Institution: Georg-Simom-Ohm University of Applied Sciences, Nürnberg (D), Business Faculty.
Strategic Development of new online business. The case of Encodex International GmbH. (Management Summary)
E-commerce is widely expected to revolutionize the value chain in all the sectors of industry where distribution costs account for around 70% of the end price. Still, most forecasts about e-commerce emphasize the B2B area, where the process has been evolving before the Internet really took off (e.g. EDI). In the US, at the year 2000 30% of all B2B transactions have been conducted electronically.
The problem: Until now communication between retailers and suppliers has been normally bilateral. Each has its own product management system, and each negotiates with other companies on the basis of largely proprietary product databases. If businesses want to make full use of the communication opportunities provided by the internet, they need platforms to allow them easy, fast and accurate access to a centralized article master file.
The solution: ENCODEX provides a centralized article master file with detailed product description and information (article information including images) with an web-driven catalogue, which is essential for all online transactions. These article information can be integrated to the home-systems and used for market research, product presentation in B2C, B2B transactions and e-procurement.
The aim of this document is to support the business development of ENCODEX, to identify and analyze problems, define objectives and strategy.
This document is structured in two units. The first unit refers to the e-commerce and how to start new online business in general lines.
The second unit refers to the ENCODEX as case study of new online business.
It has been essential for the development of this document search in literature, in reports, in competitors, at web sites as well as in internal papers in order to review, understand and adapt practices from e-commerce and online business in ENCODEX strategic development plan.
This document draws heavily upon the empirical experience of the author and the managers of ENCODEX .
The perspective of the managers of the ENCODEX and GfK
The design of the development strategy is build up on the needs of the managers of ENCODEX and GfK .
There are many different formal definitions of e-commerce and e-business. One possible definition of e-commerce would be: "any form of business transaction in which the parties interact electronically rather than by physical exchanges or direct physical contact".
The dominating language on the Internet worldwide is English. However, a recent study came to the conclusion that the first languages on the WWW in Europe are the national languages. The future of the Internet depends on the development of the network Access Points and the capacity of the backbones.
IDC forecasts that the Western European market for Internet E-commerce will rise from € 900 million in 1997 to € 26 billion in 2001. At the same time, the number of devices accessing the Web will grow from 14.2 million by the end of 1997 to almost 58 million by the end of 2001. According to GfK Western European revenues on B2B sector will grow to 728 billion Euro by 2003, from 33 billion in 1999, indicating how quickly this market segment will grow.
Types of E-commerce:
Companies' e-commerce business operations focus on:
Opportunities and Barriers
Cost savings do not seem to be a key driver for enterprises to engage into e-commerce. Rather they seem to be interested in time and quality benefits. Overall, enterprises see the barriers to e-commerce either as problems of perception, rather than real obstacles, or as barriers that have been overcome and so are no longer a problem. Most important barriers are: Cost of Investment, Cultural, Infrastructure, Security, Consumer cost of access, Language and Political barriers.
Selecting a suitable strategy
Every company must make a clear choice between the 3 generic strategies of Porter. A company's objectives depend upon its chosen strategy. For SMEs in e-commerce, there is very little choice. All must start out in a market niche with a differentiation focus. Successful companies may either move into the broad market, based on differentiation, or in a few cases move into cost focus.
Setting objectives for e-commerce and online business
There is a well-known acronym (PRAMKU) that says that such objectives should be: Precise, Realistic, Acceptable, Measurable, Known, Understood, in terms of Quality and/or Quantity and/or Time and/or Cost.
Critical success factor definitions for new online business
A fundamental ‘horizontal’ success factor that underpins all the others, is the use of technology. At the Table below is presented the complete set of critical success factors and their definitions as they defined in a KITE study (Chappell, Feindt, & Jeffcoate, 1999) as well as are illustrated the competitive advantage that each critical success factor confers.
Critical success factors, Source: Chappell, Feindt, & Jeffcoate, 1999
3 Description of ENCODEX
ENCODEX International, founded in 1998 with its headquarters in Nuremberg, Germany, is a wholly owned subsidiary of GfK AG and US based NPD Group with a focus in the e-business arena.
ENCODEX is an international, multilingual (in 6 languages for the moment), standardised item master file for durable goods with 450.000 articles, which is accessible online. It is to become the communication platform for retailers and manufacturers in this sector. Thus ENCODEX is the basis and a significant prerequisite for all E-Commerce initiatives.
ENCODEX as Content
The cornerstones of Encodex online services are:
1. The database - ENCODAT
Up to 160 General and Specific Features covered by ENCODEX databank. The content of the data base can be separated in three parts:
Sectors covered by ENCODEX:
TIS a Japanese software development enterprise has developed the software encodex++ for online access of the databank. The software is 100% pure Java with flexible Screen Design (easily customized for various functions and markets) and Multilingual (six languages).
3. Data Alignment/Mapping
Integrates the ENCODEX product master file in the in-house-system of the users. Thus, the product master file obtains a considerably higher added value. Data and Image can be download to the house system, integrated and used for market research, e-procurement, or presentation of products on the users site (B2C).
4. Online access of the system
Access can be made through any network using web technology. To reach critical mass as soon as possible it was decided to use the Internet.
ENCODEX is targeted solely to the B2B user community. The final consumer has no access to the data base. The focus of ENCODEX lies on the following target groups:
Advantages for Retailers and Suppliers:
4 Analysis of the relevant market
ENCODEX is tended to improve the supply chain and ECR processes as the communication platform between all market participants providing them an online solution. ENCODEX is targeted solely to the B2B user community (Suppliers, Retailers, e-Retailers, e-marketplaces. The final consumer has no access to the data base of ENCODEX.
The insufficiencies in the supply chain:
Trends in the "kind of business"
Retail/wholesale. A question of particular importance to enterprises in retail/wholesale is the reduction of supply and logistics costs. Companies are looking at electronic relationships with their supply side to reduce cost.
Manufacturing/Suppliers. Large companies are moving their procurement onto the Internet, which will bring all their suppliers and sub-assembly suppliers online. SMEs are particularly caught up in the reengineering of the supply chain to support electronic trading. Fact is that the industry has insufficient supply chain based on business practices unchanged for many years and the benefits of B2B solutions are visible and there is a wish of collaboration of Retailer, Suppliers and service providers to release these benefits for the benefit of the entire industry.
B2B community. The real e-commerce revolution is in the B2B segment. B2B grows very rapidly and represents over 80% of total e-commerce. It is the most strategic and urgent area. B2B allows businesses to cut their purchasing and procurement costs. It reduces time-to-market, and improves product and service quality. It allows companies to reinvent their core business and shape up new electronic marketplaces.
Virtual marketplaces. Virtual marketplaces are web-sites on the Internet where several suppliers of goods and services can come into contact with several potential buyers, and do business. Virtual marketplaces open up a whole new range of opportunities in B2B e-commerce, and the rapid growth in the numbers of such sites is visible throughout many sectors of industry.
Today, the three prevailing models of e-marketplaces are:
Electronic Data Interchange (EDI). EDI involves the exchange of standardized, structured information between organizations, permitting direct communication between computer systems and reducing or eliminating the need for human involvement and the re-keying of information.
Required technology: XML. XML is appearing as the language of the e-business. XML was defined by the independent World Wide Web Consortium (W3C) under the SGML standard to make up for some of HTML's obvious shortfalls. XML brings two major breakthroughs to the Internet. First, XML is a powerful, flexible, means to organize the information content. Second, XML is the language that will support all automated transactions between and within all types of organizations.
EDI/XML. There is no doubt at all that XML-based data interchange is going to catch up fast. Its implementation is linked to substantial initial investments in sophisticated technical environments (value added networks with expensive and complicated data communications systems, for instance). Since not every firm can afford investments on this scale, the great majority of small and medium-sized business are barred from enjoying the benefits of efficiency enhancements through EDI-based business processes.
Not only GfK tries to create new standards in the markets of Consumer Electronics, Information Technology, Telecommunication and Photo. Fortunately, most of these competitors focus on one country and/or branch.
5 Internal Analysis
Current status of ENCODEX
Two ENCODEX organizations were founded already before the foundation of ENCODEX International due to the market requests. Encodex started in Japan at the beginning of 1999. Several suppliers and retailers login are using the ENCODEX system since then. The ENCODEX roll out in Netherlands was in August 1999. The system is running successfully and cooperation established with industry associations in consumer electronics and white goods. Since April 2000 ENCODEX has been online in the key European countries (France, Germany, Italy, Spain, UK). In Germany the first contracts with the Photo Industry association are signed. In Italy, Spain, UK and France contacts with the major players from the industry and retail side have been established and service announcement has been done. The ENCODEX has been presented in several companies.
The current strategy focus on the large and international Suppliers and Retailers which are important for the start up period. When major players would have been contracted then the ENCODEX article master file will have a brighter acceptance of more market participants. A snowball effect is expected. Objective of ENCODEX by using the resources and contacts of GfK is to achieve early market acceptance and establish success story as testimonial at the first period of running the ENCODEX article master file. Furthermore a long term objective is to achieve global acceptance and a quasi position in the global market of durable goods which is the core business of GfK panel services.
Description of the International Organization Structure of ENCODEX
The international aspect is a further important advantage against the isolated solutions of the competitors. Therefore, ENCODEX has to be organized as a standardized international offer already from the beginning. The ENCODEX International GmbH is responsible for the software and coordination mainly of the national chapters of ENCODEX, as an organization above them. The national chapters of ENCODEX in every country are the business units of GfK and they are responsible mainly for marketing, contracting and delivering data from their countries. With this flexible structure, ENCODEX using the organization of GfK, has a an international presence and can expand repidly in every country that GfK is present.
Capabilities (compared to competitors)
Problems during the implementation of ENCODEX which have been identified
During the contacts with the suppliers and Retailers in several countries the following problems have been identified which seems to work as barriers for the further development and expansion of ENCODEX.
At he Commercial side
At the technical side
6 strategic objectives and Strategy formulation
Vision: Establish ENCODEX as a common language for Retailers and Suppliers worldwide providing product description and product information online.
Mission: Through the established cooperation with the major players in the European area and later on in global market to achieve critical mass and establish ENCODEX as global standard.
Strategy: ENCODEX differentiation strategy is seeking to win competitive advantage by offering a better service and content as product description and range than competitors.
For the Start up period:
When growing and establish business
Ensure the business
Key success Factors
Technology as THE critical success factor above all the other factors
ENCODEX technologies can be briefly described in the following:
Community as a critical success factor
Community is the ability to built up a critical mass of customers/business partners. ENCODEX is targeted solely to the B2B user community. The final consumer has no access to the data base. The focus of ENCODEX lies on the following target groups:
Commitment as a critical success factor
Commitment for e-companies is a clear idea of objectives and the demonstration of strong motivation using the internet. Investment is the indicator of the commitment.
Content as a critical success factor
The meaning of content is that the e-companies should offer a unique and/or innovative product or service on the internet, using the technology to add value to their product or service. In this sense content for ENCODEX is the offered service (online access to a centralized article master file).
Pricing - The ENCODEX fee concept as a critical success factor
The chosen price calculation has to support an early reach of critical mass for both Retailers and Suppliers. A clear fee structure for all countries and participants is essential otherwise there is the danger the participants to compare the prices. Unfair prices and not clear price structures could lead to unpleasant situations.
Suppliers. The size of product group is important as well as the way of delivery of data by the Suppliers. The price has been designed to encourage the data delivery in ECX format where no efforts are needed by the side of ENCODEX for feeding the Database. A discount of course for more than one Product Groups has been designed. At the fee concept the Data In Module is included as well as the installation and one day training course in order the Suppliers to use the module and to be familiar with the functions.
Retailers. The case of the Retailers is more complicated and different scenarios have to be evaluated.
The criteria in order to evaluate the alternatives are:
Proposed fee concepts depended on:
1. Number of outlets (outlets are the selling points)
2. Turnover of the Retailer within the country
3. The usage of the system
4. The size of the Retailer. Should be defined at least 3 different categories (small, medium, large). A price threshold and ceiling for every category and a price per outlet. Exception are the large Retailers where only the maximum price is fixed.
5. Headquarters price plus additional connection
Interaction as a critical success factor
Those companies that best understand their customers’ needs win Successful e-commerce models must understand customers’ stated and unstated needs. The helpdesk of ENCODEX provides problem monitoring and resolution to support day-to-day operation of ENCODEX.
Basically there are two kind of problems the helpdesk will be confronted with:
Technical Problems. The technical provider TIS will provide full-service 2nd level helpdesk support to track and resolve problems reported by ENCODEX helpdesk.
Content Problems. Content is always matter of ENCODEX. The second level support concerning content has also to be provided by ENCODEX/GfK. The ENCODEX staff for that task has to be supported by GfK staff and its specialists in the single product fields.
Promotion of ENCODEX and Brand image as a critical success factor
ENCODEX as an e-business company must use the Internet for online promotion but cannot underestimate the off-line conventional promotion methods.
Partnership and cooperation as a critical success factor
Strategic partnerships with competitors, software companies for system integration, B2B software and e-marketplaces owners are essential for the development and promotion of ENCODEX.
Third Party participation. ENCODEX International is generally open for the participation of third parties (e.g. NPD, TIS). Since ENCODEX International has no participation in national ENCODEX organisations and no owner rights regarding EIDB, the new shareholders are excluded from the important core assets of GfK.
Process improvement as a critical success factor
The automation of the data flow, starting of the inhouse systems of the Suppliers till the in-house system of the final user through the ENCODEX system, is essential for the development and establishment of ENCODEX.
Integration as a critical success factor
Business process automation is crucial for Suppliers, Retailers and marketplaces to survive and thrive in the new economy. ENCODEX receives the data from suppliers using EAI faster and correct regarding quality and Retailers using ENCODEX as source of product description can integrate these information to their system. The development of EAI of the Suppliers and Retailers is crucial and builds the critical mass ENCODEX needs to survive. These EAI services can be delivered by ENCODEX partners and ENCODEX to act as a consultant.
Control as a critical success factor
ENCODEX needs to control how many users login the system, for how long and from where.
Even ENCODEX is not an e-commerce company it has been essential to review the trends and the recommended strategies for e-commerce companies in order to adapt these practices in ENCODEX strategic development. ENCODEX is not an e-commerce company but it is an online company (dot com) which supports e-commerce and therefor is a part of e-business sector and the new economy.
E-commerce in Europe, the area where ENCODEX is developed, is still in its infancy. All the projections predict that it will boom between 2001 and 2003. Only a small part of the companies and especially the big ones are active in B2B area, but it is planed to. In summary it can be realized that an uniform market standard is appreciated more or less by everyone, but in connection with a few doubts. These doubts mainly concern the future power relations and the dependence of the participants and their possibilities to have influence on such a system.
Important issues for the growth of ENCODEX are:
At the technical side