From competition to cooperation: E-tailing's ... - Science Direct

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Fram, Eugene H. 2002. E-commerce survivors: Finding value among broken ... Porter, Michael E. 2001. Strategy and the Internet. Harvard Busi- ness Review ...
From competition to cooperation: E-tailing’s integration with retailing Jim Carter Associate Professor of Computer Science, University of Saskatchewan, Saskatoon, Canada ([email protected])

Norman Sheehan Associate Professor of Accounting, University of Saskatchewan, Saskatoon, Canada ([email protected])

E-tailing business models and consumer expectations have evolved considerably since first burst on the scene in 1995. The coming generation of e-tailers will compete by offering consumers a seamless integration of online and offline shopping, which can be achieved through an integrated chain approach or an e-cooperative approach. The focus here is on how e–co-ops can be developed and managed. As more companies move toward the next generation, the Internet will finally fulfill its promise of changing the way we shop through the integration of time and space.

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lectronic commerce, particularly e-tailing, keeps evolving to better meet the needs of its intended users. The World Wide Web has placed consumers in control of the e-tail experience, making it easy for them to leave one site and go to another. To be successful, an etailer must entice a consumer to complete a sale and return for future transactions. However, to succeed in the future, e-tailers must continue to evolve, going beyond just the business-to-consumer (B2C) realm to include increasingly complex sets of related activities, such as business-to-business (B2B) interactions and integration with other operations. E-tailing has already evolved through three generations. It began with selling products and continued with increasing information exchange and matching products to customers. Now it is shifting toward integrating with the operations of physical stores to meet customer needs, a movement that involves providing individualized service in a highly complex environment. For such integration to happen, various elements of the retail/e-tail system must seamlessly interact with one another.

The past: Selling products in the first generation The focus of first-generation e-tailing systems is on selling products. Like many other first users of a new medium, these e-tailers often concentrate on replicating parts of their non-electronic businesses on the Web as easily as possible. They can be thought of as electronic catalog sales (what we label “buyer-seller systems”), electronic factory outlets (“producer-consumer systems”), or electronic big box retailers (“box mover systems”). The service they provide is often insufficient. Of the five business transaction activities identified by ISO (2002)—purchase planning, identification, negotiation, actualization, and post-purchase servicing—they concentrate on identifying the products/services to be purchased and the actualization of the purchase. The remaining transaction activities are poorly handled or not completed at all.


J. Carter & N. Sheehan / From competition to cooperation: E-tailing’s integration with retailing

Buyer-seller systems represent the simplest form of e-tailing. Much like traditional catalog shopping, they handle buyer needs that are directly related to purchases. But they do not address how the seller obtains or makes the products, nor how the buyer uses them. Both now and in the future, they can survive only if they sell a sufficiently differentiated product to a niche market. Current users of this model also face a significant threat from suppliers, who may decide to market directly to the end consumer. It is no longer feasible for new e-tailers to adopt this model, unless they have sole distribution rights for a product that is not available elsewhere on the Web. Ultimately, even these companies may risk losing customers if they do not grow beyond a simple buyer-seller model by offering more services. Producer-consumer systems link consumers directly with the producer of the desired product, eliminating the need for intermediaries. Similar to factory outlet stores, they are a special case of the buyer-seller model, focusing only on selling products. Advanced producer-consumer systems gain additional productivity by including supply-side management/just-in-time (JIT) activities along with their e-tailing operations (in a B2B2C manner). These e-tailers have a built-in cost advantage as long as there is a demand for their products. Although price leadership is important, product differentiation is still the key, because of the limited service provided. Only those that serve a small niche market with highly differentiated offerings—for example,, which concentrates on the CDs and bookings of Paddy Tutty, a Western Canadian folk singer specializing in Celtic music—will survive over the long run; the rest will either disappear or evolve. Early versions of various airline websites were based on a producer-consumer model. However, those sites and many others in the travel industry have since evolved to offer additional services to their customers. Box movers are an advanced form of buyer-seller that provide the convenience of one-stop shopping. They create value by aggregating a large number of products from several different suppliers. However, they are vulnerable to being squeezed out of the market by producer-consumer systems that provide lower prices or by physical big box retailers that provide more services. Typically stocking few of the items they sell, they prefer to order from suppliers on a JIT basis to meet specific customer orders. And they attain a high level of product aggregation by interacting with a large number of suppliers. Their inability to achieve price leadership, their lack of services, and their delivery delays put them at a disadvantage compared to more advanced e-tailing and/or physical big box retailers. Thus, only a few product-aggregating box movers will survive over the long run. Already, the most prolific, such as and CDNow, have moved to second-generation models or beyond.


The present: Matching products to consumers in the second generation Second generation e-tailing goes beyond sales-oriented systems to focus on matching products with consumer desires. This is accomplished using the Web’s potential for rich information exchanges, which are then used to identify the product(s) that may best suit customer needs. Custom manufacturing systems generally offer a base model that users can individualize by choosing from a set of product options. Customers have access to extensive facilities for visualizing products before placing their orders, as well as the ability to negotiate delivery schedules and other options that could result in variable pricing. This model combines the ultimate level of product differentiation with the ultimate in fulfilling the consumer’s product needs to achieve product value leadership. The main threat to such e-tailers is that a mass-produced product may also satisfy the consumer, who can get it cheaper and faster than a customized one. Shopping services are active electronic agents for consumers. Though often built on a box mover model, they do not simply act as passive agents for a fixed set of suppliers. Rather, they make use of advanced Internet search technologies, such as shopping bots, to find the product that best meets the consumer’s needs. This greatly expands the set of suppliers considered and raises the chances of a consumer finding a suitable product. Successful shopping services combine the ultimate level of product aggregation with meeting consumer needs to achieve high product value leadership. However, consumers may question the independence of shopping services that charge e-tailers placement fees. Full-service e-tailers “sell” service leadership to accompany their products, expanding their interactions with consumers to include all five business transaction activities. Being “full-service” is more a goal than a reality because there is always more that can be provided. The key is to offer a range of services desired by a significant number of consumers. To be effective, full-service e-tailing uses a consumer/seller/supplier model (similar to that of buyer-seller and box mover e-tailing) and increases the exchange of information between the different parts of it. Each service may involve extensive sets of information exchanges between the e-tailer and the consumer, and may be supported by additional exchanges between the etailer and its suppliers. This enhanced information flow may also provide a basis for advanced customer relationship management. Full-service e-tailing is limited, however, to providing information-related services. When selling physical products, it still lacks a number of related advantages that traditional stores possess, such as immediate availability or allowing the product to be touched and examined.

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The future: Meeting consumer needs in the third generation

grated chain models. However, as part of this evolution, they must include features of full-service e-tailing.

Although the Web has promised the “death of distance,” many business activities are still more effective when performed in person. The retailing mantra “location, location, location” still applies, and the integration of a local presence with an online one is key to the third generation of etailing. The evolution involves shifting from meeting buying needs to meeting all pre- and post-transaction needs as well. Integrating physical retailing with the Web produces the following advantages in the transaction activities:

Integrated chains combine an online presence with their physical locations to offer consumers a range of shopping options. By providing better service, they can increase sales at physical stores as well as build significant online sales. Consumers can shop on their own at a local store, or via the Internet on their own, or via the Internet in the store with the assistance of sales clerks. The system can identify the closest store that has the desired products in stock, so the customer can inspect them and buy them in person, if desired. It can even help local stores sell products they do not currently stock by having them transferred from another store or acquired via a special order from a supplier. While these services are possible with many current information systems, local stores seldom offer them directly to consumers. Integrated chain e-tailing goes further by making the services available to consumers in their homes.

● Purchase planning – consumers are more apt to be comfortable buying from e-tailers that are associated with physical stores they currently patronize ● Purchase identification – consumers can touch, feel, and see the merchandise before buying online ● Purchase negotiation – consumers can talk to someone face-to-face, which improves the relationship and the ability to close the sale ● Purchase actualization – consumers may pick up online purchases at the physical location, thereby eliminating shipping costs ● Post-purchase service – e-tailers can easily handle face-toface questions, complaints, returns, small repairs, and adjustments Improving customer service boosts customer satisfaction, which in turn can spell customer retention and loyalty. Having a physical presence means higher visibility, which lowers marketing costs. However, many challenges need to be addressed in combining a physical presence with an electronic one, including the costs of developing and maintaining two retailing facilities, rewarding all retail and e-tail functions that work together to serve the customer, and avoiding culture clash.

Integrated chains

This integration is tightly controlled from the head office, as illustrated in Figure 1. All purchasing and policy decisions are made centrally and imposed uniformly on the local stores and the e-tail system. The model handles the systems used by local stores in a manner similar to, but slightly more powerful than, those used directly by consumers. Requests to transfer products from store to store are facilitated and mediated by the central e-commerce server, which, in addition to serving individual consumers, can provide special services to meet the special needs of organizational customers. Chain stores are the most obvious source of third-generation e-tailing, but they are not alone. Just as chain stores do not control all retailing, integrated chains will probably not control all e-tailing. There is always room for retailers and e-tailers who can better meet customer needs. To look for other sources of third-generation e-tailing, we need to consider how to compete against integrated chains. Chain stores tend to be very inflexible in dealing with customers; integrating them with e-tailing is likely to do little to improve this.

Existing chain stores are in the best position to combine etailing with traditional retailing because they already possess the extensive physical infrastructure needed to support localFigure 1 ized facilities. However, applying An integrated of e-commerce The integratedchain-based chain modelmodel of e-commerce an integrated chain model is not limited to traditional chains. It applies equally well to any firm Regular orders for Consumers that retains a highly centralized standard products Local Centrally form of control over its local Special orders for store integrated branches, including franchises. standard products chain Firms that recognize the benefits e-commerce Special orders for Local of integrating an e-commerce server custom products store Organizational branch within their overall operacustomers tions may evolve their consumer/ seller/supplier models into inteBusiness Horizons 47/2 March-April 2004 (71-78)

Suppliers of standard and/or custom products


J. Carter & N. Sheehan / From competition to cooperation: E-tailing’s integration with retailing

Every day, small, localized firms flourish in the shadow of their chain store competitors, often getting by with higher prices. Their success involves more than having customers who are willing to support local businesses. Specialty shops tend to be the most successful. They realize they are selling more than products; in essence, they “sell” individualized services, which just happen to include products. By doing so, they establish and maintain long-term relationships that can lead to future sales. However, when speciality stores expand to multiple locations, they quickly evolve into chain stores. The challenge to compete against integrated chains is to be able to integrate independent local specialty stores without causing them to lose their identities and their individualized services. To accomplish this requires a cooperative e-tailing approach.

Figure Figure22 An of cooperative e-commerce Anadvanced advancedmodel cooperative/based model of e-commerce Consumers Independent store Independent store

Cooperative e-commerce server

Regular orders Special orders Special orders for standard for standard for custom products products products

Suppliers of standard and/or custom products

Cooperative e-tailing


arious systems and strategies exist for “e-cooperatives,” the groups of largely autonomous retailers that choose to become interdependent in order to gain access to a greater array of customers and products. The future of e-tailing lies in this approach, which supports independent stores in meeting the needs of individual customers, both electronically and in person.

An e–co-op model Cooperative e-tailing involves more than strategic alliances between firms with an existing physical presence, such as a Best Buy, and various firms with existing Web presences, such as those listed at Homepage/Partners.asp. It also involves greater support of e-tail/retail integration than that found in chains. Figure 2 illustrates our model of how an e-commerce system can support a number of cooperating stores using some centralized e-com services. The model allows individual stores (which can be independent stores or relatively autonomous units within an organization) to increase the range of services and products they provide to their customers (via both traditional retailing and e-tailing) while still keeping their autonomy. A server assists individual stores without forcing them to standardize their operations and/or products, giving them the option of ordering products directly from suppliers or using the combined buying power of the cooperative. Such an e–co-op is more complex than other forms of etailing. It actually involves two distinct types of systems: the main cooperative system and those of individual stores. The main system is evolved beyond full-service integrated chain e-tailing by its addition of B2B functionalities for dealing with the different stores as both suppliers and organizational customers. The particular functions 74

to be performed by the main server and the stores’ e-tail servers are subject to negotiation between the e–co-op and the stores. However, they should include ● helping consumers/stores find products, or the physical stores that have those products in stock ● helping consumers obtain a desired product at a physical location convenient to them by facilitating transfers of products between individual stores ● helping individual stores order products from suppliers (and attain volume discounts) Each individual store needs its own e-tailing system, which should present the store’s individuality to customers like a full-service e-tailer while dealing with the co-op system and the other stores in a standardized manner. Usually, individual stores may make use of versions of a common full-service e-tail system that has been customized to suit their particular needs. In some co-ops, however, different stores may actually have different types of e-tailing systems that are a legacy of their pre-cooperative e-tailing efforts. Individual stores, regardless of the type of e-tailing they use, also need to deal with the co-op via B2B, both as a supplier and as an organizational customer. The high level of individualized service provided by the main co-op website and individual store sites goes beyond an integrated chain by allowing consumers to choose between different stores to obtain a set of products and services that best fulfill their needs. Various factors are taken into account, including product specifications, cost, availability, and local support. Consumers can interact with a variety of catalogs: a catalog of products currently available at the individual store; a virtual catalog of all products currently available at some local set of stores; a

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virtual catalog of all products currently available at any store in the co-op; and similar catalogs of all products, available or not, carried by any combination of stores. When dealing with the main co-op website, users should be able to set store, location, and availability preferences to order the items in the catalog without hiding any other possibilities, rather than having to choose which catalog to consult. When dealing with a particular store’s website, consumers should be able to consider products available or carried by other stores, which the store can then obtain for the consumer in a manner similar to products it carries but does not currently have in stock. Cooperative e-tailing provides the greatest competitive advantage in those locations where a local presence is available. In other locations, it can still combine full-service e-tailing with a high level of product aggregation.

Sources of cooperative e-tailing E–co-ops require complex software support, which can be developed through organizations that are evolving from second-generation models, evolving from integrated chains, or being developed organically. The most likely source is evolving second-generation e-tailers that do not have an extensive physical presence of their own. is a good example of an e-tailer that evolved from being a box mover to a full-service e-tailer to an e–co-op. Its network of zShops is one of the first examples of cooperative e-tailing. According to its website, “zShops sellers often offer things also available at, but better yet, they offer many things does not.” Other second-generation e-tailers will likely follow this lead. The transition involves expanding possibilities for full-service and custom manufacturing e-tailers. However, the evolution of shopping services may mean a major shift in how these firms do business. Rather than just preferring certain stores, they will have to further limit the stores they deal with to those willing to become part of their e–co-op.

Developing both e–co-op capabilities and a physical network of stores would require a large effort for a start-up firm. However, existing companies may be able to develop one or another of these essential aspects. E-commerce development organizations (such as are beginning to include cooperative features in the e-tail systems that they make widely available to various clients. They concentrate on developing the computer support and leave the actual aspects of developing e–co-ops to their clients. Likewise, existing co-ops may secure or develop cooperative e-tailing software for their members. Smaller ones are more likely to use off-the-shelf systems (such as those offered by, whereas larger ones may be in a position to create their own systems.

Cooperation increases business transaction options Our e–co-op model greatly expands the options in each of the five business transaction activities. It involves much more than just processing orders for products. The overall effect is to offer more ways to meet consumers’ needs. Providing each option involves real costs for individual stores and/or the co-op. When possible, the e-tailing system should support tracking activities and allocate costs appropriately. In many cases, however, especially with planning and identification, it is not feasible to track every option a customer uses. has recently evolved this way. Where it once simply linked consumers to flower shops where they could order standard products using third-generation integrated chain features, it has become an e–co-op that provides support to independent florists’ e-tail sites. The florists have the flexibility to display their own products along with their choice of featured FTD products.

In the planning stage, a consumer identifies the need for a product and then selects a source to provide it. The consumer can identify the need on his own while visiting a store or multiple stores, or while going online at the cooperative e-tail site, at a store or e-tail site outside the co-op, or at some combination of these. The co-op may have some influence in identifying needs, but there is no guarantee that this influence will lead to its being chosen as the supplier. Vendor selection can similarly be based on one or more factors beyond helpfulness in need identification. A consumer could choose a store or the co-op based on the reputation or location of a local store and/or on a relationship the consumer has already developed with it. Although it is almost impossible to track the business transaction planning basis for most sales, the synergy of these various options is expected to lead to a rise in overall sales for the co-op as a whole.

Cooperative e-tailing is not just for small independent stores; it can be used wherever a number of physical locations are integrated with an e-tail system. The main difference between integrated chains and e–co-ops is the level of individual autonomy each store has. Thus, cooperative e-tailing could evolve from an integrated chain that provides additional autonomy to its stores. Although this evolution would be relatively easy to accomplish technically, it may require a major change in the culture of the retail/e-tail organization.

Identification involves finding the best product to meet a need. Even when the customer knows the exact product he wants, he must make sure the retailer/e-tailer can supply it. Again, identification can be made in person, online, or through a combination of both. The customer can go into a store to check out a product he first saw online, or he could go online to find further details about a product he first saw in a store. It is not uncommon for customers and/or sales assistants to go online in stores to find further product information. Likewise, customers may combine

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visits to many stores and/or e-tail websites while identifying products. Although many sites accumulate data on “hits” to particular product pages, comparing these hits to actual sales may produce dubious information. It is always unclear whether the product sold itself or the Web page influenced the sale. As with planning, it may be almost impossible to track the identification basis for most sales, but the synergy should boost overall co-op sales. The role of negotiation is considerably expanded with cooperative e-tailing, involving both B2C and B2B aspects. Negotiations between the customer and the store may involve price, a procurement fee for items not currently in stock (including those obtained from other stores), and a delivery fee for items not picked up by the customer. Because delivery is required for e-tail sales, it could also be offered to in-store customers, especially for products not currently in stock. Delivery may be further complicated by providing various options. Individual stores need to be able to adjust the prices and fees they charge customers as one aspect of maintaining their independence. Actualizing a transaction needs to be as easy as possible for customers, regardless of whether they do it in a store or online. This means they should be able to buy a combination of products, some in stock and some not, some to be picked up and some delivered, all at one time, either in person or online. Orders should be tracked for the sale of all products, other than those bought in and immediately taken from a store. The system needs to handle all inventory and payment information for each transaction, regardless of how many stores are actually involved. Although a local presence is important for post-purchase servicing, it should not be the only source. There is a role for both Web-provided service and service from (supplier) stores that have unique knowledge about unique products. Because of their involvement in the co-op, local stores may also receive requests for servicing products bought via etailing from other co-op stores. When servicing demands are significant, a B2B mechanism will need to compensate local stores that service other stores’ products.

E–co-op strategies


–co-ops combine industry, product, customer, and location-specific expertise in order to give their customers superior service. Those that encourage a high level of service differentiation between member stores offer customers the opportunity to buy identical products through a number of different stores that may each provide several different service options.

Where may e–co-ops thrive? The greatest potential for e–co-ops lies with products/services that have the following attributes: 76

● typically “thin” trading in a given geographic area ● a high “touch” factor ● more differentiation between local retailer offerings ● high price Examples of products/services that meet these criteria would be Inuit art, used golf clubs, and specialty home items. There is less potential for e–co-ops to sell products that appeal to the mass market. If there is a high demand for the products in a given geographic area, such as digital cameras, best-selling novels, or DVDs, they will typically be sold in chain stores. If the product is thinly traded but has a low touch factor, such as model train accessories, it may be found in an e–co-op. However, it is more likely that a full service e-tailer can supply the market effectively from a distance because the customer does not generally need to see the product before buying it. If the product has a low degree of differentiation, it will typically not be found in an e–co-op, because this may lead to competition based on price rather than service. Finally, even if the product meets the first three criteria but is not pricey, it may not be found in an e–co-op, because customers will not pay for additional service with the purchase.

Establishing and growing e–co-ops E–co-ops serve two distinct types of customer: end customers and member firms. Thus, their strategy needs to be integrated. To attract end customers, they need to offer service and elicit trust. The advantage of a physical presence should enable them to do both better. To attract and keep member firms, they must establish and build the coop and manage the composition of its members. Establishing an e–co-op is difficult; without a network of members it is difficult to persuade firms to join, and without member firms there is no reason to join. However, an e–co-op does offer membership advantages. It can provide the necessary software and assistance to get a firm online at a reasonable cost and lower risk. And it can sell the cooperative element: “If you join, others will join, and the customers will follow.” In the beginning the customers will typically be the members’ existing customers, but the coop will grow over time with the offering of more opportunities to access new customers through the network. We see three alternatives for establishing an e–co-op. First, an industry association may be the catalyst. For example, Golf Pros of North America could start an e–co-op to realize higher sales of golf clubs accepted on trade at the Pro Shop. This is a natural progression for an industry-based association because the element of cooperation is already present. Second, a dominant retailer can start the ball rolling. For example, the largest seller of Inuit art in North America could establish an e–co-op as a way to expand sales and attract new customers in other locations. It

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could even help them make connections with additional artists. Third, a software developer could start by offering the requisite software and installation expertise in return for a share of the e–co-op’s profits.

may have). It also opens the door for “free riders”: other e–co-ops gaining “connections” and thus value for their own customers without incurring all the costs of building or maintaining the network.

An e–co-op has three expansion options: (1) organic growth, (2) mergers/acquisitions, or (3) negotiating interconnections with competing e–co-ops. Growing organically may involve setting up physical stores in areas not currently served, or convincing firms not currently involved to join. This is attractive because of network effects and the air of legitimacy that size provides, but the downside involves higher costs and a slower speed of expansion. If more than one e–co-op is competing for customers and members, the first mover will have a big advantage, given the network effects. The upside to organic growth is the control it provides over the member firms it selects.

In many ways, e–co-ops are like exclusive clubs; they need to manage the who and what of membership. Though no one member is more important than the e–co-op, some concessions can be made to firms that bring in a larger proportion of customers and/or sales for the other firms. Like anchor tenants in physical malls, some members are more beneficial in attracting customers to the e–co-op. Recognizing this, eBay has Gold and Silver sellers that are offered lower unit fees and additional services. Special conditions can involve both cost and governance issues. However, the allocation of special conditions should not create such a gap among members that regular membership becomes unattractive.

A related organic option is to expand into complementary products and services, such as a Used Golf Club e–co-op branching into used sports equipment. The main benefit is that the co-op can spread a larger number of transactions over fixed operating costs. The downside is that by moving outside the area of core member expertise, the e–co-op may potentially decrease its level of service and thus degrade its source of competitive advantage over other retailers. (What would a golf pro know about used hockey equipment?) It may be better to have a local representative than no representative, but the e–co-op needs to consider any potential damage a lack of expertise may have on its service reputation. Moreover, expanding into complementary products/services may lead to more direct geographic competition between existing e–co-op members. However, because the products are more or less different at each retailer, and because these retailers compete on superior service rather than on price, this should not be a big issue. The second alternative, which applies to markets reaching maturity, is to acquire or merge with other e–co-ops. Similar ones serving substantially different geographical areas provide the best candidates for mergers. The main concern may involve merging different hardware/software standards and company cultures. Merging or acquiring e–coops that bring in directly competing members may be less attractive from the perspective of existing members. A third alternative for rapid growth is to negotiate interconnections with competing e–co-ops. This is most applicable when the market begins to mature. It has the advantage of expanding the network the customers can connect to, which offers them added value—much the same way being able to use ATMs from all banks benefits all banking customers. However, from the perspective of member firms, this alternative may compromise the exclusivity of being in the e–co-op and thus reduce any competitive advantage gained (allowing all customers to access a bank’s ATMs negates any location advantage the bank Business Horizons 47/2 March-April 2004 (71-78)

As a result of network effects, larger e–co-ops may achieve both demand side and supply side economies as they expand. The more member stores involved, the more likely customers are a convenient distance from a store. Because e–co-ops compete on offering superior service through actual interaction, location is key to achieving competitive advantage. Size (more members) means more transactions over which to allocate fixed operating costs and thus a lower transaction fee, which the member may keep or pass on to the customer. Just as members are expected to serve their customers, so must the e–co-op serve its members. Some forms of growth may provide a disservice to individual members. The co-op will need to avoid growth for growth’s sake, especially in areas that cost members without offering offsetting benefits. Expanding beyond a well-defined product/service category and geographical area may open it to new competition and higher service costs. Likewise, it must avoid the tendency to add centrally provided “services” that support it without meeting its members’ needs. A final consideration with respect to member composition is that all firms in the e–co-op act as both direct suppliers and indirect competitors. One way to address this is through the revenue model, as the fees paid and earned by members signal the desired amount of cooperation versus competition.

Potential revenue models for e–co-ops E–co-ops need to have agreements in place over how the operating costs will be funded by members, at what price interstore transfers will occur, and what pricing structure(s) should be offered to customers. Expenses include software/hardware, system maintenance, Internet connections, advertising, and general/administration. The cost recovery model used should depend on the e–co-op development model. If the e–co-op is a spin-off of an industry associa-


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tion, the price will more likely be based on a monthly fee; it can even be included in the association fee rather than billed separately. If the e–co-op is started by a dominant firm, there will likely be a monthly fee and a transaction fee., winner of Forbes‘s Best of Web Award in 2002, lists 40 million titles from 10,000 independent booksellers. It charges a $25 to $300 per month subscription fee, depending on the number of books posted, plus it takes up to 5 percent of each purchase made through the website. If the e–co-op is started by a software developer, it too may charge a monthly fee and transaction fee. E–coops may also want to evaluate whether charging a set-up fee is appropriate, although this practice may not apply in the growth phase. As noted above, e–co-op management must balance the supplier/competitor pressure that may arise among member firms. The interstore transfer pricing structure is one tool that can be used to send signals about the level of cooperation desired. The transfer price needs to be set low enough to encourage the local stores to search the net when a customer asks for something they don’t have, or when they service an item not sold locally. And it should be high enough to encourage stores to put all their merchandise online, not just pieces that are difficult to move. Setting the price too low may create a “lemon” problem, in which the only goods offered online are those in poor condition, of low quality, or otherwise undesirable. Finally, a mechanism is needed to address the question of who pays if a customer returns an item ordered from another store. Making the customer pay may discourage customers from buying via local stores. Assessing the cost to the local or distant store has consequences in terms of service level and cooperation. Given that cooperation is needed to ensure the e–co-op’s survival, the cost of returns should be partly reimbursed by the co-op.


ith the advent of the World Wide Web, many retailers stampeded online. Profitability remained elusive, though, because advances made by one e-tailer could easily and inexpensively be copied by others. During this “gold rush,” business models evolved rapidly as e-tailers searched for a winning model. The winners were those that evolved to include unique combinations of services. Now the models have evolved, and the key to success in this third generation is to improve service by increasing


physical presence and ensuring that consumers can choose how to shop, touch or try out the product, return items easily, and enjoy the shopping experience. The integrated chain model is easiest to develop, because it can be built on a variety of existing infrastructures. Cooperative e-tailing requires linking up individual outlets and e-tailers that may otherwise prefer to be independent. Building a profitable e–co-op involves a wide variety of trade-offs between independence and interdependence. All these possibilities enhance the opportunity to satisfy the customer, which ultimately leads to building relationships and boosting sales and profitability—once the key issues of building the chosen model are satisfied. ❍

References and selected bibliography Afuah, Allan, and Christopher L. Tucci. 2001. Internet business models and strategies. Boston: McGraw-Hill Irwin. Akerlof, George A. 1970. The market for “lemons”: Quality uncertainty and the market mechanism. Quarterly Journal of Economics 84/3 (August): 488-500. Amazon. 2004. What are zShops? @ obidos/tg/browse/-/537854/002-3361417-1877600 (accessed 12 January). Berry, Leonard L. 2001. The old pillars of new retailing. Harvard Business Review 79/4 (April): 131-137. Carter, Jim. 2002. Developing e-commerce systems. Upper Saddle River, NJ: Prentice-Hall. Fjeldstad, Øystein D., and Knut Haanæs. 2001. Strategy tradeoffs in the knowledge and network economy. Business Strategy Review 12/1 (Spring): 1-10. Fram, Eugene H. 2002. E-commerce survivors: Finding value among broken dreams. Business Horizons 45/4 (July-August): 15-20. Gulati, Ranjay, and Jason Garino. 2000. Getting the right mix of bricks and clicks. Harvard Business Review 43/3 (May-June): 107-114. ISO. 2002. International Organization for Standardization, ISO/IEC Final Draft International Standard 15944-1 Business Agreement Semantic Descriptive Techniques—Part 1: Operational Aspects of Open-EDI for Implementation. Katz, Michael, and Carl Shapiro. 1985. Network externalities, competition and compatibility. American Economic Review 75/3 (June): 424-440. Porter, Michael E. 2001. Strategy and the Internet. Harvard Business Review 79/3 (March): 61-78. Reichheld, Frederick F., and Phil Schefter. 2000. E-loyalty: Your secret weapon on the Web. Harvard Business Review 78/4 (JulyAugust): 105-113. Slywotzky, Adrian J., and David J. Morrison. 2000. How digital is your business? New York: Crown Business.

Business Horizons 47/2 March-April 2004 (71-78)