Smart cookies - Channel hopping - E-commerce confronts established market leaders with 'channel conflict'. What is it and how can it be managed?
What is channel conflict?
The battle between new and old ways of reaching customers. New channels are lower-cost or more effective at capturing and keeping customers They are first introduced by new competitors, who grow rapidly and take the market share from established firms. Established firms are then torn between the need to respond and the need to protect current channels and profits. They agonise about cannibalisation - but if they don't eat, they will be eaten.
Give me some examples of channels and conflict.
In retailing, the shift from small high-street stores to large out-of-town superstores. Toys R Us and Ikea decimated the high street. High-street retailers such as UK grocery chains Tesco and Sainsbury responded aggressively and survived and prospered - at least for a while.
In financial services, the shift from high-cost branches and agents to call centres and direct marketing. This is led by new competitors such as Schwab in discount brokerage, and Direct Line in personal insurance.
The hottest channel conflict right now is e-commerce. The internet costs less than bricks-and-mortar branches, in-person sales forces, distributors and even direct marketing and call centres. It is better at delivering high-value, high-convenience and highly personalised customer care than an individual sales or service rep. And the speed and scope of impact is far greater: a good e-commerce site can be up and running in six months for around £3 million, with immediate global reach - unlike the national roll-out of superstores, or the build-up of a global distributor network.
How are businesses reacting to the e-commerce conflict?
So far, not well. Many are virtually absent from the online channel. Travel agencies are terrified of e-commerce, which will cannibalise their huge branch networks, while travel providers (airlines, hotels, tour operators) push hard to cut out agencies by selling direct over their own web sites.
Bookstore Barnes & Noble's response to Amazon exhibited classic channel conflict problems: initial denial of Amazon's significance, then a half-hearted response with a poor online offering and, only recently, an acknowledgement and (belated) commitment to real online competition.
A random trawl of traditional UK financial brands throws up poor sites which are often no more than brochures. Even leaders in direct marketing or call-centre businesses such as First Direct are showing little leadership in e-commerce.
There must be some positive exceptions?
Yes. In financial services, after initial caution, Schwab embraced e-commerce and reverse-engineered its whole business (including its pricing), putting e-commerce at its core. Its soaring market cap recently overtook Merrill Lynch's, forcing Merrill to announce its late conversion to e-commerce.
Dell uses the internet as a natural extension of its original PC direct marketing and phone sales. The web site plus phone combination is hard to beat.
But the leading models are mainly new entrants, or separate divisions of established firms. In travel, Microsoft/Expedia, Sabre/ Travelocity and Preview. In books and retailing, Amazon (although Wal-Mart is about to make a major e-commerce launch). In financial services, E-Trade in brokerage and First-E in online banking. Prudential's Egg business now only accepts customer applications online and is introducing higher interest rate accounts with separate charges for those using a back-up telephone service.
How should businesses exploit e-commerce and manage channel conflict?
First, recognise the inevitability and scale of the impact. Address it proactively and aggressively, within a specified time frame.
Second, separate the development of the new channel from the current core business. The e-commerce team must focus on the new opportunity, not on juggling it with the interests of the current organisation.
Third, pursue the logic of the new channel to its conclusion. E-commerce offers lower cost-to-serve, so pricing should be different, and lower than old channels. It also creates the opportunity for delivering high value at low cost - so services and information, previously charged for, should be offered free to capture customers.
Fourth, act faster and with greater flexibility. Investment decisions that used to take six months must be taken in six days, with less analysis.
And work with more third-party partners (in technology, marketing and fulfilment), rather than doing it in-house.
E-commerce dining etiquette is simple and brutal: eat your own lunch - or be lunch.
Andrew Wileman is a strategy and organisation consultant; e-mail: firstname.lastname@example.org.