CHAPTER 2

Chapter 5: Technology In Services

Chapter 5Technology In ServicesTOPICS FOR DISCUSSION

1. Can an Internet service encounter be a memorable experience?A well designed website can be a pleasure to use but it cannot create the same depth of memories that an adventure to a foreign land can. An Internet experience is limited by the two-dimensional computer monitor-user interface.

2. How does the economics of scalability explain the failure of Living.com, an online furniture retailer?Living.com discovered the considerable expense of shipping and handling returns of furniture. Brick and mortar sites with a cash and carry policy such as Ikea can avoid this cost and pass on the saving to customers in low prices. Because of the importance of comfort and feel, furniture needs to be appreciated in the physical world to avoid returns.

3. What are the characteristics of early adopters of self-service?Characteristics of early SST adopters include perceived control (belief about ones competence and mastery over the environment), technology readiness (propensity to use new technology in home life and at work), and locus of control (connection of personal traits and/or actions with outcomes).

4. How can we design for self-recovery when self-service failure occurs?

Design for self-recovery must include failure prevention using poka-yoke devices to avoid errors and assistance after the failure by including FAQ (Frequently Asked Questions) in the protocol. A panel of customers could test prototype SST for robustness in use.

5. What could be the explanation for the high customer satisfaction scores in Table 5.6 for Internet services?This question could provide a lead into Chapter 6 on Service Quality. Begin by asking students what are the customer expectations for Internet service. This will uncover the low expectations and standardized nature of Internet service which reduces variability leading to a perception of consistency in service. Furthermore, customers are coproducers and thus have a sense of competence when using Internet services.

CASE: AMAZON.COM

[Students Brian Graybill, Ken Hall, Frank Mastronuzzi, and Pete Thornfield wrote the responses for these questions.]

1. How would you contrast Amazons business design with that of Barnes & Noble before Barnes & Noble went online? From a customers perspective, what are the advantages and disadvantages of each design? Background

Amazon.com has taken the business world by storm. Jeff Bezos set out with lofty goals and has taken every conceivable step to achieve them. Amazon.com identified a market that was perfect for the virtual world. Books are the same no matter where they are purchased. There is no need to try on or taste books so books can be sold effectively without the physical presence of the customer. Amazon.com launched with a concentration on books, but quickly branched out into other lines of business such as music and auction sites. It is hailed as the top pure web-based business in existence, yet it still has not turned a profit. This is due to Bezos eye towards long-term success, which he thinks is driven by grabbing market share early in the game regardless of profitability and creating strong brand equity for the business.Business Design

Amazon.com set out to rewrite the rules in the selling of books. Upon its launch it touted itself as the worlds biggest bookstore. Yet it was launching this revolution in a mature industry that had few well-established traditional market leaders. The brick-and-mortar market leaders were Barnes & Noble (B&N) and Borders. Clearly, Amazon.com had to offer consumers an advantage over these established retailers to have any chance at success. It accomplished this objective by analyzing its business design and implementing systems that would give it a competitive advantage within the industry.

First, its guiding force was customer service. Everything it did was to enhance customer service, encourage trial visits to the site, and, most importantly, to generate repeat customers. One persons delightful observation is:

Somebody who buys from you once and never again is just a purchaser. Someone who buys from you repetitively is a customer.

Amazons focus was on increasing its customer base. It did this by capitalizing on the Internets major strength its ability for mass customization. It developed Discussion Boards that allowed customers to post opinions and reviews. This incorporated the customer as a participant in the development of the website and helped to increase loyalty to the site. It used collaborative filtering to personalize recommendations to its customers and the 1-Click streamline service to make repeat ordering as hassle free as possible. Finally, Amazon made the site simple to navigate and used few graphics so the site would load quickly. The attributes work together to raise the level of involvement between Amazon and its customers thereby creating switching costs in the future. Analyses of Amazons service package and a traditional retailer such as B&N highlight the differences between their business designs (Exhibit I).

EXHIBIT I: Service Package Comparison of Amazon.com versus Barnes & Noble

Service PackageAmazon.com

(Online)Barnes & Noble

(Traditional)

Supporting Facility( Server

( Website

( Database Physical store

Supporting components (e.g., a cash register)

Facilitating Goods( Books, CDs, videos

( Auction items

( Personal computer

( Internet access Books

Information Remembers past purchases

Reader reviews In-store recommendations

Explicit Services Competitively priced books

Customized service

Convenience Competitively priced books

In-store live service

Coffee bar

Implicit Services 24 hours/7 days convenience

Community

Pleasant ambiance

Relaxing diversion

The supporting facilities necessary for Amazon are very different from those for B&N. Amazons supporting facilities include a server, website, and database program. B&Ns supporting facilities are more physical in nature. Its primary supporting facility is a physical store, which includes all of the electronic systems necessary to ensure that it runs efficiently. The net effect is that B&N is forced to endure much higher real costs. Its capital expenditures to increase sales are dramatic namely, for building another store. On the other hand, Amazons supporting facilities are infinitely scalable at very low incremental costs.

The facilitating goods for both stores are similar, except Amazon asks much more of its customers. Both must have books for the consumer to buy. While each sells other things, bookselling is the key business driver. One big point of differentiation is that Amazon customers must possess a very important facilitating good a computer with Internet access. A potential customer without a computer and Internet access cannot visit Amazon.

The explicit services provided by both Amazon and B&N are similar. At the most basic level they both sell books at competitive prices. However, Amazon offers convenience and customized interaction. B&N offers a pleasant atmosphere, helpful sales personnel, and, in some cases, a coffee bar.

Amazons implicit service includes anytime shopping convenience and customized pages for customers that help create a sense of community. In fact, most experts feel that it was this implicit feeling of community that was responsible for Amazons early success. Amazon has successfully kept this community feeling while growing exponentially owing to its ability for mass customization. This is an advantage over the traditional retailers where only the most regular customers are known and employee turnover makes long-term customer relationships even more unlikely. B&Ns implicit service is the relaxing ambiance created for customers. The use of coffee bars contributes to a relaxed feeling that many consumers enjoy when just browsing through the bookstore.

Advantages and Disadvantages of OnLine and Traditional Shopping

There are definite advantages and disadvantages for each type of purchasing as shown in Exhibit II. Online shopping has the major advantage of convenience. Customers can access the site from home, work, or wherever they have a computer. In addition, they are not bound to traditional hours of operation. If they cannot sleep, for example, they can make a purchase at 3 am when traditional retailers are closed. Online shopping also saves time for customers. They do not have to get in their car to drive to a physical store to purchase an item. They can visit a website and purchase an item in a matter of seconds.

EXHIBIT II: On-Line versus Traditional Shopping

OnlineTraditional

Advantages Convenience

Saves time

Customization

Bulk orders

Hard to find items

Anonymity Experiential

Exposure to new, unfamiliar items

Ability for trial or inspection

Disadvantages Need computer

Need Internet access

Shipping fees

Loss of control

Security

Anonymity Time

Lines

Impulse buying

Out-of-stock/hard-to-find items

Online shopping allows businesses to track a customers purchasing habits and to create customized suggestions for each individual customer. Finally, online stores do not have the inventory constraints of some physical stores so customers can purchase larger quantities of a single item more easily. For example, a salesperson that is planning a presentation to 50 people might have to visit several brick-and-mortar stores to get enough copies of a particular item to give to the participants.

Online purchasing, however, does have some serious disadvantages for the customer. First, a computer with Internet access is required. This is becoming less of an issue as the price of Internet/PCs decreases, but it still is an additional expense that is not incurred in traditional shopping channels. All physical items purchased online incur shipping charges. Often these are less expensive than what a consumer would pay in sales tax at a traditional retailer, but they can be high for heavy or bulky items. The customer has less control of the entire purchase. There is no physical person to deal with if things go wrong. A well-publicized area where many Internet retailers fell short this past Christmas season was in dealing with returns from customers. Finally, there are the security issues that people must deal with on the Internet. This ranges from protection of credit card information to the need to give up personal data to allow on-line retailers such as Amazon to customize its product to individual customers.

The first and foremost advantage that a customer has at traditional physical stores is the experience that can be created upon entry to the establishment. We know that music and design elements can influence a customers perception of an establishment. In addition, brick-and-mortar stores can display new items prominently and draw the customers attention. Finally, items can be inspected and even tried on or test-driven at a physical store. No matter how wonderful the Internet may be, shopping for shoes might be a crapshoot if you do not have the opportunity to try on a pair before purchase.

The disadvantages of shopping at a traditional brick-and-mortar store involve the effort and time necessary to do the shopping. This could mean spending an entire day at the mall or searching from store to store for a hard-to-find item. Waiting in lines for service or purchase contributes to the shopping time, especially at certain high seasons or peak hours. Physical stores often need to control inventory tightly to remain profitable. Many times an item will be out of stock and have to be shipped from another store or backordered, which increases the customers time and effort. Finally, physical retailers are masters of creating the impulse purchase. Grocery stores make you walk through the entire store to get those items that many people just want to pick up quickly. This causes shoppers to notice other items and purchase them on impulse.

2. Will Amazon.com continue to be successful against click- and- mortar competitors, such as Barnes & Noble?Click-and-mortar companies have a sizable advantage over Internet pure-plays. They have the ability to leverage their physical presence to drive traffic to their site. However, in an Internet world where brand is everything, Amazon has the upper hand. It has positioned itself to be virtually synonymous with the Internet and e-commerce. When Amazon launched its site in 1995, the market had no preconceived notions about the company or the products it would be selling. Its foresight in choosing a name has proven valuable because it no longer is just a peddler of books. Barnes and Noble, on the contrary, will always be known as a bookstore, which might hamper its opportunity to diversify into other markets.

Amazon has chosen a prudent strategy to lead the Internet economy in the customer service arena. Its position at the forefront of consumer care affords it the latitude to survive mistakes that otherwise would bury a potential rival. Barnes and Noble does not share a similar luxury online because of it has had to play a catch-up role.

Amazon can utilize the power of its brand name to sell a myriad of products effectively. In addition, its CRM approach to proactively cross-sell products based on an individuals propensity to buy will increase its profitability. This look-alike sales strategy has proven its effectiveness in other industries and should enable Amazon to leverage the power of its diverse product offering. After all, a company only has so many opportunities to cross-sell a book.Several service winners, including its 1-Click technology and its DWIM search engine, allow Amazon to be one of the recognized customer service leaders on the web. It also benefits by encouraging its customers to actively participate in the shopping experience and by forming strong partnerships with complementary vendors such as Yahoo.

4. Is Amazon.com a model for the future of retailing?

Amazon.com definitely is a model for future retailing for one primary reason: the company listens to its customers and alters its service package real-time as a result of this feedback loop. A quick rebuttal to this argument might be Amazons lack of profits. However, high levels of customer service and customer retention techniques might drive revenues through the rough start-up period, which Amazon.com has definitely succeeded in doing so far. There are numerous reasons to believe Amazon will be profitable in the future. First, it has very strong brand equity. Amazon has become the Nordstroms of the Internet world. It is the gold standard of service, which every future Internet retailer must match or risk falling short of customer expectations. Second, this strong brand equity has led to a loyal user base, including a current estimated repeat customer rate of 73 percent. It is no secret that the lifetime value of a customer is tremendous. Amazon has recognized this and is poised to reap major profits from its current user base. Eventually, Amazon will no longer be in a pure market share drive. This will allow it to lower its marketing expenditures and reap the lifetime customer profits.

The reasons Amazon has established itself as the future, retailing model include (1) customer-centric process design from inception, (2) full utilization of information technology to enhance the service delivery, (3) and a unique and continually evolving service package. The Internet empowers the buyer so retailers that are unable to perform well in these three areas will fail miserably in the Internet retail space.

Jeffrey Bezos vision for Amazon took an entire year to develop, which in Internet time is an eternity. As speed-to-market is the only rule, Bezos demonstrated his customer-centric focus by his bet to take more time to develop the best product for the customer that was friendly and very easy to use. This bet early on clearly established one of Amazons founding principles customer focus. This was further demonstrated through its decision to ensure minimal customer dissatisfaction this past Christmas season. Amazon stockpiled inventory so customers would not be dissatisfied when items were out of stock. This eventually forced it to write down $39 million, but it was a hedge to ensure its customer service was 5-star.

Utilization of information technology to provide the service delivery process is Amazons strength. It has been credited with specific Internet innovations that include 1-Click (purchase processing), customer wish lists, personalized recommendations for each customer, ability to distinguish between personal and gift purchases, and site customization to focus on each customers preferences. Amazon is one of the best companies at benefiting from the utilization of its information technology and customer-specific data to generate additional sales.

Finally, Amazons approach has created a give the customer what he/she wants or lose the business mentality. The customer can locate and purchase a good with only a click of a mouse. Amazon.com has definitely put the rest of the retail industry on its ear in terms of service levels and service packages and it has signaled the market that this is only the beginning!

CASE: EVOLUTION OF B2C E-COMMERCE IN JAPAN1. What features of the 7-Eleven Japan distribution system illustrate the Value Net Integrator E-Business model?The Value Net Integrator coordinates activities across the value net by gathering, synthesizing, and distributing information. Figure 5.2 illustrates all of these functions as performed by 7-Eleven.

2. Does the 7-Eleven Japan distribution system exhibit scalability economics?The ability to consolidate goods ordered by different customers and make delivery on established routes to Konbinis exhibits scalability because each additional order represents negligible variable costs of shipping and handling.

3. How does the 7-Eleven example of B2C E-commerce in Japan illustrate the impact of culture on service system design?Culture (i.e., desire to pay with cash), geography (i.e., population density speeds delivery), and commuting (i.e., use of trains with access to convenience stores in stations) all had an effect on the design.

4. Will the 7-Eleven Konbini and Mobile system be adopted in the United States?

The United States might eventually reach an equally high penetration of wireless devices and acquire an abundant number of content providers and e-tailers that target mobile users. It is hard to imagine, however, that people in the U.S. would spend at least one hour daily looking at their cellular phones, a phenomenon commonly seen on commuter trains in Japan. The legacy effect of excellent landline telephone service in the United States will delay the rapid adoption of M-commerce as witnessed in other countries.

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