Case 2.

1: Manufacturers Squeeze Retailers

Donavan W. Albert is a retailer's worst nightmare. Like clockwork, the 28-year-old Boise, Idaho, resident used to go to J.C. Penney or Sears every three months and purchase $200 worth of Levi's casual outfits. But tired of the parking horrors at the mall, his most recent shopping trip took place via the Internet at Levis.com and sister site Dockers.com. Levi Strauss does not allow retailers to sell its products online. So he went to the source. "They had basically every style pants I wanted, while a store might be out of a specific size or color," says Albert, a semiconductor executive. The cost, including shipping, was comparable to a store's. "I prefer to purchase directly from Levi's. I trust the company." Excited by the opportunity to showcase their wares, forge direct links with consumers, and realize fatter profit margins, manufacturers are edging onto the webnot just to promote their products but to sell them. Household names such as Timex, Clinique, Sony, General Electric, and Ford are testing the waters or plotting Internet forays. Unlike Levi's, most are doing so carefully, fearful of alienating the retailers they rely on for most sales. Some companies offer items not available in stores. Others go head-to-head with merchants, though they generally sell at list price so as not to undercut them. But manufacturers are expected to intensify their Internet efforts, and their online prices eventually will be more competitive, analysts say. "There's definitely tension between the camps," says analyst Kate Delhagen of Forrester Research. Mattel, after reporting a $17.9 million quarterly loss, recently said it will beef up its muchmaligned web sites. After losing a projected $65 million on $60 million in sales in a year, its electronic commerce is expected to generate $200 million in revenue in the year 2000. General Electric's financial services web site is generating $1.5 million weekly and GE Chairman John Welch said in April that the web will change the way GE sells everything, including appliances. Rival Whirlpool's chief financial officer, Ralph Hake, recently told analysts: "There will come a time when our products are sold directly over the Internet" at much lower costs. Whirlpool sees e-commerce as a natural in a future in which the company will monitor household appliances via the Internet. Polaroid.com recently began selling its $199 ColorShot and PhotoMax digital photo printers along with other products such as scanners and digital cameras. Ford, General Motors, and DaimlerChrysler, whose web sites steer consumers to dealers for new or used cars, are quietly mulling the possibility of selling online, though franchise laws require dealers to play a role. Korean carmaker Daewoo is already selling online.

Virtually all manufacturers are now anticipating their future e-commerce sales strategies. They can expect to save millions on advertising by hitching their web addresses to TV and print ads and even products. Levis.com is etched on its pants labels; BMG's music sites are promoted on its CD packages. An Ernst & Young survey last fall found 15% of manufacturers selling online, up from 9% the previous year. In addition, some manufacturers are tired of competing for floor and web-site space at retailers and are taking advantage of the Internet to reach customers directly. "Macys.com has 25,000 items and limited resources to dedicate to our line of business," says Angela Kapp, a vice president at cosmetics giant Estee Lauder, which operates Clinique.com. "We can dedicate 100% of our resources to our site." Manufacturers also are enticed by a chance to directly receive customer feedback, with which they can develop better products, market other offerings to online subscribers, and build loyalty. "They never owned that customer relationship before," says Laura Berland of ORB Digital Direct, an on-line ad agency.

Clinique.com customizes cosmetics and hair-care products for shoppers. The site has signed up 500,000 users to whom it promotes other offerings. Kapp says 18% of its online shoppers were previously not Clinique customers, and 42% of orders include products shoppers had never used. "There's a whole cadre of people who don't like to go up to a cosmetics counter," which can be intimidating, she says. Clinique is a household name, and analysts say makers must enjoy a similar cachet;think Black & Decker, Polaroid, Hooverto succeed online. Ideal candidates are pricey products such as cars, appliances, and stereos that consumers replace infrequently, typically with the brand they trust. It is believed that manufacturers will never shut out retailers or come close to dominating online consumer commerce. Retailers can bring products from different manufacturers under one roof or onto one web site. Thus many manufacturers plan to involve merchants in their web sales, arranging pickups and deliveries through them. Estee Lauder says it will share its online photos with other web retailers. "If they're building brands (on the web) that we can sell, that ultimately improves our position," says Sears spokeswoman Paula Davis. As for retailer backlash, stores are not likely to stop carrying such popular brands as Levi's or Sony. They could retaliate more subtly, though. Penney's Stephanie Brown says Levi's's policy spurred the chain to intensify promotion of its private brand merchandise (Arizona) over name brands. Timex's two-year-old web site was created because of the company's desire to display all 270 of its watches far more than any store offers"the way we'd like to see it," including discontinued favorites, says Timex advertising director Susie Watson. Another driver, she admits: "Huge margins." Shoppers can search for watches by entering the shape and style they want. The site, unlike most, is profitable and run by an in-house web expert. Start-up costs were less than $100,000. Sales are $6 million, or 1% of the company's total revenue, and doubling annually; not bad in an industry plagued by chronically flat sales, Watson says. More importantly, Timex is gathering a tremendous amount of marketing information. Mattel's sites focus on collectibles, such as classic Barbie dolls, Hot Wheels cars, and customized products. By gathering e-mail addresses, the company can "sell the customer from cradle to grave," says Margaret Whitfield of Tucker Anthony. My Design Barbie lets kids choose hair color, skin tone, and outfits to design dolls that look like them. Vicky Nichols of Pasadena, Calif., recently bought one of the $39.95 dolls for her 8-year-old daughter, Hannah. Nichols says she would "definitely go to the Mattel site" for other Barbies "because they tell you what's coming up and other things retailers wouldn't know." "We see this as incremental sales" that won't cannibalize retailers' business, says Mattel spokesman Glenn Bozarth. However, Whitfield expects the chain eventually to sell most of its other toys online, with gross margins as much as double normal. The web, she says, could loosen Mattel's dependence on five big retailersa contradiction of the company's stated interest. Last December, Mattel could not offer some of its hottest toys because Toys R Us cut its inventory. Says Toys Us spokeswoman Rebecca Caruso, "We would like to be able to partner with toymakers." To give consumers greater choice, some manufacturers are partnering. Last month, BMG and Universal Music, the nation's two largest record companies, with a combined 40% market share, announced a joint venture to promote and sell music online. They hope to stimulate sales by using their artist relationships to let surfers chat with stars, view recording sessions, and preview albums.

"We want to make people more excited about music," says BMG Vice President Kevin Conroy. Noting its prices are higher than CDNow and Amazon.com, he added, "Whether they buy online from us or at a retail location, we win." Some Questions to Think About: 1. How are the product-service bundles changing with the advent of electronic commerce? What kinds of businesses stand to gain because of these changes? What kinds of businesses will lose? Answer: Through the years, customer preferences and demands became more versatile. This is why manufacturers and retailers tend to aggressively react on the upcoming changes that they can foresee about their consumers behavior. The usual way of manufacturing products and distributing these to retailers and distributors is not anymore the trend nowadays. Businesses opt for lesser costs but higher profit margins. With the conventional way of selling their units, manufacturers tend to lessen their initial prices to retailers so that ultimate consumers will still be able to buy their products at an acceptable price. Thus, just enough profit is gained from selling to their usual customers, the retailers and other small-volume distributors. With the advent of e-commerce, traditional products-service bundles change into something that is more consumer-friendly, convenient, flexible and profitable. Many companies are dwelling into e-commerce, as a means of expanding markets, improving customer service, reducing costs, and enhancing productivity. E-commerce changes the basis of competition by altering product/service offerings and the cost structure of firms. Costumers buy quality products marketed through various streamline services; yet they still need to go on malls, retailers shops, boutiques, product centers and other stores to purchase. With the use of the Internet, buyers can easily gather information about products or services without traveling to stores to inspect products and compare prices. E-commerce provides manufacturers with access to their ultimate consumers at lesser costs. Now, they can ensure that their buyers could buy the item that meets their specific qualifications as regards to the shape, size, color, height, length, design, etc., that some of their retailers cant provide due to limited and out-of-stock products. With this, buyers could customize the products that meet their needs. Also, businesses will be able to monitor and respond directly to purchaser feedbacks that would increase customer satisfaction that will greatly influence buyers future purchase intentions. With these changes, many businesses are gaining and enabling e-commerce to prosper more. Many banks nowadays are beginning to deliver credit and deposit products electronically to facilitate payment of electronically sold units. The banking industry is finding opportunities to earn more income because of e-commerce. Also, new entrants to the market will find a cheaper way to penetrate their desire consumer segments. With lesser costs to market and offer their own products, starting businesses would be able to use the Internet to sell their products or services. Delivery businesses will also flourish because of their services such as direct home delivery, haulage and courier. However, some businesses will lose due to the offshoot of e-commerce such as advertising companies that come up with advertisements on TVs, radios and other means. This is because it will be easy for the manufacturers to attach their own website on different sites in the Internet or accumulate email addresses to send campaign articles. If this is also the case, retailers will lose more since inventories supplied to them will be directed to consumers by the suppliers themselves. 2. What are the supply-chain configuration implications of electronic commerce?

Answer: Electronic commerce or e-commerce is buying and selling of products over the internet and other networks. A supply chain as a system of organizations and activities involved in transmitting the products from the supplier to customer is affected by other factors trying to enter the market or industry. The development of technology has caused supply chain processes to change from being a traditional paper-based system of documents to an electronic process of transmitting and data at a less complicated and practical manner with integrated enterprise resource planning systems. This electronic process has been design for faster transaction and improved quality of information in the supply chain. One of the processes affected by the electronic commerce is the source of costs in the supply chain which some are cut across through the chain with e-commerce. Examples of these costs are inventory, administrative costs and transportation costs. With the electronic system, the company can monitor when to add inventory and cuts cost from transporting from a warehouse to another. Another process affected is the communication process between the supplier and the buyer. Before, they used paper in documenting the transaction which is now replaced with electronic data that is more flexible and prevents errors that paper based system; and are well suited to providing information such as product tracking and tracing for customers. With electronic data interchange, administrative and cost due to errors are cut and produces more reliable results but requires substantial one-time expense. A purchase of a company is a quite complicated internal process within different departments. Through e-commerce purchases have been engineered to directly input quantitative information on the system by the purchasing department although the amount to be purchased and ordered is still a major decision to make. Faster compensation and settlement process is exists through all the stages of the chain. 3. What are the cross-functional integration issues raised by electronic commerce? Answer: Cross functional integration is the establishment of tools that facilitates coordination and organization of different functions that they work together effectively to obtain a common goal. This is needed across organizations achieve a well-managed supply chain. In order to market electric commerce effectively, an analysis of accurate data in customers is needed. In electronic commerce to effectively enforce cross functional integration distinct information system is needed to organize the firm with the additional function of selling over the internet. Although, ecommerce enables lowered costs, it needs to accelerate processes and facilitate information sharing to its customers. 4. What ethical issues are faced by manufacturers who use electronic commerce to bypass the businesses that have distributed and retailed their products in the past? Answer: It is important for manufacturers to establish steady networks with their distributors and retailers. These two should be regarded as partners in providing products and services to ultimate consumers. Big companies should take into account the relationships they have built with the businesses that have distributed and retailed their products in the past. Some ethical issues faced by manufacturers lies on the timing, future impacts to reputation, contractual breach of contract and improper alienation of retailers rights and privileges. Retailers should be given enough time to find other manufacturers that would supply them with inventories to sell to their own clients. Also, negative opinion from past retailers and distributors will threaten the companys reputation

and how the business is being perceived by the consumers. Retailers should be promptly informed if the manufacturers have plans of selling their products online so that breach of any agreement will be prevented. Lastly, existing retailers whom the manufacturers have contracted to should be given the priority of selling their products since doing otherwise would jeopardize the retailers own operations, consumer markets and earnings.

Source: Adapted from Paul Davidson, "Manufacturers Squeeze Retailers," USA Today, June 4, 1999.