The ICDT Model: A Framework for e-business
Article by Anthony Leong © Copyright 1998
In order for companies to fully exploit the growing Internet 'marketspace', a framework is needed to aid in the design of their on-line business strategies. Businesses hoping to expand their activities onto the Internet are re-engineering or refining their products and services in order to take advantage of the new opportunities, as well as face the new challenges, of the medium.
The ICDT model (http://www.insead.fr), developed by Albert Angehrn at INSEAD, is a systematic approach to the analysis and classification of business-related Internet strategies. It serves as a basis for identifying how existing goods and services can be extended and redesigned to take advantage of the Internet, as well as suggesting the characteristics of new goods and services made possible through this new medium.
This model takes its name from the segmentation of the virtual 'marketspace' into four distinct areas:
- the Information Space
- the Communication Space
- the Distribution Space
- the Transaction Space
A firm's activities in some or all of these virtual marketspaces should be aimed at increasing overall profitability, which can be achieved either by increasing revenues:
- increasing the customer base (by reaching new customer segments or geographies)
- increasing the amount purchased by customers (through increased selection and new offerings)
- increasing the purchase frequency (by making re-purchase convenient or rewarding, or suggesting more usage occasions)
or decreasing costs:
- reducing new service/product development costs
- more effective/efficient promotional spending
- more effective/efficient inventory replenishment
- business reengineering
- greater capital efficiency/effectiveness.
Furthermore, these activities can be directed both outward and inward:
- Outward: In addition to serving the needs of customers, activities in any of the virtual marketspaces can also reach out to the other stakeholders of the firm, such as supply chain partners, investors, industry organizations, the media, and even prospective employees.
- Inward: Relationships within a company can also be strengthened via the virtual marketspaces, such as improving the movement of goods, services, and information within the firm.
Each of these new areas of activity created by the Internet will be examined in relation to the Web activities of your competitors, and hopefully this information will provide some direction for your company's own Internet strategy.
The Information Space
The Information Space consists of the channels by which companies can provide information about themselves, their products, and their services. The area of greatest activity for the Information Space is the World Wide Web, an area of the Internet in which companies can set up 'home pages' that allow global reach and the ability to provide rich information.
Turning Interest into Action
For consumers, the World Wide Web has provided a new efficient approach for gathering information and making comparisons between competing offerings. The key aim in exploiting the Information Space is to move prospective customers further along the sales cycle by converting interest into action. This can be done by:
- Providing the basic information that customers would need, such as product information, company contact information, areas that the company services, and what visitors can do at the site (such as on-line purchasing, modifying billing and invoice information, browsing the product catalog, etc.)
- Building up buyer confidence in the company, by having a professional-looking web site and providing information that will enhance the firm's credibility. Providing information such as a company history, a list of accolades or favourable write-ups in the media, a list of patents owned by the company, or even photographs of the company's facility and staff can go a long way in allaying customer fears of dealing with a fly-by-night operation.
- Providing information that will move visitors further along the sales cycle, such as contact information for the nearest real-world retailer, comparisons with competitive offerings, or third-party evaluations of the company's offering.
Though this is the simplest of Internet-based activities that a company can undertake, many companies have entered into the Information Space without any strategy, providing little more than electronic versions of their company brochures. There are numerous examples of web sites that fail to:
- build buyer confidence
- offer the basic information that visitors are looking for
- provide information that would help move the visitors further along the sales cycle
Content Isn't Just for Customers
However, the Information Space is not merely restricted to servicing the needs of customers and stimulating sales. The Information Space can also be used by a company to serve the needs of other stakeholders, such as:
- prospective employees
- supply chain partners
- the media
- the company's own employees
with content specifically tailored to their interests. Some examples of web-mediated initiatives for serving these other stakeholders include providing supply chain partners with a shipment status lookup application, or allowing investors to view the annual report on-line. While these activities may not necessarily increase a company's revenues, they certainly can help to reduce expenses and increase the responsiveness in serving these other stakeholders.
The Communication Space
The Communication Space allows for companies to exchange information with the various stakeholders in their business: their suppliers, customers, and strategic allies. Unlike the information provision activity in the Information Space, communication in the Communication Space can go both ways.
The Internet has allowed for high-speed and low-cost communication, unhindered by physical and geographical constraints, by the use of e-mail, Usenet discussion groups, and chat rooms. This new communication channel can be used for lobbying, influencing opinions, negotiating potential collaborations, and the creation of communities. However, in most organizations, this is an undeveloped area.
E-mail as a Communications Channel
The simplest use of the Communication Space is to allow customers to ask questions or provide feedback to a company, usually through e-mail, and not surprisingly, a majority of companies have implemented this. However, simply having an e-mail link for customers to use is not enough-- the company must be able to handle incoming e-mails and respond to them in a timely fashion.
To test the behind-the-scenes e-mail handling operations of each site, we sent an e-mail to each company, inquiring about the ability of the company to ship to Canada. Generally, the general guideline for e-mail turnaround is 48 hours.
Incoming e-mail must be treated like telephone messages, and responded to quickly, rather than like incoming postal mail. By ensuring that it is captured properly and answered in a timely manner, you are helping to ensure customer satisfaction. Many companies don't understand this, and waiting more than 48 hours can cause ill-will. In fact, the failure to respond to e-mail promptly is one of the single most common reasons for lost business and lost image over the Internet. In the very least, if it is not possible to provide a proper response in that time, a company should send a simple e-mail back to the customer stating that the query was received and when an answer should be expected.
Follow-on Marketing with Mailing Lists
The next step up for a company would be to proactively direct content on a regular basis to its customers. This can be done by asking visitors to subscribe to a mailing list that would provide them with updated content on a timely basis. This way, the company can maintain top-of-mind awareness in the potential customer, even if they never get around to visiting the site again.
Furthermore, with the right content, a company might be able to stimulate additional sales through follow-on marketing. So instead of spending money on postage to send out promotional mailings or circulars, some companies are sending out weekly e-mails outlining their new offerings and special promotions at considerably less expense.
In the Internet marketspace, the creation of on-line communities, where like-minded individuals can interact and exchange information, is another aspect of the Communication Space. Community creation can encourage visitors to return to a site more frequently, serve as a means of generating demand for a company's offerings, cultivate customer loyalty, and further reinforce a company's positioning as a destination site.
'Sticking' is what retail analysts call the creation of a community around a product in the real world. In creating such a community, visitors are encouraged to linger longer in a store and are provided with an incentive to return. In essence, creating a community makes a store a 'fun place to shop'. Examples in the real world would include:
- the Disney Store, a brightly decorated store with themed merchandise that offers in-store activities for kids and attractive offerings for their parents
- the Chapters chain of bookstores, where customers can peruse the store's offerings in comfortable chairs, look for hard-to-find books, or meet friends over coffee
- home improvement stores have also gotten into the creation of communities, by offering demonstrations and professional advice for would-be home renovators
The key to creating a community around a product in the virtual marketspace is to augment the customers' experience with the product, thereby encouraging them to return, which would hopefully drive further sales. For example, community-building activities can include:
- the creation of a knowledge base that will provide customers with sound advice to assist with decision-making (such as movie reviews or product-selection guides)
- providing information on new uses for products (such as providing recipes for a food product)
- providing forums that allow customers or other stakeholders to speak with one another (such as a 'household cleaning tips' exchange)
The value in a community lies not in the product itself. Instead, it lies in what the business can do to create new value for the customer by enriching the experiential aspects of the purchasing process, whether it be the provision of valued content on the products, or offering a forum where customers can speak with other like-minded individuals.
The Distribution Space
The Distribution Space is a new distribution channel which companies can use for their goods and services, especially those goods and services without a physical component, such as digitizable media (such as books, music, software, etc.) and services (consulting, technical support, education, financial services, etc.). Like the Information Space and Communication Space, activities in the Distribution Space can be directed both outward (to customers, the media, investors, and supply chain partners) and inward (to the company's own employees).
The Transaction Space
The majority of web sites today are what could be termed 'brochureware'. A brochureware site essentially provides little more than product information with a phone number or address for contact-- electronic versions of the company's real-world brochures.
Completing the Sales Cycle On-line
However, having a 'brochureware' web site does not necessarily mean that potential clients will follow through by making an inquiry about a company's products. Web-based businesses must turn interest into action as quickly as possible, so as to avoid the potential customer's demand from 'leaking away'. The Virtual Transaction Space provides a means of capturing this demand via new channels by which companies can carry out business transactions with their customers-- orders, invoices, and payments.
The Pitfalls of On-line Sales
Unfortunately, conducting on-line sales with your customers does raise two issues for companies:
Because of the global reach of the World Wide Web, some firms are finding interest from customers in other countries, and companies must decide which geographic areas they will service. Even if the retailer restricts the fulfillment of customer orders to a specific geographic area, such as within North America, there are still logistical issues that must be resolved.
Selling directly to the consumer involves sending numerous single or small shipments to numerous customers, and not many retailers can do this economically, let alone manage it. Furthermore, the addition of the shipping charges will decrease the value proposition of a retailer's offerings, and may even make direct sales unviable, especially for lower-value items.
- Channel Conflict
The other pitfall of selling directly to consumers is the risk of channel conflict, which will vary depending on the structure of the retailer network. By opening up a new direct channel, a company may alienate its existing retail outlets by directly competing with them. For example, Compaq faced heavy resistance from its network of retailers when it proposed the creation of a direct sales channel.
Before proceeding, a retailer should weigh the benefits of selling directly against the possible backlash from its real-world network. Some tactics being used to minimize channel conflict would include selling items that are not available through normal retail channels, or only selling directly in geographical areas where there is currently no retailer coverage.
Barriers to On-line Sales
Even if a company manages to resolve the logistical issues and can alleviate the possibility of channel conflict, simply having a few available items and a 'for sale' sign does not guarantee that visitors will actually place orders on-line. Research has found that on-line shoppers are a cautious group, and their reasons for not engaging in on-line transactions include:
- Security: According to a study conducted by Ernst & Young in 1998, 70% of web purchasers felt uncomfortable with sending their credit card number over the Internet. Another study, conducted by E-Valuations, found that 94% of web buyers with either a medium-high or low-medium propensity to buy would purchase more on-line if protection from credit card fraud was guaranteed. Despite the protection afforded by SSL encryption and the SET credit card protocol, it is the consumers' perception of on-line security that Internet retailers will have the most difficult time overcoming.
- Purchase Risk: Another barrier to the acceptance of Internet transactions is the fact that consumers cannot 'see' the merchandise, and therefore are unable to judge product quality. A 1997 survey conducted by America's Research Group asked several consumers about the degree of trust they had for shopping at a store versus shopping at a web site, and the consumers responded with almost a 10:1 preference of shopping in a 'real' store.
- Privacy: Privacy is another concern of potential Internet consumers. A GVU World Wide Survey conducted in 1998 found that 26.9% of consumers were reluctant to make on-line purchases because they did not believe that the information that they provided would be kept private.
- Convenience: Convenience is another barrier to on-line shopping. 22.6% of those questioned in the 1998 GVU World Wide Web survey said that they could find what they wanted more easily or quickly at a local retail outlet, sidestepping the lag time between order placement and the delivery of the merchandise.
- Old Habits: The entrenched shopping habits of consumers are another set of obstacles to on-line consumer transactions. An America's Research Group survey found that 14.9% of consumers always buy in stores, 11.6% like to pay cash, and 11.1% simply enjoy shopping too much. As bandwidth increases and on-line buying becomes less of a hassle, these percentages should go down, however, much like the experience of banks with the roll-out of automatic tellers, there will always be a small minority who will insist on face-to-face shopping experiences.
e-retailing Best Practices
In order to overcome consumer reluctance in making use of the Transaction Space, a number of web retailers have come up with a number of best practices:
- Strong BrandingBranding a retail concept in the real world is all about creating an image, feeling, or attitude within a consumer's mind. This helps create a powerful bond between the retailer and the consumer, favorably influencing purchase behavior.
On the Internet, with consumers unable to 'see' or 'touch' the merchandise they are buying, consumers tend to purchase items that are standardized so that they know what to expect. For example, on-line clothing retailers are finding that the best-selling clothing items on the Internet are recognizable basics such as jeans, khakis, and T-shirts. A brand is one of the few means by which a consumer can judge the consistency and quality of an on-line offering-- a Compaq computer is a Compaq computer, whereas a computer from XYZ Corporation would be a more nebulous entity.
- Affiliation with an Established High-Traffic SiteInternet retailers are ensuring high visibility for their offerings by quickly snapping up prime real estate on the shopping channels of popular on-line services (such as AOL and Compuserve), search engines (such as Yahoo! and Lycos), and on-line communities (such as Netscape or Microsoft Network). These established high-traffic sites, also referred to as portals, serve as the entry points for many Internet consumers and are used by the majority of both new and experienced users as navigational aids.
Not only do these high-profile sites aggregate Internet traffic for retailers, thereby providing a higher concentration of 'eyeballs', but from the consumer's perspective, they serve as a form of qualification, a reassurance of the retailer's legitimacy.
- Real-world Promotional ProgramsIn 1997, the IBM World Avenue Mall, which housed many on-line storefronts, closed its doors due to lower-than-anticipated traffic. One of the reasons offered for the cybermall's failure was inadequate promotion of the service in IBM's print and television ads. Likewise, in order for an Internet retailer to stand out from the millions of web sites, and reach potential customers who may not use the Internet on a regular basis, they must use real world promotional programs to increase their visibility.
Becoming 'real wired' involves placing the web address on:
- every piece of advertising or promotional copy that is produced, as business cards, annual reports, advertisements, and brochures
- every piece of property owned by the retailer (such as buildings and delivery vehicles)
- direct mail pieces to existing and potential customers notifying them of the web presence and what they can do there
- Reduce the Cost of Acquiring CustomersSeveral demand generation models have emerged on the World Wide Web, with the most popular being banner ads, portal affiliations, and syndicated selling.
- Banner ads are clickable graphic links that take the Internet user to another web site, and this ad space is sold at a fixed monthly fee.
- Portal affiliations would involve an Internet retailer 'renting' space on high-traffic web sites, such as popular on-line subscription services (such as AOL or Prodigy), search engines (such as Yahoo! or Lycos), and Internet communities (such as Netscape or Microsoft Network).
- Syndicated selling would involve an Internet retailer signing on 'affiliate' web sites that would refer its visitors to the retailer's web site. In exchange, the affiliate receives a commission for referring the customer, usually 5-15% of gross referred sales.
Among all the demand generation models in current use, syndicated selling has been found to be the most inexpensive way of acquiring new customers, since advertisers are only paying for click-throughs that result in actual sales. An analysis conducted by eToys found that a $40 sale on their web site cost only $10 under their syndicated selling program, whereas the same sale triggered by a banner ad would cost $20 or more.
- Easier Site NavigationIn a recent usability study of the nine most highly-regarded web sites (including those of Fidelity, Disney, and Travelocity), most of the 70 test users could not find specific information they were instructed to find a majority of the time. The best retailing web sites make the selection and ordering processes more intuitive by mirroring the customer's 'purchasing logic'.
In a world where consumers suffer from computer glitches, browser crashes, and slow modem speeds, it is important to make the on-line shopping experience as hassle-free as possible. Some strategies that have assisted retailers in making their web sites more user-friendly include:
- minimizing the use of frames, animation, and Java applets to reduce both download times and browser incompatibilities
- reducing the number of page views a customer has to navigate through in order to find what they are looking for
- Reduce First-time Purchase RiskMany first-time buyers 'test the waters' by submitting a small initial order, which they believe to be 'safer'. The size of this initial order will typically range from 10 to 30% of the average order size, depending on the brand strength of the product being purchased. By building up consumer trust quickly, a retailer can convince more browsers to make purchases, and increase the average order sizes for its newest customers. Strategies for building up this trust and lowering the customer's perception of risk in the ordering process include:
- Offering a full refund policy
- Offering a discount or extra value to first-time buyers, such as the offer for free shipping on initial orders from Barnes and Noble
- Enticing customers to place larger orders by offering discounts or free shipping, such as the free shipping offered by The Gap for orders over $50
- Offering branded merchandise such that the customer knows exactly what they will receive-- the most popular items at The Gap On-line store are recognizable basics such as jeans, khakis, and T-shirts.
- Promoting the security of the site by displaying security pledges from third-party auditors (such as TRUSTe or the recently introduced WebTrust program, launched by the Canadian Institute of Chartered Accountants).
- For customers that are still wary of sending their credit card number over the Internet, offer a 1-800 number for customers to call
- Offering a policy that protects customers from fraudulent charges, such as the On-line Secure Shopping Guarantee offered by Dell Computer that reimburses customers for credit card liability charges up to $50 if any fraudulent charges result from a purchase at Dell's web site
- Reduce the Cost of Servicing Customers
Internet retailers have lower costs associated with maintaining a physical infrastructure, labor, and carrying inventory than their real-world counterparts. For example, rent and depreciation represent less than 4% of Amazon's sales, compared to 13% for the traditional bookstore. Instead, the majority of on-line retailing costs, besides the cost of acquiring customers, come from servicing customer orders, which include order processing, handling, and shipping.
- Offer Valuable Ordering ApplicationsSome on-line retailers are increasing the ease by which customers can purchase products from their web sites by offering time-saving on-line applications. Though some of these on-line shopping applications are of dubious value, such as the 'virtual dressing room' at The Gap's web site, there are several useful ones. One would be the gift-giving assistance tool at Spree.com where customers can enter the specifications of the gift recipient (sex, age, occasion, price range, etc.) and are then provided with several alternatives.
- Quick Order ProcessingIn addition to site navigation, another area that many web sites perform poorly in is the efficiency by which customers can pay for their purchases. In the real world, if customers spend too long lining up to pay for their purchases, they will either abandon their purchases or make a conscious decision to shop somewhere else in the future. A survey conducted by Forrester Research found that Internet customers currently abandon up to two-thirds of 'virtual shopping baskets', and they suggest that the number of abandoned baskets should be no more than 5-10%.
The best Internet retailers have implemented procedures that streamline the ordering process, such as British grocer FoodFerry's on-line grocery shopping service that allows customers to save baskets of the groceries they buy regularly, making repeat purchasing of staples more convenient.
- Providing Order Status InformationAn administrative task that many on-line retailers must deal with are queries from customers regarding the status of their order-- answering questions such as 'has it been shipped?', 'where is it?', and 'when is it due to arrive?' For a retailer processing hundreds of orders per day, this can become a time-consuming burden.
By having a self-service feature that allows customers to check on the status of their order, or an automated process by which e-mail reminders are sent to customers apprising them of order status, not only are customer concerns allayed, but retailers are able to reduce the amount of administrative overhead.
- Develop Incentives for Repeat PurchasesIn the real world, it is far less expensive to convince existing customers to buy more, than it is to attract new customers. This same rule applies to the domain of Internet retailing. Currently, Amazon finds that 58% of their orders come from existing customers. Not only is it less time-consuming to service these customers (i.e. they know what to expect, they need less assistance, they can be processed via 'one-click' ordering), but research has found that repeat customers browsing a retailer's storefront are five times more likely to make a purchase than a visitor who has never purchased anything before.
By converting more first-time purchasers into repeat buyers, the on-line retailer can achieve higher growth rates at less expense than retailers who only focus on getting new customers to their web site. Incentives to increase repeat purchases include excellent customer service, loyalty programs, one-to-one marketing, and outbound marketing programs.
On-line Transactions Beyond Ordering and Sales
The Transaction Space is not merely limited to the automation of sales or order-processing operations. Web-based activities can also impact on supplementary activities or back-end operations, for stakeholders both outside and within the confines of a firm. The use of the Transaction Space in this respect would include such as customer account management activities, invoicing, order tracking, and payment functions.
Collaborating with Supply Chain Partners On-line
Finally, the Transaction Space is also being used as a tool for coordinating the movement of products along the supply chain. The adoption of this business-to-business application is being driven by the ability to lower purchasing costs, reduce inventories, cut down cycle times, improve customer service, lower sales/marketing costs, and create new sales opportunities. While this type of coordination has traditionally been done with manual order management processes, and more recently with EDI, the Internet is providing a more cost-effective and more easily adaptable vehicle for collaboration.