Multi-channel Management: Getting it Right!

Multi-channel Management: Getting it Right! Jos Schijns Kees Groenewoud gr 06-02 ge 06-01 OUN

Multi-channel Management: Getting it Right! Extended Abstract of Work in Progress Author Co-author Dr. J.M.C. (Jos) Schijns, M.B.A. Assistant professor at the Open University of the Netherlands School of Management P.O. Box 2960 6401 DL HEERLEN, The Netherlands Phone: +31 45 5762196 Fax: +31 45 5762103 Email: jos.schijns@ou.nl Web: www.ou.nl C. (Kees) Groenewoud, MSc. Manager Marketing Projects & Consultancy at Cendris Dept. of Customer Information P.O. Box 24024 2490 AA THE HAGUE, The Netherlands Phone: +31 70 3344605 Fax: +31 70 3343233 Email: kees.groenewoud@cendris.com Web: www.cendris.nl Abstract A hybrid channel approach turns out to be beneficial in several ways. The question, however, is: how to implement a hybrid channel strategy? This paper reviews three models of hybrid channel organization with the objective to identify factors that help choosing the right mode of channels organization. In addition, we summarize the requirements for implementing a multi-channel strategy, as this hybrid channel type appears to be the most beneficial type. Research results suggest that complete integration of customer contact channels is rare in the Dutch services industry, and that several areas of hybrid channel management need to be improved in order to become fully integrated.

1. Introduction Whether a company should use a single-channel strategy or a multiple-channel strategy is not the question anymore, since markets of the future will contain a mix of channels (Balasubramanian et al., 2005). For that, several reasons can be distinguished. First of all, customers increasingly prefer to use multiple channels when searching and buying products or services. Customers prefer different channels depending on their characteristics, the nature of the product, and the stage of the transaction process (Skierra, 2003). Secondly, technological developments offer suppliers the opportunity to meet the channel preferences of customers. As more and more consumers are embracing alternative channels, consumer marketers must adapt to the multi-channel shopping trend (Schoenbachler and Gordon, 2002). Thirdly, companies add channels because of competitive pressures (Grewal et al., 2001). Businesses have to accept new channels or risk becoming obsolete and left behind by competition (Schoenbachler and Gordon, 2002). However, companies that employ multiple channels to respond to competitors, to respond to customer expectations, or because they have the technology and know-how available, will insufficiently utilize the benefits hybrid channel management has to offer them. 1.1. Benefits that accrue from using multiple channels By adding more channels, companies can gain several important benefits. From the perspective of suppliers, using multiple channels is beneficial as a means of (Hobmeier, 2001; Kotler, 2000; Rollo, 2004; Schögel and Sauer, 2002): (1) Cutting costs; (2) Developing deeper relationships with customers; (3) Increasing sales; (4) Spreading (or reducing) risks. 1.1.1. Cutting Costs In today s environment, costs within many traditional channels, such as in sales forces and branch networks, are increasing at an alarming rate. As a result, there is increasing pressure on organizations to move to electronic channels and seek to develop customer self-service strategies to reduce costs. (Payne and Frow, 2004: 529). Self-service through the Internet, for instance, can help to reduce costs in human resources and administration (Fineos, 2001). 1.1.2. Customer relationship management Serving customers in their preferred channels will improve customer satisfaction and loyalty, resulting in lifelong customer relationships. For that, companies can use both high touch means and high tech channels. High tech and high touch are interrelated in a way that high tech enables high touch: The right technology enables your business and frees up your time, giving you the edge to offer truly superior customer service, keeping customers from straying to competitors (Kelly, 2004). 1.1.3. Increasing revenues Choosing the right channels, whose selling features fit customer requirements better, puts the company on the path of delivering increasingly personal and rewarding experiences and products (Rollo, 2004; Schögel and Sauer, 2002). Besides resulting in improved customer 1

satisfaction and attitudinal loyalty this will encourage repeat purchases, cross-sales, and referrals (behavioral loyalty). In addition, new channels provide access to new (e.g. international) markets, and reach un(der)served customer segments that could not be touched (effectively) through current channels, resulting in increased market coverage and sales volume (Easingwood and Storey, 1996; Kotler, 2000; Schögel and Sauer, 2002). 1.1.4. Risk dispersion/reduction Dispersion of risks is related mainly to the three benefits mentioned above. E.g., entering new markets and reaching additional customer segments through using multiple channels not only increases revenues, but also reduces the company s dependency on a limited number of markets and existing customer segments. Adding direct channels to indirect devices reduces a company s dependency on (independent) intermediaries in the Vertical Marketing System (Schögel and Sauer, 2002). In addition, reducing costs reduces the risk of becoming unprofitable, and improved customer relationship management reduces the risk of customer defection. Using (principal components) factor analysis applied to the response of 592 managers, who qualified for selection if they had marketing or marketing-related responsibilities, Schijns and Blokland (2004) supported three types of benefits of a hybrid channel approach: cost reductions, revenue improvements, and deeper customer relationships. Risk dispersion did not appear to be a distinctive factor, and was supposed to be related to and included in the other three factors (See Fig. 1, Appendix). In order to sufficiently utilize the benefits hybrid channel management has to offer, companies have to determine what model of hybrid channel organization fits best. The objective of this paper, therefore, is to identify factors that help choosing the right mode of channels organization. In addition, we summarize the requirements for implementing a multi-channel strategy, as this hybrid channel type appears to be the most beneficial type. First, we propose three models of hybrid channel organization, depending on the level of integration. Distinguishing different models makes it possible to measure and compare the effectiveness of each model with respect to e.g. customer loyalty. Next, we focus on factors that help choosing the right mode of channels organization. These factors are relevant when developing a hybrid channel strategy. Thirdly, we summarize the conditions for implementing a multi-channel strategy, since this hybrid channel type is suggested to be the most beneficial, for both suppliers and customers. In a multi-channel strategy, for example, new measurements might be required that allow managers to understand how customer s attitudes and behaviors exhibited in one channel impact other channels. 2. Models of hybrid channel organization Companies tend to add channels and methods without a clear and realistic vision of an ultimate go to market architecture, resulting in (channel) conflicts and moral problems inside the marketing organization and confusion and anger among distributors, dealers, and customers on the outside (Moriarty and Moran, 1990). By adding new channels to existing ones, companies create hybrid marketing systems (Moriarty and Moran, 1990). Depending on 2

the level of integration, Holmsen et al. (1998) distinguish three types of hybrid marketing systems (See Fig. 2, Appendix). 2.1. Coordinated channels model In this monolithic system (Cespedes and Corey, 1990) channels within the organization are completely integrated with uniform business processes, shared technology architecture and common key performance indicators are used to assess both the individual channel and the overall organization s performance (Yellavalli et al., 2004). 2.2. Managed competition model In this model channels have some uniform business processes, shared technology architecture or common key performance indicators (Yellavalli et al., 2004). The model sets standards across channels based on the company s strategy for customer and product offerings, but relies on internal competition to secure efficient resource allocation. 2.3. Competing channels model The competing channels model transfers accountability for results down the organization, exposing channels to the discipline of the market (Holmsen et al., 1998). In this pluralistic system (Cespedes and Corey, 1990) each channel is treated as an autonomous business entity with distinct business processes, separate technology architecture and key performance indicators (Yellavalli et al., 2004). We refer to organizations that use more than one channel to interact with their customers as hybrid channel organizations. The level of channel integration determines whether hybrid channel organizations are (independent) multiple channel companies, (integrated) multichannel companies, or companies with partially coupled channels. 3. Choosing the right mode of channel organization Distinguishing different types of hybrid channel organization results in the question how to determine which type fits a particular organization best. Instead of focusing on an either-or channel choice, however, executives should be asking: What degree of channel integration makes sense for our company? (Gulati and Garino, 2000). Whether different channels should be integrated and to what level, is determined by factors as suggested by Gulati and Garino (2000), Holmsen et al. (1998), and Willcocks and Plant (2001). (Full) Integration (Multi-Channel Management) makes sense if: - The brand extends naturally to the new channel (e.g. the Internet); - Executives have the skills and experience required to pursue the new channel; - Executives are willing to judge and manage the initiative through different performance and reward criteria; - Distribution and information systems can be applied well with the new channel and provide a competitive superiority; - The integrated company remains attractive to potential alliance partners for dimensions such as brand strength and speed of action; - The cultures of the new (e.g. online) business and the existing (e.g. traditional branches) business gel in a mutually supportive way; - The information systems provide a solid foundation on which to build; 3

- Either system constitutes a significant competitive advantage. Otherwise, separation (Multiple Channel Management) is more viable when: - A different customer segment or product mix is being offered; - Pricing needs to be different to stay competitive; - Channel conflicts exists; - The new channel fundamentally threatens the current business model; - Outside capital is required and is best raised by a stand-alone operation; - There are problems retaining or attracting the right talent; - A key partner is reluctant to connect with the parent company; - The parent company s culture would undermine the effectiveness of the new business; - A certain supplier, distributor, or other partner is key to the venture s success. 4. Requirements of a multi-channel management approach Though using different channels, customers want a seamless and consistent shopping experience, and a superior customer value. In order to produce this, it is increasingly imperative to integrate the activities in those different channels (Payne and Frow, 2004). In addition, it is important to integrate, rather than separate a company s touch points, in order to create a virtuous circle where different channels complement, rather than cannibalize, each other. It is far more difficult, however, to integrate a new channel within the existing arsenal than adding a new channel to the channels currently used (DMA, 2005). For these reasons, we focus on some of the main requirements for an integrated multi-channel approach here. 4.1. Organizational level First of all, CEO buy-in and direct control of IT priorities is required, since IT is a strategic connection to customers (instead of being viewed as a cost center under the CFO s control). Secondly, multi-channel experience ownership has to be established. A VP or director of MCM has to be appointed who reports to the CEO or VP of strategy, and who is responsible for cross-channel consistency and channel conflict issues. Thirdly, cross-functional teams are required for cross-channel marketing processes and coordination. Prescribing channel roles is one of the tasks of these teams in order to prevent potential and minimize existing channel conflicts. Also, a multi-channel company must rethink how it compensates employees. Now companies are too often organized and compensated in a way that encourages competition between channels (Aaronson, 2003). 4.2. Business processes and infrastructure Through growth, acquisitions, outsourcing and trading partners, most organizations now have multiple ERP systems, legacy systems, order fulfillment systems, and order management systems loosely tied together to support their supply chain. Without proper integration, these systems can create organizational roadblocks to integrating the multiple selling channels (Yellavalli et al., 2004), resulting in a lack of channel connectivity. The business should seek to capture all customer information across all channels and integrate it within a single data repository so the business can recognize previous interactions with the customer, regardless of the channel in which the interactions took place, and use this to enhance the customer experience (Payne and Frow, 2004: 531). So, an intrinsic part of channel management is consolidating and centralizing customer information (Fineos, 2001). 4

Customer data standards have to be defined. Not only to build a giant, integrated customer database, but also to coordinate consistent marketing and service policies. 4.3. Implementing training of personnel across channels The current stratification in operational silos also prevents companies from executing a multichannel integration strategy, since it can lead to an us vs. them mentality and misplaced internal competition (Yellavalli et al., 2004). In order to increase organizational effectiveness, these operational roadblocks resulting from varying competency profiles and cultures across channels must be identified, addressed and overcome. Key performance indicators are required to assess both the individual channel and the overall organization s performance. Common sales targets and metrics will also contribute to a monolithic rather than a pluralistic system. According to a recent study in the Dutch services industry, an industry that is best suited for a multi-channel approach, integration of channels is rare (Schijns and Blokland, 2004). Only one third of the responding companies indicated that their customer touch points were interconnected. The majority of the respondents acknowledged that their channels were judged in isolation. Only half of the organizations channels had the same customer data available, and in less than half channel roles were prescribed (See Fig. 3, Appendix). 5. Conclusions The benefits of a hybrid-channel strategy are that multiple-channel tactics offer a great opportunity to boost sales, encourage customer loyalty and reduce costs and risks (Herrmann, 2003). Depending on the level of integration, three types of hybrid marketing systems can be distinguished (Holmsen et al., 1998): 1. Coordinated channels model (integrated Multi-channel); 2. Competing channels model (separate, Multiple channels); 3. Managed competition model (Mix). The integration-separation decision, however, is not a binary choice. There are infinite permutations along the integration spectrum. (Gulati and Garino, 2000: 112). By avoiding an either-or choice and considering each aspect of its business on its own, a company can strike the right balance between the freedom, flexibility, and creativity that come with separation and the operating, marketing, and information economies that come with integration. (Gulati and Garino, 2000: 114). Due to drawbacks of separation (e.g.: duplication in infrastructure; the failure fully to leverage customer information; a risk of channel conflict as each channel and product group comes to believe that it deserves to be a standalone business (Holmsen et al., 1998)), it is suggested that a multi-channel approach turns out to be the most efficient and effective, and that the move towards a multi-channel approach is an evolutionary process for most companies. Implementing a multi-channel strategy, however, is harder than it might seem. It is more than multiplying the number of channels resulting in unintended consequences that actually raise costs or cut revenues (Meyers et al., 2004). Human, organizational, operational, and technological adjustments are to be considered. 5.1. Implications 5

The multi-channel customer may be more complex to service, but studies show that on average they spend more (Banta Corporation, 2004), have higher levels of satisfaction (Freed, 2005), are significantly more loyal (Aaronson, 2003; Wallace en al., 2004), and are more likely to recommend the supplier to others (Freed, 2005). Managers need to think more holistically, however, when it comes to these positive effects of a multi-channel approach. They have to work on breaking through traditional silo mentalities, since the empowered customer of tomorrow will be in command and expects an enhanced and uniform shopping experience across all channels. Customers who have a bad research experience in one channel may be deterred from shopping through the supplier s other channel as well. In order to support this holistic view, new measurements are required that allow managers to understand how customer s attitudes and behaviors exhibited in one channel impact other channels. For example, suppose 38% of a customer base uses the web to research their purchases, but 71% of these customers choose to complete their purchase in the store. Viewing this segment of online shoppers from a web metrics perspective could be misleading, as the vast majority would be viewed as shopping cart abandoners or merely browsers. However, when viewed through the lens of multi-channel customer satisfaction metrics, we clearly see the role the web plays in driving in-store sales and forging a successful multi-channel strategy (Freed, 2005: 5). So, KPI s are needed that measure what is most important for the organization as a whole and not what will best satisfy one channel at the cost of another (Yellavalli et al., 2004). In order to assist organizations in creating and implementing a multi-channel strategy scorecards can be built that take into account the required changes toward a multi-channel strategy. These scorecards assist in determining not only the current integration level of the hybrid channel company ( as is business process), but also the to be level of channel integration (Yellavalli et al., 2004). 5.2. Suggestions for further research A distinction between three types of hybrid marketing systems was introduced. More research needs to be done on the reasons why such systems are implemented in the first place (Wallace et al., 2004). When choosing the right mode of channel organization, several factors were identified by e.g. Gulati and Garino (2000). Their list, however, can be seen as a useful starting point, and has to be completed further. For example, separation can also be a more viable alternative when the new channel fundamentally extends the current business model, rather than threatens the current business model. Although it was suggested that a multi-channel approach is the most efficient and effective type of hybrid channel management, empirical research needs to be done on other hybrid channel strategies that are available to managers. In particular, what is the efficacy of each strategy, and what are their managerial challenges and implications? (Wallace et al., 2004: 259). 6

References Aaronson, J. (2003), Multichannel Marketing: Channibalism? ClickZ, May 15. Available at: http://www.clickz.com/experts/crm/crm_strat/print.php/2205571 Balasubramanian, S., Raghunathan, R. and Mahajan, V. (2005), Consumers in a Multichannel Environment: Product Utility, Process Utility, and Channel Choice. Journal of Interactive Marketing, Vol. 19, Nr. 2 (Spring), pp. 12-30 Banta Corporation (2004), Developing Effective Multi-Channel Marketing Strategies. A Banta Corporation white paper, February, 10 pages Cespedes, F.V. and Corey, E.R. (1990). Managing Multiple Channels. Business Horizons, July-August, pp. 67-77 DMA (2005), The DMA 2005 Multichannel Marketing Report. The Integration of Catalog, Retail, and Online Media, Direct Marketing Association, New York Easingwood, C. and Storey, C. (1996), The Value of Multi-Channel Distribution Systems in the Financial Services Sector. The Services Industries Journal, Vol. 16, No. 2 (April), pp. 223-241 Fineos (2001), Channel Management. A white paper, 13 pages Freed, L. (2005), Customer Satisfaction, Loyalty, and Buying Behavior in the Evolving Multi-Channel Retail World. Foresee Results / FGI Research Report, ForeSee Results, January, 15 pages Grewal, R., Comer, J.M. and Mehta, R. (2001), An investigation into the antecedents of organizational participation in business-to-business electronic markets. Journal of Marketing, Vol. 65, July, pp. 17-33 Gulati, R. and Garino, J. (2000), Get the Right Mix of Bricks & Clicks. Harvard Business Review, Vol. 78, May-June, pp. 107-114 Herrmann, T. (2003), The Five Essentials of Multi-channel Marketing. Available at: http://www.the-dma.org/cgi/registered/whitepapers/5essentials.shtml, downloaded on: August 19, 2005 Hobmeier, M. (2001), Professional multichannel management. CEO, No. 3, pp. 36-38 Holmsen, C.A., Palter, R.N., Simon, P.R. and Weberg, P.K. (1998). Retail Banking: managing competition among your own channels. The McKinsey Quaterly, Nr. 1, pp. 82-92 Kelly, M. (2004), One to many, through many. 02 March 2004. FINEOS. Available at: http://crm.insightexec.com/cgi-bin/library.cgi?action=detail&id=1319, downloaded on: June 12, 2004 7

Kotler, Ph. (2000), Marketing Management, 10th International Edition, Prentice Hall, Upper Saddle River, pp. 507-509 Meyers, J.B., Pickersgill, A.D. and Van Metre, E.S. (2004). Steering customers to the right channels. The McKinsey Quaterly, Nr. 4. Available at: http://www.mckinseyquaterly.com, downloaded on: July 21, 2005 Moriarty, R.T. and Moran, U. (1990). Managing Hybrid Marketing Systems. Harvard Business Review, Nov.-Dec., pp. 146-155 Payne, A. and Frow, P. (2004). The role of multi-channel integration in customer relationship management. Industrial Marketing Management, Vol. 33, pp. 527-538 Rollo, C. (2004), Seniors, Teens, and Everyone Tween: Selecting service channels to fit customer demographics. Available at: http://www.the-dma.org/cgi/dispnewsstand?article=1121, downloaded on: February 23, 2004 Schijns, J.M.C. and Blokland, H. (2004), Benefits of Using Multiple Channels as Drivers for Channel Selection. Proceedings of the 16 th DMEF Educators Conference 2004, October 17, New Orleans, Ill. USA. Available at: http://www.the-dma.org/dmef/proceedings04/6-schijns.pdf Schoenbachler, D. D. and Gordon, G.L. (2002), Multi-channel shopping: understanding what drives channel choice. The Journal of Consumer Marketing, Vol. 19, Nr. 1, pp. 42-53 Schögel, M. and Sauer, A. (2002), Multi-Channel Marketing Die Königsdisziplin im CRM. Thexis, Nr. 1, pp. 26-31 Skiera, B. (2003), Project Proposal of Cluster III: Multi Channel Management. Johann Wolfgang Goethe-Universitaet, Frankfurt am Main, February, 12 pages Wallace, D.W., Giese, J.L. and Johnson, J.L. (2004), Customer retailer loyalty in the context of multiple channel strategies. Journal of Retailing, Vol. 80, pp. 249-263 Willcocks, L.P. and Plant, R. (2001), Pathways to E-Business Leadership: Getting From Bricks to Clicks. MIT Sloan Management Review, Spring, pp. 50-59 Yellavalli, B., Holt, D. and Jandial, A. (2004), Retail Multi-Channel Integration: Delivering a Seamless Customer Experience. A white paper, September, Infosys Technologies, Addison, TX., USA. 11 pages. Available at: http://www.infosys.com/supplychain/infosysmciwhitepaperfinal.pdf 8

Appendix Three types of benefits (factor analysis) CRM Revenue improvements Cost reductions Alpha =.86 Alpha =.79 Alpha =.70 Risk Reduction Source: Schijns and Blokland (2004) Fig. 1. Benefits of using multiple channels Models for channels organization Multiple Channel (Competing Channels Model) Mix Mix (Managed Competition Model) Multi-Channel (Coordinated Channels Model) Model) The Hybrid Channel Spectrum Decentralized Management Shared Management Centralized Management Models for channel management Fig. 2. Models of hybrid channel organization 9

0% 20% 40% 60% 80% 100% 34.8 12.9 52.3 Channel connectivity Prescribed channel roles Judged in isolation The same data 47.4 56.5 50.5 15.3 9.8 10.1 37.3 33.4 39.7 Applicable No opinion Not applicable Fig. 3. Requirements for MCM 10

Managementwetenschappen working papers 2003-2006: Green series 2003 gr03-01 gr03-02 gr03-03 gr03-04 gr03-05 gr03-06 A.C.C. Herst, R.J.R. Hommelberg The Risks and Returns of Management Buy-Outs. Evidence from the Netherlands Marjolein C.J. Caniëls, Henny A. Romijn Firm-level knowledge accumulation and regional dynamics Cees J. Gelderman Handling measurement and strategic issues in Kraljic's portfolio model - results of explorative case studies David Davis, Ivo de Loo Black Swan Records - 1921-1924: From a Swanky Swan to a Dead Duck Allard C.R. van Riel, JanJaap Semeijn Online Travel Service Quality: Towards Delighted and Loyal Customers Henk van den Brink, Kees Kokke, Ivo de Loo, Peter Nederlof, Bernard Verstegen Teaching Management Accounting in a Competencies-Based Fashion 2004 gr04-01 gr04-02 gr04-03 gr04-04 gr04-05 Marjolein C.J. Caniëls, Anke Smeets How to integrate didactic principles in an e-learning environment Ivo de Loo, Peter Nederlof, Bernard Verstegen Behavioral Patterns of Controllers in the Formation of Control Marjolein C.J. Caniëls, Cees J. Gelderman Buyer-supplier relationship development - Empirical Identification and Quantification Peter Storm, Rob Janssen High performance projects - A speculative model for measuring and predicting project success Jos Schijns Service Encounter Effects on Customer Loyality 2005 gr05-01 gr05-02 gr05-03 gr05-04 gr05-05 Marjolein C.J. Caniëls, Cees J. Gelderman Power and interdependence in buyer supplier relationships: A purchasing portfolio approach Marjolein C.J. Caniëls, Henny A. Romijn What Works, and Why, in Business Services Provision for SMEs: Insights from evolutionary theory Cees J. Gelderman, Arjan J. van Weele Purchasing portfolio usage and purchasing sophistication Cees J. Gelderman, Herman T.A.E. Laeven Competition or cooperation? Alternative purchasing strategies for leverage products - an empirical study Ivo de Loo Action learning as a form of management control: The case of a Dutch elevator company gr05-06 Janjaap Semeijn, Lingling Cao en Paul W.Th. Ghijsen 11

Trust and its antecedents in supply chains: Evidence from a German buyers Chinese suppliers perspective 2006 gr06-01 gr06-02 Ger Arendsen en Martine Coun Task types in a competence-based business curriculum Jos Schijns en Kees Groenewoud Multi-channel Management: Getting it Right! Yellow series 2003 ge03-01 ge03-02 Bernard Verstegen Critical Accounting in the Academy Huibert de Man De afstudeer-begeleider als coach: reflecties op ervaringen in een bedrijfskundige opleiding 2004 ge04-01 ge04-02 ge04-03 ge04-04 ge04-05 Bé Albronda, Kees Gelderman Managing the Global supply Base through Purchasing Portfolio Management Iwan Sewandono Vox populie vox dei? Versterken van burgerinitiatieven Huibert de Man Bewust organiseren? De betekenis van onbewuste processen in organisaties en de consequenties daarvan voor strategievorming en organisatieverandering John Gerrichhauzen, Albert Kampermann HRM en ICT onderweg naar morgen Jos Schijns, Hanneke Blokland Benefits of Using Multiple Channels as Drivers for Channel Selection 2005 ge05-01 ge05-02 Mimi Crijns Assumpties achter doelmatigheidsonderzoek Iwan Sewandono Knooppunt school en bedrijf. Visie op zij-instromers en het onderwijsleerbedrijf in de regio Dordrecht 2006 ge06-01 Werkgroep taaktypen en toetsvormen Managementwetenschappen Eindverslag: een typering van 5 taaktypen voor het onderwijs bij Managementwetenschappen 12