In what ways does e-business create value for a business organisation on the example of Tesco
Although in a value chain key activities of the firm are represented in a following way: inbound logistics – operations – outbound logistics – marketing and sales – after-sales service, with online retailing the pull factors are stronger than the push ones, because in a way the customers themselves trigger the sequence of firm’s activities, they rather demand customized order-based approach than more conventional one. But using the e-business initiatives across all the value chain identifies the key cost drivers in each link of it.
Generally there are 2 directions in this process – the elimination of physical processes or making them more cost-effective (Porter, 2001). Outbound logistics In case of online shopping these activities are closely bound together, outbound logistics is an internal operation it becomes crucial in customer perception of service performed. In the early times of internet shopping Tesco concentrated the attention on optimizing the processes in physical movements of the goods instead of heavily investing in building warehouses.
Basically they built an effective delivering system instead, picking, packing and dispatching orders in local Tesco’s stores, each of them having several vans. The advantage is that customers are able to arrange more convenient delivery times, because smaller vans are covering shorter distances. The optimizing initiatives included for example managing vehicle loading, avoiding inefficient empty travelling for the long distances – the problem that pure-play e-tailers had later, uncapable to process the rising demand.
Tesco was able to cope with such problem as at the beginning the demand was quite low, with an opportunity to grow as a service extension in their case. Besides at the early stage they may have attracted the customers from other competing supermarkets. Ultimately they were able to gradually expand their model while continuously updating it – faster anyway than competitors who had to create distribution systems from scratch (Child 2002).
While big centralized warehouses offer their own advantages of scale, it is rather dubious and risky in case of online shopping as the customer behaviour resulting in particular sales volume for different categories can be determined by the other patterns. Still the centralized warehouse remains on agenda, but at the moment the stores can endure the increase in sales up to 50 %, while building a central unit can be a challenge as it should be close to consumption which may cause a problem in speed of delivery (for example, London).
Finally Tesco was able to set a task to deliver the goods within 2 hours slot with an opportunity to choose the preferred time over a seven-day period, implementing real-time processing of orders. Still there are other difficulties – a possibility to arrive while no one is at home. The consistent system of customer notification should be developed, still not to be a nuisance.
The other tool Tesco is using to increase the accuracy and speed of order processing is the usage of electronic picking lists, as opposed to paper lists, which sometimes resulted in errors, whereas with electronic picking via hand-held scanner allows to avoid them (Summerour 1999). When an order is received from the Tesco’s website, it is sent to the server computer at the store nearest the customer’s home. The order is first assigned to the van that is to deliver the goods and then are fed through a computer which provides the least time-consuming route around the store for the pickers and calculates the best delivery route for the driver.
While company after company claimed the low asset intensity of doing business on-line to discover that inventory, warehouses, and other investments were necessary to provide value to customers Tesco made the most of its assets. Sales/customer service As a general e-commerce rule the buying behaviour of the customer is not determined by shelving/replenishment capacity at the physical store and its outlay, location along with point-of-sales promotions, sales staff.
So-called customer dwell time and browsing behaviour meaning purchasing impulse additional items influenced by the store ambiance wouldn’t apply either. So in case of online retailing the conventional notion of ‘total shopping is not relevant, but comparing to other shops grocery retailers are most likely associated with the one, because people tend to avoid hassle while shopping for convenience items comparing to, say, clothing shops. However, they may find pleasure in selecting meat, cheese etc from specialist shops.
What that is beneficial for internet shopping that people will less hesitate to avoid in-store congestion, queues, carrying bags, parking problems etc. This is particularly critical in busy time of the year – last Christmas online sales accounted for 7 % of overall retail spending over 2 months period. During Christmas period such sectors as electrical consumer goods and alcohol performed very impressively (The Register, 20th January 2004). Another boom time happened in that remarkably hot July when people ordered large quantities of soft drinks, beers and ice packs, cooking utensils and tomato ketchup.
More and more customers make their orders at night, not only at peak hours when they finish their work, eliminating therefore stressfull shopping. It can be said that e-tailers target so-called cash-rich time-poor consumers or young professionals – research has showed that online customers typically spend more. Besides online shopping is usually 4 times faster even for novices. And there are opinions that those who tried it once won’t be back. Another important figure is that among Tesco online shoppers 40 % are new customers, proving that online shopping attracts not only existing customers.
Another consideration is that at a physical store the customers are faced with what they see directly at the shop – not all the assortment possible as something may be out of stock or different format of the store can apply – they are made to buy what is available. On the contrary pure-play retailers have to analyze the demand and to predict the sales before actual investment and building of the automated warehouses along with devising the distribution system and supply chain scheduling that result in lots of efforts and expenses.
But such e-tailers as Tesco should be aware of the huge customers’ frustration over the substitution of products which were not in stock and consider their returns policy with online customers. So some different patterns may apply. It is still rather a controversial issue whether the customers are prepared to buy fresh produce online or not. Some findings suggest that as a percentage of the shopping basket, more fresh food is bought through the home shopping system than in a usual store.
But some grocers argue that people prefer to purchase online bulky non-perishable convenience items and commodities while shopping for meat, fruit and vegetables in ordinary shops as it is something that people want to touch and select. Still buying online they can be sure that at least less people if none at all touched these products. As commodities are low margin items, to cater to the more sophisticated tastes Tesco is aiming to install the custom-made software at all delicatessen, butcher, fish and bakery counters.
Such factors as fees for delivery may also have an influence while being currently very competitive, not covering the costs of the service. With the possible demise of high street shopping and legislation restricted out-of-town formats these fees represent something similar to the salespeople commission at the ordinary shop, while some people argue that out-of-town shops may charge for entry. We can spot similar trends in airline business – with Easyjet, which has no physical ticket office, and charges more for telephone sales.
Once people had an experience of buying online, overcoming their uncomfortable feelings, they are not going to use anything else, seduced by the low prices and ease. Orders made online provide an opportunity to capture all the data about the customer automatically, making it easier to predict the demand and devise profiling. Additional value-adding services may be provided such as recipes and favourite items tailored to the customer. There are a lot of opportunities in this field, providing the content to the customers, making them more loyal.
Some observers argue that such customization and information rich customization may lead to charging premium for the services once it would appear difficult to switch to another supermarket. Another trend which Tesco is following is diversifying from offering broadband and mobile phones, TVs to legal services, DVDs, books, travelling, musical instruments online. It undertakes strategic partnership, for example with Lastminute. com, eDiets. com, opens a page for kids and parents etc. The contract has been signed for posting the books with a private company.
At this stage Tesco is competing with other pure online retailers and content portals. Currently Tesco relies on user-friendly model, making the website look like a physical store, which is convenient both for first users and repeat users and undertakes accessibility initiatives for disabled/elderly customers (Hughes 2004). Customer service is a primary objective for the home shopping team. The site has frequently asked questions section and uses lengthy descriptions for its products as customers totally rely on them.
Apart from remembering shopping list the software for offline shopping is offered at no extra cost – a popular feature for those using the Internet from home, they are able to download information from the site, and then browse it offline before going back online to make their purchase. So Tesco’s case is a good example of convergence of several distribution channels, avoiding its conflict – it is basically built one on another and same procedures apply, extending and complementing the existing service.
Same services mix is used, same prices, bonus points and multi-save options. That represents a consistent strategy in the integrated channel management including information exchange, warranty, claims, automated contract terms and agreements and ultimately doesn’t undermine the brand equity. The company is responsible for the whole thing, the customer is not treated as just a chain link, ending the distribution channel.
While the synergy can be particularly evident with other non-food retailers when customers use either Internet or salespeople to research the product and then make their transaction using another medium, it works with Tesco in some as way, because Tesco has high brand recognition and people are just generally aware of what they can find in their store and consequently on their website. Still other high street retailers such as WHSmith, BHS have not found their place online, treating their website as a static business brochure not like a real business tool.
Anyway there is challenge for a brick-and-mortar retailer to integrate its offline and online channels not to allow the pure-play retailers to be a parasite on its shop. Operations & Inbound Logistics & Marketing Operations are performed in such a manner which is both beneficial for the company’s suppliers and marketing function, providing them the essential information. The company’s focus on operations enabled development of certain operational skills and boosted efficiency and productivity levels. For example, EPOS system is used in every Tesco store.
Though it is not a novelty in the retailing business, it can be widely used to share information with suppliers especially using the Internet to perform automatic stock replenishment, transmitting regularly information to distribution center for picking and delivery. Deliveries can be scheduled to avoid congestion. The benefits of such systems are obvious: it provides access to real-time information about sales and available stock; improves efficiency and accuracy, makes the bargain/promotional transactions easier and allows sales-based ordering which results in less stock and freshness of goods, increasing the turnover.
Self scanning facilities are being tested as well, some of them allowing scanning the products while browsing the store. Tesco had an initiative to share the information with 200 key suppliers, then with 2000 of them embracing the small firms, who are not particularly e-commerce savvy. That became possible by using business-to-business trading Internet system helping to react quickly to consumer demand and speed up bringing products to market.
Same principle as with end consumers applies – avoiding the hassle with phone, fax, email or post (The Evening Standard. December 13th, 2000). This year Tesco was going to roll out radio frequency identification technology across its supply chain infrastructure. By use of radio barcodes it will be possible to improve on-shelf availability. It is planned to use radio barcodes first on high-value goods and then to expand the technology across the entire supply chain over the next few years.
The chips will be attached to pallets containing higher value electrical items like hairdryers and store supply-chain information and should give Tesco a clearer view of its inventory. The chips will be read automatically once the cases leave the warehouse and again as they go into stores. Tesco is running a trial of smart chips that warn staff when products are past their sell-by date or being shoplifted. Radio frequency networks in all its stores enable to communicate with central systems via a wide area network.
Tesco has improved its in-store stock control after providing staff with web-enabled handheld computers. The retailer purchased wireless devices to make sure shelves are not empty and ensure that pricing is accurate and competitive. EPOS gives vast data for analysis, as it is linked to loyalty cards as well. The effect of promotions, new pricing policy, new products, new package or even new layout can be monitored against different factors including competitors combining geodemographical and lifestyle data from loyalty cards, trends identified and new marketing campaigns devised.
CRM is the next step of this process, especially bearing in mind that 20 % of consumers bring 80 % of revenue. The loyalty scheme is made attractive for customers by partnerships with other stakeholders – Marriot hotels, car rental company etc. The gathered intelligence can be made operational through employing data mining techniques and expert systems. That’s another challenge of using these systems – once you have the data it is difficult and costly to store and analyze it.
Tesco launched a special subsidiary for this purpose, bearing in mind how important is to keep track of their customers. Eventually such systems facilitate crucial decision-making. Apart from introducing new applications and technologies with the increasing importance to be at the cutting edge with its online operations there is a task to keep up-to-date with hardware and software. If to compare bricks-and-mortar operations of the store with the benefits of online based ones around half of a shop’s revenue is consumed by operating costs.
Much of these costs is associated with floor space, labour and display stock – variable costs that in the internet-model are either removed or directly borne by the consumer. Virtual products stand in for physical products, reducing inventory and obsolescence costs. The customers themselves spend their time and their money on internet service costs to do tasks traditionally done by shops. As an example with banking shows transaction costs are cut by 90 per cent by getting the customers to key in and check information via the web instead of asking a teller to do it (Roper 2004).
Conclusions Underpinning Tesco’s success is an obsession with operational efficiency and productivity gains, which the company uses to keep prices low or to improve service rather than to increase its operating margins (Child 2002). That enabled Tesco to develop its key value-adding activities and remain on the cutting edge comparing with other competitors while moving further its value chain across the boundaries of the organisation. Their firm online strategy since 1996 allowed them to develop a distinctive competitive advantage over other players in the industry.
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