International E-Business – Building Online Customer Loyalty with Relationship Management

come to an end. Anyway, I also look forward taking a further step towards „reality“.

The life and the studies would only be half worthwhile without my friends and colleagues, with whom I hopefully can keep i n touch for a long time. They helped me in many ways, and I want to thank them all. In particular, I wish to thank for their thoughtful comments, and everybody who kept encouraging after work while having a glass of wine.

Special thanks are dedicated to my family for support, patience and faith in my studies.

Questions concerning the topic of this thesis are welcome under wolfgang_katsch@gmx.net.

Innsbruck, September 2001 Wolfgang Katsch

i

Table of contents

  List of Figures  iii

  List of Tables  iv

  Preface  v

1  Introduction  1

1.1  Problem Statement  2

1.2  Objective  2

1.3  Relevance of the Topic  3

1.3.1  Theoretical Relevance  3

1.3.2  Practical Relevance  3

2  Literature Review and Theoretical Framework  5

2.1  State of Research: Descriptive instead of Conception  6

2.2  Methodology  7

2.2.1  Definition and Limitation of Research Topic  7

2.2.2  Research Structure  8

3  Loyalty and Customer Relationship Management  10

3.1  Definition of Loyalty and Relationship Management  11

3.1.1  Benefits of Relationship Management Customer Loyalty  13

3.1.2  Transactional View versus Relationship View  16

3.1.3  The Evolution of Relationship Management  18

3.2  General Approaches to Relationship Management  20

3.2.1  IMP Interaction Approach  20

3.2.2  Five-phase Profit Chain by Bruhn  22

3.2.3  Dynamic Framework by Dwyer Schurr Oh  24

3.3  Evaluation Criteria for a Concept of Relationship Management  27

3.4  Chosen Concept  28

4  International E-Business  29

4.1  Definition of E-Business  30

ii

4.2  Value Adding Characteristics Opportunities of E-Business  31

4.2.1  Interactivity Dialogue Individuality  33

4.2.2  Customer-Integration and Innovation  36

4.2.3  Changing Structure of the Value-adding Process  37

4.2.4  Market-pull and Customized-push instead of Market-push  40

4.2.5  Global 24 hour Access  41

5  Customer Loyalty and International E-Business  43

5.1  New Model for Customer Loyalty Relationship Management in E-Business  

   43

5.2  Individuality and Interactivity during the Relationship Process  45

5.3  E-Business Relationship Process  50

5.3.1  Stage 1: First Contact Online Surfer  50

5.3.2  Stage 2: Customer Satisfaction Online Buyer  52

5.3.3  Stage 3: Customer Loyalty  54

5.3.4  Stage 4: Customer Retention Repeat Business Contacts  54

5.3.5  Stage 5: Economic success Long-term Profitability  57

5.3.6  Influencing factors: External and Internal  58

5.4  Instruments for Customer Loyalty in the World of E-Business  60

5.4.1  Knowing your Customers Customer Profiles Database  60

5.4.2  Online Communities  64

5.4.3  Complaint Management System  73

5.4.4  Membership Clubs  82

5.4.5  Datamining  86

5.4.6  Customer-Integrated Product Innovation  94

6  Conclusion  102

  References  104

iii

List of Figures

  Figure 2 1 Limitation to Business-to Consumer Processes  7

  Figure 2 2 Structure of the Thesis  8

  Figure 3 1 Stakeholder Relationships  11

  Figure 3 2 Kano s Model: Expectations Differentiation and Customer Satisfaction  15

  Figure 3 3 The Transition to Relationship View  17

  Figure 3 4 IMP Interaction Approach  21

  Figure 3 5 Profit Chain of Customer Loyalty  23

  Figure 3 6 Relationship Development Process  25

  Figure 4 1 E-Business Builds Customer Value  31

  Figure 4 2 Value-Adding Characteristics Opportunities in E-Business  32

  Figure 4 3 Traditional One-To Many Mass Communication Model  33

  Figure 4 4 Interpersonal Communication  34

  Figure 4 5 Many-to Many Communication in E-Business  35

  Figure 4 6 Evolution or Revolution of Existing Business Systems  37

  Figure 5 1 New Model of Customer Loyalty Relationship Management in E  

  Business  44

  Figure 5 2 Implications of Communities  66

iv

List of Tables

Table 3 1   18

Table 3 2   28

Table 5 1   46

v

Preface

In the year 1876 Jules Verne finished his book “The Propeller Island”. He portrays the life on an artificial island, which is constantly moving around the pacific, following the most favorable climate. The inhabitants employ the latest technology in order to enjoy their live in an ideal world.

One visitor, who is shown around on the island, arrives at a shopping center. “I can’t see any customers” the visitor notes “maybe it is to early”. “Not necessarily, but most of the shopping is done in a tele -autographic way” explains the guide. “We use a machine, which transmits the handwriting like a telephone the voice. With the help of this machine purchase orders are taken, bills are sent and contracts are made.” What Jules Verne illustrates at the end of the last century is nothing else than E-Business. But not until the development of computer, modem and internet should this fiction become reality.

1 Introduction

This chapter

• points out the problem around E-Business and customer loyalty

• describes the objective of the thesis

• explains both the theoretical and practical relevance of the thesis

1.1 Problem Statement

For many years, successful neighborhood merchants, restaurants and pubs had real customer relationships. They knew their customers personally, understood what they wanted, and, as best they could, satisfied their needs through personalized service. As a result, they earned loyalty and a large share of their customers' business. Some of the best examples of building customer loyalty can be found in those traditional small businesses.

Now the question arises how customer relationships can be built in the world of E-Business. E-Business - the buying and selling of products and services over the Web - and its impact is comparable with the industrial revolution at the end of the last century. After hysteric times of E-Business startups and well known bursting bubbles the point of disillusion has come. Some internet companies recognize that traditional business concepts are not necessarily outdated. They realize that focusing only on customer acquisition is not enough. Acquiring customers on the international marketplace of E-Business is enormously expensive and unless those customers stick around and make lots of repeat purchases over the years, profit will remain uncertain. For lasting success companies have to i ntensify their efforts towards customer loyalty and customer relationship management. Without loyalty even the best-designed E-Business model will collapse.

The described problem leads to the following objective.

1.2 Objective

The objectives of the thesis are

• to combine the concept of customer loyalty with the characteristics of E -Business

• show how companies can build loyalty with customer relationship management

1.3 Relevance of the Topic

1.3.1 Theoretical Relevance

Concerning E-Business there exist plenty of literature mainly from a technical point of view. On the other hand, academic discussions about business concepts like customer loyalty and relationship management have a long tradition among researchers.

The drawback is that although loyalty and relationships are seen as very important factors in the context of international business, the question has obtained scarce attention in literature about E-Business. Existing studies in this area mainly have descriptive character or try to offer quick-fix over-optimistic internet solutions, which become obsolete pretty fast.

The theoretical contribution of this thesis is to fill that gap and offer a more conceptual/systematic as well as critical perspective towards the topic. The thesis

- Transfers the concept of relationship management into the environment of E-Business

- Points out potential conflicts

- Demonstrates benefits and show ways to increase online customer-loyalty

1.3.2 Practical Relevance

Companies in E-Business already realize that focusing only on customer acquisition is not enough for lasting success and are therefore intensifying efforts towards customer loyalty. According to recent studies only a small part of the companies know how many visitors they have on their Websites. And only some of them know the number o f frequent/loyal buyers. A lack of customer knowledge and relationships with customers can get dangerous, especially in a scenario, where the competitive offer is only one “click” near by.

The benefits of customer loyalty are directly measurable, knowing that the costs of

taking care after loyal customers are many times below those of customer

acquisition. From a practical point of view the aim of the thesis is to show how

companies can build loyal online-customers in order to develop long-term business

relationships.

2 Literature Review and Theoretical Framework

This chapter

• describes the state of research concerning the topic of the thesis

• points out how the problem of this thesis is solved in order to reach the objective and why exactly this way

• explains the limitations of the research topic

2.1 State of Research: Descriptive instead of Conception

The proliferation of the internet is unparalleled in the history of communications. No surprise then that the phenomenon has become a hot topic in the popular press. Use of the internet as a business platform is quickly capturing the attention of management academicians as well, despite the fact that transactions on the Internet form a minuscule part of the total trade through all possible avenues. ¹ A number of d emographic studies exist concerning the development around E -Business. Traditional demoscopic institutes expand their comprehensive and representative surveys with topics about spreading of technology and use of the internet (e.g. number of users). However those studies are only descriptive. Due to the dynamic development the mentioned studies merely have a short-term value and get obsolete pretty fast. Although the basic growth trend of E -Business is confirmed, the studies hardly can function as a basis for sound management planning.

An exception are studies of international consulting companies like Accenture, Arthur D. Little, Booz, Allen & Hamilton, Boston Consulting Group, McKinsey & Company, KPMG, Roland Berger & Partner etc. Those studies could contribute to the conceptual building of E-Business know-how, since they go beyond demoscopic surveys and work on problem-oriented solutions. Unfortunately the studies are normally not public accessible, because of their preparation during consulting projects. Often consulting companies publish only excerpts or single results in press releases or on their Websites. 2

¹ Sindhav, 1998, pp. 120-121

² e.g. Boston Consulting Group, 1999, BCG E-Commerce Studie;

Roland Berger & Partner, 1999, Erfolgsfaktoren im E-Commerce;

McKinsey & Company, 2001, Qualitysearch, URL:

http://www.qualitysearch.mckinsey.de/archive

2.2 Methodology

How is the problem solved/the objective reached and why exactly this way?

2.2.1 Definition and Limitation of Research Topic

In general relationship management works as a term for the effort of companies to develop closer relationships with the end customer through personalized communication, customized services, and so forth. The term is widely used as synonymous with database marketing as well. Relationship management seems to also describe the phenomenon of tightening relationships with fewer suppliers as firms consolidate the supplier base, and bring the suppliers into the firm’s continuous improvement process. 3

Figure 2-1 Limitation to Business-to-Consumer Processes 4

³ Cooper/Gardener, 1996, p. 146

⁴ Source: own illustration

In this thesis the term relationship management is used in context with business relationships to end customers in order to build customer loyalty (business-toconsumer, B-2-C). Relationships to other stakeholders including suppliers (businessto-business, B-2-C) are not focused on. Furthermore the thesis focuses not on electronic databases, also known as Customer Relationship Management (CRM)systems, although the topic is considered important in the process of onlinerelationship management and therefore covered in a later chapter of the thesis. It should be clear that the concept of the thesis has a business perspective, in contrast to a more technical or IT orientation.

2.2.2 Research Structure

The author attempts to reach the objective of the thesis as follows:

Figure 2-2 Structure of the Thesis 5

⁵ Source: own illustration

First the concepts of loyalty and customer relationship management are explained and distinguished. The literature proposes several concepts and definitions of loyalty and relationship management. In the next part the author will explain E-Business and its unique value-adding characteristics.

After having described customer relationship management (chapter 3) on the one hand and E-Business (chapter 4) on the other hand, the two concepts are combined in chapter 5. In other words the business concept of relationship management is transferred into the environment of the internet and a new model is developed. Now potential conflicts, benefits and synergies can be demonstrated. It is possible to show how companies can build customer loyalty in the world of E-Business.

Methodical characteristics of the thesis are

• Drawing from international management literature, focusing on recently published articles in order to take into consideration the developments in the changing marketplace of information technology.

• Successful online companies and their practical experience should illustrate the application of different concepts and methods in a practice-oriented way.

• Systematic/structural approach: Instead of a cursory discussion of loyalty and E-Business, this thesis is written in a systematic and logical manner.

• International perspective: When discussing the topic E -Business, an international perspective is always a prerequisite. Customers around the world have access to a company’s Website. Therefore business relationships cannot be explained from a narrow, local point of view. As soon as E-Business is discussed, it is about business on the international marketplace of the internet.

3 Loyalty and Customer Relationship

Management

This chapter

• describes the evolution of customer relationship management

• presents different approaches to relationship management and customer loyalty

• shows an evaluation of different concepts in order to use one concept later in the thesis for model building of customer loyalty in E-Business

3.1 Definition of Loyalty and Relationship Management

Successful competition, whether local, regional or global, can be based on cost leadership, superior customer value, time leadership, reliable relationships or a combination of these categories of competitive advantage. 6

Reliable relationships, that is, a network of positive personal and institutional relations with all the important stakeholders in the relevant business system. ⁷ Possible stakeholders are suppliers, employees, competitors (e.g. strategic alliances), public organizations (e.g. governments, interest groups) and customers. 8

A definition that covers all forms of relational exchange and focus on the process of relationship management is:

⁶ Wright/Kroll/Chan/Hamel, 1991, pp. 245-254.

⁷ Mühlbacher/Dahringer/Leihs, 1999, p. 385.

⁸ Hinterhuber, 1996, pp. 2-3.

⁹ Source: own illustration

Research on industrial business networks and on service firms in highly industrialized regions of the world as well as experience from Arab, Asian and Afric an countries demonstrates how companies can very successfully build their competitive strategies on personal as well as institutional relationships with important stakeholders. Some companies have discovered that the most important factor for long-term success in their markets is the establishment and maintenance of close relationships with their customers. It is much less expensive to keep existing customers than continuously build new customers. 11

In the literature a number of definitions exist for the term customer relationship management. Originally the concept is based on Berry ¹² who describes relationship management as “attracting, maintaining and...enhancing customer relationships” 13

While its objective is still to add profit to the company, it accomplishes that goal by concentrating on customer benefits and values rather than what a company wants to sell, thereby strengthening the relationship between the customer and the company. It is not an overnight cure but rather a long-term profit builder. It takes business away from the traditional objective of new customer acquisition at any cost to customer loyalty, from developing short-term transactions to developing customer lifetime value 15

¹⁰ Morgan/Hunt, 1994, p. 22.

¹¹ Mühlbacher/Dahringer/Leihs, 1999, p. 385.

¹² Backhaus, 1998, p. 21.

¹³ Berry, 1983, p. 25.

¹⁴ Newell, 2000, p. 2.

¹⁵ Newell, 2000, pp. 1-11.

A final interpretation of relationship management with the link to customer loyalty could be:

3.1.1 Benefits of Relationship Management & Customer Loyalty

A range of authors claim, that ongoing customer relationships are the company's most important business asset. ¹⁶ The main contribution of relationship management to the firm is fivefold. First, it builds up loyalty. Second, it enhances profits form existing customers. because the longer customers are with a company, the more willing they are to pay premium prices, make referrals, and spend more money. ¹⁷ Third, it helps reducing marketing expenditures, mainly because the cost of attracting a new customer may be as large as six times that incurred for retaining an old customer. ¹⁸ Fourth, it facilitates a direct dialogue with customers that in turn increases the attentiveness level of the organization to clients’ needs. ¹⁹ Moreover relationship management helps firms to protect themselves against attacks of new entries and of changing preferences. 20

For a better understanding of relationship management the connection between underlying reasons for relationships, differentiation and critical success factors are discussed in the following.

¹⁶ Webster, 1992, pp. 1-17.

¹⁷ Duncan, 1998, pp. 1-13.

¹⁸ Rosenberg/Czepiel, 1983, pp. 45-51.

¹⁹ Shani/Chalasani, 1992, pp. 330-342.

²⁰ Laker/Pohl/Dahlhoff, 2000, pp. 127-140.

It was mentioned that customer relationships often enable a company to reduce costs. Business relationships, however, might allow a company not only to cut costs, but also other forms of differentiation of its products and services from competitor’s offerings. Furthermore both, reduced costs (which is a kind of differentiation itself) and other forms of differentiation, create barriers to entry to competitors.

Competitive costs are very important in international markets. However, they are usually only a pre-requisite for success in the long-term, because of the enormous competition many companies are facing. Reasons for this big competition are the ongoing globalization of markets (for products and resources), the reduction of trade barriers and trade restrictions through the liberalization of world trade, the deregulation of industries as well as technological advances, e.g. information technology. ²¹ In such a situation, success can only be achieved if a company possesses those capabilities and resources which are needed in order to fulfil the decisive expectations and aspiration of customers and other stakeholders. These capabilities and resources, which are so-called critical success factors, allow a company to differentiate its offering positively from those of competitors. Traditionally, such critical success factors have been those allowing a company to provide high quality standards for competitive prices to customers. 22

In today’s competitive environment however, differentiation in many markets is hardly attained through quality standards or competitive prices alone, because these factors for many businesses have become a pre -requisite for the existence on the international marketplace. Put differently, providing high quality standards and competitive prices are often related to capabilities and resources a company needs to possess, in order to be regarded as a relevant supplier. These core factors do not allow a company to differentiate itself positively from competitor. ²³ Core factors are related to aspirations and requirements of customers and stakeholders, which

²¹ Hill, 1998, pp. 10-15.

²² Mühlbacher/Dahringer/Leihs, 1999, pp. 310-319.

²³ Mühlbacher/Dahringer/Leihs, 1999, pp. 310-319.

must be fulfilled (“Must-requirements”). Success factors on the other hand are related to aspirations and requirements whose fulfillment allows a positive differentiation. “Should requirements” allow a positive differentiation and customer satisfaction if they are fulfilled above a certain minimum degree. “Can requirements” are aspirations and requirements without a minimum degree of fulfillment, because customers and stakeholders have no experience with them. However, if differences in the fulfillment of the requirements are recognizable, they might be rewarded and can fill the customer with enthusiasm. A positive differentiation can be obtained in this case (see following figure). 24

Figure 3-2 Kano's Model: Expectations, Differentiation and Customer Satisfaction 25

The increasing importance business relationships have obtained is related to the fact, that relationships are often connected to the fulfillment of should- and canrequirements of customers and stakeholders. In this case, relationships relate to

²⁴ Bailom./Hinterhuber/Matzler/Sauerwein, 1996, pp. 117-126.

²⁵ Source: from Kano, 1984, pp. 39-48 quoted in: Matzler/Bailom, 2000, p. 220.

capabilities that are honored by the marketplace and which allow a positive differentiation from competitors.

If a business relationship does not relate to capabilities which are needed in order to fulfil the decisive expectations and aspirations of customers, investments that have been made into relationship specific assets can be regarded as sunk costs. Put differently, in certain environments are long-term relationships not necessarily ideal and feasible because they do not allow a company to positively differentiate itself from competitors. 26

3.1.2 Transactional View versus Relationship View

In Webster' call for a paradigm change, he observed that the narrow conceptualization of management as a short-term profit maximization function seems increasingly out of date. He identified the change as one that focuses on relationship management rather than transaction management. ²⁷ Understanding relationship management requires distinguishing between the discrete transaction, which has a distinct beginning, short duration, and sharp ending by performance and relational exchange, which traces to previous agreements and is longer in duration, reflecting an ongoing process. 28

²⁶ Mühlbacher/Dahringer/Leihs, 1999, pp. 310-319.

²⁷ Webster, 1992, pp. 1-17.

²⁸ Dwyer/Schurr/Oh, 1987, p. 13

Figure 3-3 The Transition to Relationship View 29

The emphasis in the management literature has shifted from a so-called “transactional” to a “relationship” view. The exchange of a product as the outcome of the production process is at the core of the transactional view. In contrast the relationship view puts the main emphasis on the interaction process between the business partners. In this process a supplier of good or services represented by people, technology, systems and know-how interacts with its customer and other decision makers. ³⁰ The following table by Webster provides a contrast of the two views. 31

²⁹ adapted from Payne, 1992, p. 30.

³⁰ Grönroos, 1997, pp. 322-340.

³¹ Webster, 1992, pp. 1-17.