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LECTURE 5: Managing innovation in e-business market relationships: Customer Based Intangibles and Market Based Assets

AIM Customer based intangibles and market based assets are extremely important for any company’s competitiveness. Innovation in Information and Communication Technology (ICT) has provided great opportunities and challenges to the way in which such assets are managed.

In this lecture we will look at innovation management in relation to the creation of customer loyalty and branding in e-business as a result of the micro-electronic revolution and the emergence of e- business and the Internet. In particular, we will address how companies innovation in order to create value from customer loyalty.

LEARNING OBJECTIVE Students will learn the economic and market positioning principles behind innovation management in customer relations through (i) price competition (adding value to products or ‘product economics’), (ii) ‘total customer solution’ or client based competition (adding value to customers or ‘customer economics’) or (iii) managing customers in networks (adding value to networks or ‘network economics’). This will enable them to reach suitable innovation strategies in the management of customer loyalty in e-business.

Students will also learn to critically evaluate the role and scope of branding as innovation strategies.

KEY READING:

Hax, A and Wilde II, D (2001). Discovering New Sources of Profitability in a Networked Economy. European Management Journal, Vol.9, No 4, pp.379-391

FURTHER READING

Chaffey, D. (2002) E-business and E-commerce Management Harlow: Prentice Hall. (Chapter 9)

The Economist (2004) A Perfect Market. A survey on e-commerce. The Economist, May

51th-21st.

The Guardian (2001), 'Branded: A special investigation' Special Section (about 18 pages) in The Guardian, Monday (09.07.2001) – (FOR SKIM-READING)

Keller, K.L. (2000) The Brand Report Card, Harvard Business Review, January-February

LECTURE OUTLINE:

1. INTRODUCTION:

1.1 Why “Customer Based Intangibles and Market Based Assets”? 1.2. Defining the term “Customer Based Intangibles and Market Based Assets”.

2. THREE CRM APPROACHES: THE CHARACTERISTICS AND ECONOMIC PRINCIPLES

2.1. Best Product (BP) solution: Product Economics

2.2. Total customer solution (TCS): Customer Economics

2.3. The system lock-in solution (SLI): Network economics

3. ELABORATION ON THE ECONOMICS OF CRM IN THE NEW ECONOMY OF ICT

3.1. Best product: Product economics and ‘managing customer loyalty’ strategies for ICT and e-business

3.2. Total Customer Solutions: Customer Economics and ‘managing customer loyalty’ strategies for ICT and e-

business

3.3. Total system lock-in: Network economics and ‘managing customer loyalty’ strategies for ICT and e-business

4. NEW MARKET SPHERES

5. VARYING THE TYPES OF PROMOTION TO INFLUENCE / ENHANCE DEMAND

AND CUSTOMER BONDING

6. THE ‘6 Is’ OF E-MARKETING

7. BRANDING

7.1. Brands: Definition

7.2. Different kinds of brands; - all related to POSITIONING

7.3. The rationale for brands.

8. DISCUSSION

9. CONCLUSION

1. INTRODUCTION:

1.1 Why Customer Based Intangibles and Market Based Assets?: Why Managing Customer Loyalty and Branding?

Building long term relationships with customers is essential for any sustainable business. The application of technology to achieve “Customer Based Intangibles and Market Based Assets” has been a key element in e-business.

Stylised facts:

(i)

Greater importance of new market relationships

(ii)

ICT changing the nature of market relationships

1.2. Defining the term: “Customer Based Intangibles and Market Based Assets”

• With its roots in marketing “Customer Based Intangibles and Market Based Assets:

Managing Customer Loyalty” is about the creation of strategies and processes to build customer loyalty.

• Another evolving string of literature on “Customer Based Intangibles and Market Based Assets: Managing Customer Loyalty” has been on the operational front, regarding the development and organization of software, or technology support solutions, that will automatically manage customer relationships

2. THREE APPROACHES TO “CUSTOMER BASED INTANGIBLES AND MARKET BASED ASSETS: MANAGING CUSTOMER LOYALTY”: THE CHARACTERISTICS AND ECONOMIC PRINCIPLES

What is the central purposes / objectives of managing customer loyalty? and

what are the strategies of achieving customer based intangibles and market based assets?

Hax and Wilde II (2001)’s paper is about strategy in relation to ‘customer bonding’.

Their paper is about creating economic value through customer bonding: This is also the

essence of Customer Based Intangibles and Market Based Assets: Managing Customer Loyalty” .

“The name of the game is to attract, to satisfy, and to retain the customer, and to establish an unbreakable link and close relationship which we refer to as customer bonding” (Hax and Wilde II 2001 p.380)

Hax and Wilde II (2001) discuss three different ways in which firms can profit from the way they bond with customers (see figure on next slide).

· It is all about “Customer Based Intangibles and Market Based Assets: Managing Customer

Loyalty” for profitability.

· They address the ‘economic principles’ behind “Customer Based Intangibles and Market Based Assets: Managing Customer Loyalty” that firms must consult.

Broad view on INNOVATOIN IN “Customer Based Intangibles and Market Based Assets:

Managing Customer Loyalty” : The economics principles

Typology

2.1. Best Product

2.2. Total Customer

2.3 System Lock-In (SLI)

(BP)

Solution (TCS)

Drivers

Product economics:

Customer Economics:

System (or network) economics:

Low price or differentiation

Client based composition of products and services that enhance the customers to create their own economic value

Portfolio of products and services extended by the complementors.

Standardized

products and

   

services

Innovation

Internal product

Interactive or jointly with customer

Distributed or collective across the network

process

development

Competi-

Imitation and price wars, resulting to convergence

Strategy is not war with competitors but love for the customers

Increasing return to scale and adaptation

tion

Benchmar

Competitors

Customers

Complementors in value networks or dynamic markets

-king

Small: Customer is generic, massive, faceless.

Large: Value propositions that bond with each individual customer

Perfect: ‘Forced’ customer

Customer

bonding (trap customers in networks).

bonding

3. ELABORATION ON THE ECONOMICS OF “MANAGING CUSTOMER LOYALTY AND BRANDING” IN THE NEW ECONOMY OF INFORMATION AND COMMUNICATION TECHNOLOGY (ICT)

3.1. Best product: Product economics and “Managing Customer Loyalty” strategies” for ICT and e-business

(I) COSTS AND PRICE

• Scale economics

• Digital products are non-rival by nature (public good economics).

Given opportunities for lower costs and discounted prices are possible, the firm can enhance profit in various ways:

• Cost plus pricing

• Target profit pricing

• Competition based pricing

• Market oriented pricing

• Knowing price sensitivity (price elasticity) when setting prices online

(II) PRODUCT We change the features of a product to bond with customers: New product characteristics in e-business

• Digital vs. non-digital

• Product bundling

• Product line stretching

• Hybrid products

(III) TARGET MARKETS: MARKET SEGMENTATION We need to review the options for using the digital media to reach new markets and to develop existing markets.

We need to:

analyse target markets (or segments) and to understand their needs and potential and then to develop a strategy to satisfy these markets to maximise revenue.

The process is called segmentation

In the e-marketing ‘target market’ planning perspective we need to ask following questions:

• Who are our customers?

• How are their needs changing?

• Which do we target?

• How can we add value? (Through price or differentiation or both)

How do we become a first choice? (positioning)

3.2. Total Customer Solutions (TCS): Customer Economics and “Managing Customer Loyalty” strategies for ICT and e-business

ICT has lowered the transaction costs of TCS: In the networked economy – firms link of very easy (with very low transaction costs) with customers which, in its turn, provide better scope for total

customer solutions (TCS).

TCS is about interaction and feedback mechanisms for ‘marketing intelligence, and customer interface’. Such “Managing Customer Loyalty” should help customers to create their own

economic value by jointly developing the product with the supplier.

The social formation of individual consumer behaviour

• Habits are changing with e-commerce: Consumer psychology and consumer behaviour must be

revisited

Data related challenges in the digital economy supporting total customer solution (TCS) approach to customer bonding

• From sample to population: Traditionally data regarding behaviour of consumers was sampled

(and most often only a few percentages of the total population were collected)

• With online behaviour data can be collected of the entire population and at much less effort.

the opportunity to change from mass marketing and mass production to mass customisation!

3.3. Total system lock-in: Network economics and “Managing Customer Loyalty” strategies” for ICT and e-business

• Learning effects from use of software.

• Infrastructure coordination effects.

• Technological interrelatedness and technological webs.

• Pure network externalities

and technological webs. • Pure network externalities In networks, we find self-reinforcing virtuous circles. Each

In networks, we find self-reinforcing virtuous circles. Each additional member increases the network’s value. Which in turn attracts more members, initiating a spiral of benefits

Members Value Value Members
Members
Value
Value
Members

Pricing in markets applying network economics:

• When customers are locked in to

network standards, bonding is perfect. • Thus, we have eliminated any price sensitivity, which in turn open up for profit

Controversy:
Controversy:

Best Product (BP): Product economics

Total Customer Solution (TCS): Customer Economics
Total Customer Solution (TCS): Customer Economics

System Lock-In (SLI): Network economics

“Managing Customer Loyalty” has changed in nature and character with the emergence of the networked economy:

· CRM has evolved from Product Economics to Customer Economics now it tends towards Network Economics.

Sub-conclusion

Discovering new sources of profitability in a networked economy through “Managing Customer Loyalty”

Type of “Managing Customer Loyalty” is differentiated across industries and across time

4. NEW MARKET SPHERES :

Online markets provide new spheres and this may influence demand.

• The Internet is global in nature

• Convenience by shopping online instead of stress at the store

• Shopping online instead of embarrassment in the shop

Market spheres and competition:

Evidence has shown that competition is

• not between ‘bricks and motar’ outlets only,

• not between new-age click firms only,

• not between ‘bricks and motar’ outlets and new-age click firms.

• All firms should recognize and participate in both retail and e-tail competition. They are of

very different nature and often serving very different products and customers etc.

• ‘Bricks and motar’ outlets and new market spheres are complements

5. VARYING THE TYPES OF PROMOTION TO INFLUENCE / ENHANCE DEMAND AND CUSTOMER BONDING

• The Challenge for e-marketing:

• Firms going online need to invest

• Accepted rules of advertisement are being challenged

• New marketing media communications for promotion

6. The ‘6 Is’ OF E-Marketing: (McDonald and Wilson, 1999)

(1)

Interactivity

(2)

Intelligence

(3)

Individualization

(4)

Integration

(5)

Industry re-structuring

(6)

Independence of location (relate to “Place” above)

7. BRANDING

7.1. Brands: Definition

Denotes ownership and identity of products and services

Brands are protected by trademarks, which protects words, names, symbols, sounds or colours that distinguish goods and services.

7.2. There are different kinds of brands; - all related to POSITIONING (see Annie

Brooking 1998 - reading week 1)

•Product brands •Service brands •Corporate brands (or logos)

7.3. The rationale for brands:

Business ethics argument

The rationale of the trademark system is as defined by the USPTO:

Trademarks function as a safeguard for consumers against confusion of products and quality as well as deception in the market place.

Hence, brands and trademarks enhance quality by helping firms developing recognition by investing in quality of products and services

Economic rationale perspective

•An economic function of brands and trademarks is to economize on consumer search costs. Brands and trademarks also help consumers to know who to complain to when they are not happy with a product or like.

Hence, brands and trademarks enhance quality by helping firms developing recognition by investing in quality of products and services

Critical view on brands:

Brands are hugely influential

– they don’t just sell a product or a service anymore

– advertisers claim that they sell a set of values, a philosophy, a set of values, a love-affair, a ‘religion’ a meaning of life.

Brands are for capitalistic exploitation and not for consumer protection… claims at recent WTO demonstration

WHAT DO YOU THINK ? (see discussion - point 8 below)

8. EXERCISE / DISCUSSION:

QUESTION 1:

With starting point in the economic principles of “Managing Customer Loyalty”, what is the empirical evidence in existing and new market places that customer relations are managed through:

(i)

BEST PRODUCT (by price mechanism and differentiation and by adding value to products) or

(ii)

TOTAL CUSTOMER SOLUTIONS (by adding value to consumers) or

(iii)

TOTAL SYSTEM LOCK-IN (network economics and by locking in consumers)

Discuss e.g.

• Amazon.com

• Nokia

• Tesco

•Virgin

• other

QUESTION 2:

Do brands (i) create good customer relations and (ii) enhance superior competition? – what do you think? In your answer:

• Can you find examples where brands (i) create good customer relations and (ii) enhance superior competition?

• Can you find examples where this is not the case, and explain why?

9. CONCLUSION

In this lecture we looked at innovation management with respect to nurturing your market relations. Focus was on the creation of customer loyalty and branding in e-business as a result of the micro-electronic revolution and the emergence of e-business and the Internet.

An emphasis in this lecture has been on discovering the sources of profitability for firms through “Customer Based Intangibles and Market Based Assets: Managing Customer Loyalty” .

· We addressed different ‘economic principles’ behind “Customer Based Intangibles and Market

Based Assets: Managing Customer Loyalty” that firms must consult before they can design any appropriate strategy for profitability.

· We discussed how “Customer Based Intangibles and Market Based Assets: Managing

Customer Loyalty” has changed in nature and character with the emergence of the networked economy of ICT and digital ideas. We discussed how the principle design of Managing Customer Loyalty” has evolved from Product Economics to Customer Economics and how it now tends towards Network Economics.

Marketing and branding has experienced a huge boost and transformation due to innovation in information and communication technologies (ICT).

We brought forward some controversies surrounding the role and scope of branding. •We discussed how brands are not necessarily beneficial for the consumers and they are certainly not neutral or necessarily creating more competition in existing or new market places.

If you have understood this lecture you should be able to answer following questions

Discuss different ways in which “Customer Based Intangibles and Market Based Assets are managed in old and new market places.

“ICT encourages a move from ‘product economics’ towards ‘total customer solutions’ in new market places”. Discuss.

What are brands, and how do they assist market positioning?

“Trademarks and brands function as a safeguard for consumers against confusion of products and quality as well as deception in the market place.” Discuss.