of e-commerce. dmc.cc has developed strategies for the field of e-commerce in many projects in cooperation with their clients. From this experience we deduced a strategy model for e-commerce that consists of two fundamental elements: 1. A course of action model for strategy development 2. A framework of relevant analytic and configurative levels for strategies in e-commerce When devising a strategy in e-commerce, practical experience suggests a three-level process: Analyzing Mode Divergent Thinking Mode Convergent Thinking Mode 1. Identification of scope and determining factors 2. Assessment and analysis of the initial situation 3. Development of options 4. Validation and concretization of promising options 5. Selection and prioritization of options 6. Validation of practicability 7. Planning of realization Fig. 1: Process of strategy development in e-commerce What are the building blocks of an e-commerce strategy? Fig. 2 gives an overview of the modes of analysis and design necessary for a strategy in e-commerce. The following illustrates the elements on the different levels. 6 Cf. On Strategic Planning Chapter 3 by Mintzberg, H. (2008), Strategy Bites Back. Licensed under a Creative Common License BY-NC 3.0 3/6

5 Strategy Business Model Operating Model Implementations Manual Fig. 2: Levels of analysis and design for strategy in e-commerce Objectives, determining factors and positioning 1. Objectives and KPIs 2. Determining factors 3. Positioning 4. Products and services 5. Customers, target groups and markets 6. Distribution strategy, channels and customer journeys 7. Value chain and processes 8. Technology 9. Organization and sourcing 10. Business case 11. Roadmap 12. Change management After assessing the status quo, the first strategic element focuses on objectives and positioning of the business on the market. Those monetary and non-monetary objectives to be met by e-commerce are inferred in a systematic process 7 and edited in a system of objectives referring closely to the business s system of objectives. This system of objectives highly matters in the subsequent course of the process of strategy development: Each option will be assessed as to how it fits in the objectives system and respectively pursued further or discarded. Often the business environment cannot or, at most, can only hardly be influenced. Still it must be intensively analyzed because completely ignoring one s business environment and simply pushing one s thing through will most likely not yield the results desired. Only sound knowledge about one s market environment and relevant competitors familiar and established competitors as well as new rivals with innovative business models 8 allows a valid assessment of the risk-reward ratio. Based on objectives and determining factors a reflection, sharpening and modification of one s positioning takes place: What does the business stand for, and for what it does by no means? At this point slipping into the customers shoes is essential because one s own perception of the unique selling proposition is usually not congruent with that of the customer. With multi-brand and companies with more than one business model, a differentiation into meta-positioning or family brand and into positioning and marketing brands of the individual models takes place. Business model In the course of the ongoing strategic process, this newly-developed positioning is then applied to a business model logic. 9 The business model should ensure an economically sustainable combination of demands on the market and, on the side of supply, an added value logic with respective activities and resources. 7 Based on Balanced Scorecard. Cf. Kaplan, S. und Norton, P. (1996), The Balanced Scorecard: Translating Strategy Into Action. 8 Many businesses do not know what a large share of their market new competitors cut off. An external and experienced view helps to reach an adequate positioning of the business in the context of market and competition. 9 Based on Business Model Canvas. Cf. Osterwalder, A. and Pigneur, Y. (2010), Business Model Generation: A Handbook of Visionaries, Game Changers and Challengers. Licensed under a Creative Common License BY-NC 3.0 4/6

6 E-commerce especially changes traditional and classical distribution strategies and presents not only retailers, but also producers and brands with new challenges. 10 From the demand perspective, it is essential to answer the following key question: Which products enriched by what services do we offer to which customers in what channels? This question clearly demonstrates the dimensions the business model must include. How can I generate interaction from my customer with the nature of my offer? What customer experience do my products feature and how can I communicate in a way that secures this customer relationship on a long-term basis? The customer journey presets the design of one s own route. Operating model How can an adequate cost-efficient configuration of the operative elements to meet the objectives of the business model look like? On the supply side, one must primarily develop a configuration of a value added logic that is adjusted to the business model: Which processes are necessary and through which internal and external resources or partners can they be dealt with? Fulfillment is a decisive cost-pusher. Can numerous single orders and returns be accomplished by the existing systems? Which additional services are needed and is my business still cost-efficient? Usually, modifications and extensions of the existing processes are required. Structured sourcing approaches illustrate all activities important for value creation in a target-oriented way whether services are rendered by interior or exterior providers. Here the strategic relevance of the respective activities (especially resources, know-how and cost structure) must be deliberated against the background of one s own capabilities. Technologies are not ends in themselves but rather additional benefits on several levels of the value chain that are relevant for one s own USPs. Business Case These elements are the connecting factors for the calculation of business case scenarios with complete details. How much capital is needed? How much turnover must be generated in which channels to create a profitable enterprise and how long does it take for the costs to amortize? Concrete scenarios show interdependencies and provide first instructions for realization. They are, however, no inflexible directions, but support you in reaching decisions for or against certain options and allow for control over project results during and after the project. Because of complex cost structures in e-commerce with their fixed and step costs and many variable components, many companies are not satisfied with merely maximizing top-line effects as intended by classical strategies. However, cost implications and synergies between single business models and several operating models are often the significant factors for corresponding investment decisions that are designed on a customer-individual basis. Roadmap und Change Management An implementations manual helps to locate the potentials of e-commerce on a trajectory in a way that is clearly suited to the situation of the business. The risks of the models and their implementation for a certain 10 Dialog Digital Handeln 2014/I regarding the topic E-commerce in classical distribution and direct marketing has been published. Visit dmccc.de/publications. Licensed under a Creative Common License BY-NC 3.0 5/6

7 period of time are as essential as the adjustment of the organizational structure and the empowerment of the personnel. With the help of adequate communication and a stakeholder management concentrating on this change, amplitudes of the change curve and its duration can be reduced while still achieving a successful change. Let the right strategy reliably navigate you to your objectives During the strategic process objectives are being formulated and a suitable positioning of the business is developed. An appropriate business model with a cost-efficient operative model implements these objectives. Business case scenarios and implementation manuals based on these support a business in deciding how much e-commerce they can afford to meet their superior business objectives. dmc.cc has accompanied producers (Hugo Boss, Daimler, Victorinox, e.g.) and retailers (Galeria Kaufhof, Intersport International, Conrad Electronics, e.g.) from different contexts and markets on their way. We do not only ask the right questions at crucial waypoints but also help to develop their individual answers. At the end of this process, you will find a strategy for e-commerce that will reliably guide you as a navigation system to your objectives. The routing depends on your individual KPIs (length of your route versus journey time). The navigation reacts to contingent occurrences flexibly. Road works and traffic jam are circumnavigated You have reached your destination! Licensed under a Creative Common License BY-NC 3.0 6/6

8 Carsten Klenner, senior consultant at dmc commerce consultants, is responsible for e-commerce business strategies for brands and manufacturers, retailers and start-ups. His special focus is the efficiency and quantification of business models and their transformation into successful process and operating models. The internet s enabling-function for business processing and innovation models has been his key interest for more than 15 years. Previous activities include classic management consulting, research and various positions at technology companies. Bartosz Przybylek, management consultant at dmc commerce consultants, develops strategic approaches in cooperation with producers and retailers to identify and meet their challenges in e-commerce. Before working for dmc.cc, he studied philosophy and, as an entrepreneur, he implemented innovative retail and marketing concepts focusing on cross-channel retail. dmc commerce consultants is an independent management consultancy combining hands-on execution experience of the dmc group since 1995 with expert knowledge and methodical competence. We pave the way for producers and retailers towards a strategic market entry or the realignment of their digital commerce activities efficiently with relevant decision strategies and results. Thus we support businesses in defining and realigning their business models for digital commerce. Sebastian Wohlrapp holds degrees in engineering and business administration. He is founder and managing partner of dmc.cc. He leads the business development and the consulting operations of the management consultancy focusing exclusively on digital commerce. For further publications by and with dmc.cc visit As the market leader in enterprise application software, SAP helps companies of all sizes and industries run better. From back office to boardroom, warehouse to storefront, desktop to mobile device SAP empowers people and organizations to work together more efficiently and use business insight more effectively to stay ahead of the competition. SAP applications and services enable more than 253,500 customers to operate profitably, adapt continuously, and grow sustainably. Contact dmc commerce consultants GmbH SAP SE Rommelstraße 1 Dietmar-Hopp-Allee 16 D Stuttgart D Walldorf Tel.: / Tel.: / Fax: / Fax: / info@dmc-cc.de info@sap.com Licensed under a Creative Common License BY-NC 3.0