Escape from the herd

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Escape from the herd

Ruud Huisman

February 2012

Master Thesis

Rijksuniversiteit Groningen

Economics and Business

Msc Business Administration

Specialization Small Business & Entrepreneurship

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EXECUTIVE SUMMARY

The Dutch fashion industry faces capricious times. Especially small firms are struggling to keep afloat. There is less traffic on the streets, a power shift has been observed from retailers to both consumers and suppliers, large chains continue to increase their influence, rents are rising, and if that were not enough, the poor economic situation. Furthermore, the Internet affects the industry heavily. The future in retail is cross-channel. Rather than fully substituting offline operations, the Internet will act as a complement to the physical retail environment.

Any self-respecting retailer or brand has recently invested in an online presence. Not every retailer is doing it for the right reasons, with the right expectations or with sufficient quality. The adoption of a Web site will not automatically generate traffic and become a success. Awareness should be created and the Web site should be of high quality. The moment a firm is not online, it might lead that the firm is overlooked by, at least, part of the firm’s target group. Whereas there is no guidebook to online success, a firm’s online presence should be tailor-made. This can be via the adoption of a Web site or the subscription to social media. Yet, for both, commitment and quality are important. Even though there is widespread agreement that the Internet offers numerous advantages, many small retailers do not possess the knowledge, expertise, or financial resources to exploit these benefits to a maximum.

The firm under study is a small fashion retailer having one location in a lively, medium-sized city. The ultimate goal of the research is to prepare the firm for the future and enhance performance. The analyses showed that the firm is in the possession of a number of strategic resources. Yet, in order for the firm to prepare for the future changes have to be made. The firm must ensure that the customer remains king at all prices. The owners must continue to strive to be different than others in order to survive. All roads lead to Rome when it comes to this ‘escape from the herd’. There are still great opportunities for the firm with respect to online operations. Instead of exploiting the ostrich technique, the firm has recently launched their Web site. This is one step in the right direction. Yet, the Web site lacks quality and therefore the firm will not take full advantage of the possibilities the Internet offers. For all thirteen online dimensions, recommendations are drawn in order to improve the firm’s Web site. The owner’s lack of expertise and knowledge make it critical to outsource the improvement of the Web site to a trustworthy third party.

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PREFACE

This thesis is the final step in order to receive my Master of Science degree in Business Administration. The subject at hand covers the opportunities and challenges a small fashion retailer currently experiences in the turbulent external environment.

I would like to express my gratitude to a number of persons. First the business owner for giving me the opportunity to use his firm for the case study. Second my supervisor Peter Zwart for his assistance, helpful comments and constructive feedback during the entire writing process. Third the experts for their time and effort in allowing me to develop a deep understanding for the industry, developments and the subject at hand. Finally, I would like to thank my parents, sister and girlfriend for their support in the process of writing this thesis.

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1 INTRODUCTION

‘The Internet is becoming the town square for the global village of tomorrow’ – Bill Gates

The Dutch retail industry is changing. The rise of the Internet and mobile applications cannot be overlooked when analysing these recent developments. The Internet has developed into becoming a critical factor in many aspects of today’s modern life. A survey among Dutch inhabitants (Sociaal en Cultureel Planbureau and Nibud, 2009) showed that many indicated that the Internet has become a necessity of life. The importance of the Internet in today’s life can be, among other things, contributed to the many functions this relatively new medium fulfils. It enables users to communicate with one another, in providing information, for entertainment, and, a function that is growing ever since the introduction of the Internet, a channel for the purchase of products and services (Mamaghani, 2009).

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1.1 The research

The initiative for this research came when three Dutch e-tailers offered a similar product in their Fall/Winter collection. Where product prices ranged from €75,00 till €90,00, it was, surprisingly, the retailer with the highest price in which the product was sold out first. Despite the transparent nature of the Internet, price did not show to be of decisive importance in a customer’s online purchase decision. Or is this example an exception to the rule of standard that is applicable in the industry?

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1.2 The firm

The Firm

The firm under study is a small family fashion store in operation since 1986. The two owners run the store together with their youngest son and four young part-time employees in a lively, medium-sized town. In the middle of the 80ies the two designed their own collection of t-shirts and sold these to local stores. This t-shirt selling was their most important source of income, which entailed that during the winter period it was hard to make a living as retailers were not willing to buy many t-shirts for their Fall/Winter collection. This ensures that the owners decided on renting a small store themselves and selling their collection throughout the year. The number of visitors grew steadily and the owners wanted to offer more products. The small size of operations ensured that it was not possible to design and produce sweaters and jeans themselves. Yet, to enlarge their product range, the owners started off buying jeans and coats. Over the years the firm has grown to where it is now. The firm has switched a couple of times from location, but during the last 15 years they are situated on the location in which they are now. The activities at the beginning years of operations still influence modern operations. One of the agents of whom they bought products from, is the co-founder of one of the largest, and internationally respected, jeans-brands of the Netherlands, resulting in a good supplier relationship.

Products, service and activities

The firm under study is a small retailer in the fashion industry. Strong brands that have proven to work form the foundation of the assortment. The other brands in the assortment have evolved over time. The vision and identity of the owners are found in the assortment. Both the owners share a vision of offering high-quality clothes, great designs for good price and believe in the idea of sustainability. Despite is currently seems impossible for the firm to solely offer ‘green’ and ‘organic’ products, many brands are moving towards sustainable production. A growing number of cautious consumers is said to appreciate these products and demand is rising.

Mission, vision and goals

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9 ‘The moment a customer talks about the firm, this person should say that they have entered a store in which they have been helped well, received good service in an environment where great quality products are for sale’. Even though the mission, vision nor the firm’s goals are written down, the functioning of the firm and the salespeople are centred round these concepts. The owner thinks it is hard to say what lies ahead, what the future will bring and where the firm is in five years from now. Both the short- and long-term focus will lie on preparing and becoming ready for the future.

The Internet

The recently launched Web site will not only provide the firm with extra geographical reach, but it is an excellent way to communicate effectively with their customers. For the owners it also provides an extension to today’s level of customer service. The Web site is launched to sustain operations rather than replacing the current business. The Internet influences the Dutch retail industry heavily. The launch of their Web site is a good initiative, but with the current format it will not succeed. This lack of quality ensures the firm that they will not fully exploit the benefits the Internet offers. Yet, a limited number of financial resources and lack of technological knowledge and skills make it hard to fully exploit the benefits of the Internet. This research attempts to assist the owners in their quest for future success.

1.3 Defining the research

The research focuses on improving operations for the firm. There will be a focus on both channels of sales and the corresponding strengths and weaknesses. The industry also plays an important role. Special attention is drawn to the firm’s online presence and those dimensions that are argued to positively affect performance.

The main research question this paper aims to answer is:

‘How can the firm enhance operations to prepare for the future?’

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10 The different sub-questions are:

(1) How can the current business be characterized?

A firm first should have an internal focus aiming to utilize the unique characteristics of the firm’s portfolio of resources and capabilities. With the purpose of developing recommendations for the firm under study, it is important to gain a thorough understanding of the firm and its position in their traditional offline market. The goal is to formulate the firm’s strengths and weaknesses. In order to assess the sustainability of a possible competitive advantage, the firm’s strategic resources will be determined.

(2) Which key success factors apply in the market for clothing and apparel?

In most industries differences exist in the profitability of individual firms (Besanko, 2007). This is also true in the fashion industry. Stakeholder behaviour and developments within the industry might influence the firm’s operations and performance. For defining the final conclusions these developments are important to take into consideration. Small firms in particular have to accept these developments and can do little to influence factors in the external environment.

(3) Which dimensions determine online success?

The firm has recently invested in an online presence. For the firm to fully exploit the benefits the Internet offers, the Web site need to be improved significantly, as it currently lacks quality. A major point of focus within this research is therefore on this firm’s new channel of sales. Special attention is drawn on online success factors. Numerous scholars have studied the subject of online success in terms of performance measures. The literature review defines the most important dimensions.

(4) What improvements can the company make?

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1.4 Methodology

In order to draw final conclusions and define recommendations, both an internal and external analysis will be conducted. In the analysis current business practices and the industry are evaluated. The research follows contributions of De Leeuw (2003) and Gibbs (1988). The foundation of the research is formed by the problem statement and theoretical framework. In addition, the data sources, measurement- and observation issues, the analyses, and corresponding reporting, should be in conjunction with one another. Information is drawn from different sources via a combination of both primary and secondary data. Interviews, conversations, the expert technique, observations, reviews of industry reports and a literature review are the main sources of information gathering. An adopted version of Gibb’s model shall be used since it provides an excellent outline for the research steps to follow. The input for the conclusions forms an evaluation of the analyses of the current operations and the external environment. In order to answer the main research question, operational recommendations are formulated for the firm corresponding with the final stage in Gibbs reflective cycle. A more extensive description of the methodology is presented in Chapter 3.

1.5 Structure

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2 THEORETICAL FRAMEWORK

This chapter presents, reviews and discusses the relevant literature that forms the foundation of this paper. Both an internal and external analysis will be performed. Furthermore, special attention is drawn to success dimensions in the online fashion industry in order to enhance the firm’s online performance.

The theoretical framework combines different perspectives with the purpose of defining a conceptual model suited for this particular research. The Resource-Based View (from now on RBV) deals with the competitive environment of a firm by taking an inside-out approach. According to the RBV an independent firm is responsible for its own advantage. Whereas weaknesses might create opportunities for the firm, these will be explored as well. The firm’s resources and capabilities cannot solely explain firm differences in performance levels. In order to draw the full picture, this inside-out approach is not sufficient. Therefore an outside-in approach will be followed as well. The industry a firm is operating in largely affects operations, justifying the adoption of an external analysis. Before a firm can develop and exploit a Sustainable Competitive Advantage (from now on SCA), it is important to try to match the internal organisation with the Key Success Factors (from now on KSF’s) that apply in the industry. In order to create this advantage over competition, it is important for a firm to identify those resources and capabilities that cause an advantage to exist. Knowledge of these resources enables the firm to strengthen operations even further.

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13 1. Cost leadership

Small firms often face the issue of resource constraints, making cost leadership in general an impossible fundament of competitive advantage for small firms. Scale effects of large firms make cost leadership a possible strategy for them. Cost leadership entails that a firm offers the best price in a market segment by having the best margins.

2. Differentiation

The differentiation strategy can be seen as a more successful means of sustainable competitive advantage for small firms. In essence, a differentiation strategy means that the firm has a strategy of offering something to consumers, no other firm does. This can go by offering a unique product or product feature, but also the providence of great customer service. The firm should aim to create value for its customers resulting in the customer willing to pay a premium for the good or service.

3. Focus strategy

Once a firm adopts a focus strategy, a firm concentrates business on a narrow segment and within that segment it tries to achieve either cost advantage or differentiation.

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2.1 Internal analyses

2.1.1 RBV

With respect to the analysis of the internal business, the RBV is used. The RBV has become one of the most influential and cited theories in the history of management, as the theory aims to explain the internal sources of a firm’s SCA (Kraaijenbrink et al, 2010). The key of the theory is that an individual firm’s profitability is determined by the uniqueness of this firm. Rather than doing the same as other competitors do, differences are argued to be a better means in aiming to improve performance (Grant, 2002). The success of a firm’s performance is highly influenced by the identification of the resources that influence firm’s capabilities. A SCA, a long-term competitive advantage, is achieved the moment a firm acquires and controls valuable, rare, inimitable and non-substitutable resources and capabilities, and has an organisation in place that can absorb and apply these resources and capabilities (Barney, 1991; 1994). This simplicity makes the theory attractive to follow, but criticism has arisen as well (Kraaijenbrink et al, 2010).

In order to achieve an advantage over competition, a firm should formulate their strategy based on the internal capabilities of the firm. Whereas strategy is important in explaining firm’s success (Besanko, 2007), firms should aim to use the right resources and capabilities on the operational level to create value. The RBV focuses on the ability of firms to create unique, bundles of, resources to generate enviable levels of revenue.

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15 The RBV provides a framework that can be used to assess the performance of e-tailers (Colton, Roth and Bearden, 2010). The model makes it possible to search for the existence of a competitive advantage. Obviously, not all resources a firm possesses are strategically and of relevance. The RBV only focuses on those that are strategically important (Rangone, 1999). To identify these resources, numerous authors have proposed different tests (i.e. Barney, 1991; Amit and Schoemaker, 1993). These tests all share the assumptions that the long-term competitiveness of a company depends on the resources that differentiate it from its competitors. De Wit and Meyer (2004) show that certain types of capabilities can be identified in almost every business. As these are unlikely to provide a basis of competitive advantage, these will not be of primary importance. Nevertheless, it should be acknowledged that common resources are not necessarily unimportant. Barney (1989) even states that firm’s survival can be enhanced the moment common resources are exploited to create competitive parity in an industry. Even though firms are not attempting to create a competitive advantage, a firm’s probability of survival does increase (Porter, 1980).

2.1.2 Resources

Various definitions and classifications have been proposed in literature with respect to resources (Rangone, 1999). The simplest classification of resources is by tangibility, like human, financial and physical resources, and intangibility, such as reputation and know-how. This offers a very broad classification scheme and for the purpose of this research it is to be argued too vague. Amongst others, Dollinger (2003) offers a more suitable classification scheme. He devoted part of his book with a clear overview on six homogenous classifications illustrated by the abbreviation P.R.O.F.I.T. It stands for physical, reputational, organizational, financial, intellectual and human, and technological resources. Each classification includes the assets, skills, organizational processes, firm attributes, information and knowledge of a firm being either tangible or intangible (Dollinger, 2003). A description of the resource classes is given below:

- Physical assets

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16 Reputation and brand

It is difficult to separate brand and reputation. Reputation and brands are valuable resources for a firm (Amit and Shoemaker, 1993). Reputation refers to value judgements about an organisation’s qualities, trustworthiness and reliability built up over time (Abimbola and Kocak, 2007). Brands can be defined as products, corporations, persons, symbols and places (De Chernatony and Riley, 1998).

- Organizational resources

Organizational resources can be defined as the firm’s formal reporting structure, its formal and informal planning, controlling and coordinating systems, as well as informal relations among groups within a firm and between a firm and those in its environment (Barney, 1991).

- Financial resources

Financial resources represent all different money resources a firm possesses and has access to. These are the firm’s borrowing capacity, the ability to raise new equity and the amount of cash generated by internal operations (Dollinger, 2003).

- Intellectual and human resources

Intellectual and human resources cover a broad range of topics. Human capital can be defined as the training, experience, judgement, intelligence, relationships, and insight of individual managers and workers in a firm (Barney, 1991).

- Technological resources

Technological resources are physical or legal entities and are owned by the organization (Dollinger, 2003).

2.1.3 Capabilities

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17 The attractiveness of the industry and the firm’s ability to translate resources into capabilities and, subsequently, competitive advantage is of influence as well (Rangone, 1999). Where the identification for these three competences might give interesting insights for many firms, for this particular case it seems inappropriate. The firm under study does not develop or produce any products themselves and is an entrant in the market of e-commerce. Moreover, both the small business owners have no clear knowledge or experiences in the online market or adequate technical skills to create capabilities for the online store. In order to become successful online it is likely that expertise should be hired.

2.1.4 Competitive advantage

A competitive advantage is the advantage of a firm over competition. Barney (1991) defines a competitive advantage as the moment a firm is implementing a value-creating strategy that is not simultaneously being implemented by any current or potential competitor. The development of competitive advantage is one of the main components of strategic behaviour (Bamberger, 1994). Not all resources are likely to be a source of competitive advantage. Once resources and capabilities, next to being valuable and rare, are also inimitable and non-substitutable, the firm’s advantage will be sustained. An SCA will positively influence both short- and long-term performance (Newbert, 2008). Only those resources that are considered to be of strategic relevance will be discussed. In addition, it is important to acknowledge that scoring high on one success factor will not compensate for the loss of another, as a minimum threshold level is required for every success factor.

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18 As already indicated, the four tests of Barney (1991) provide the foundation of the tests to identify, potential, strategic resources for the firm under study. Barney (1991) argues that a sustainable competitive advantage is created when firms possess and employ resources that are (1) valuable, (2) rare, (3) hard to copy, and (4) non-substitutable. The exploitation of resources that share these characteristics affects the performance of an individual firm positively (Newbert, 2008).

1. Valuable

A perquisite for a resource to become a source of advantage is that it should have value. Resources are considered valuable when they help the organization implement its strategy effectively and efficiently. In other words, a valuable resource minimizes threats from the environment or exploits opportunities, which are necessary to improve performance.

2. Rare

A valuable resource that is shared among a large number of competitors will not become a source of competitive advantage (Barney, 1991). A resource is rare once it is not widely available to all competitors. A fairly broad definition, but basically in place to indicate that it is not necessary for a valuable resource to be one of kind. Hirschleifer (1980) argues that as long as the number of firms that possess a particular valuable resource is less than the firms needed to generate perfect competition dynamism, a valuable resource can be labelled rare.

3. Imperfectly imitable

There are three factors that make it difficult for firm’s to copy each other’s resources and capabilities:

a. Unique historical conditions

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19 b. Causal ambiguity

Causal ambiguity exists when the relationship between cause and effect is not well understood or ambiguous (Barney, 1991). It is there to indicate that it is unclear what caused what and why things have happened the way they have. As it is uncertain what caused something, duplication is extremely hard. Complex interactions between social, psychological, economic and technical factors are often hard to fully and clearly understand. The moment a firm understands the causes and effects between its resources and capabilities, their advantage will not last forever. Eventually, competitors will find out as well (Dollinger, 2003).

c. Social complexity

As long as a firm uses human and organizational resources, social complexity may serve as a barrier to imitation. Complex social relationships between managers, workforce, suppliers and customers are all hard to fully understand. In order to illustrate the phenomenon of social complexity, Dollinger (2003) uses the relationship between a company’s sales force and its customers. First of all, it is possible to identify that customers like the staff. Nonetheless, it does not make it possible for competitors to copy this relationship. Even if a competitor will hire away the sales force of the company it might not reproduce the original relationship. The sales force may work under different conditions, with different managers, a different organizational culture while working for dissimilar incentives.

4. Non-substitutable

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20 A resource can be considered strategic once it fits the previously described tests. Since Barney (1991) various authors have proposed different tests. Rangone (1999) attempted in her paper to summarize existing knowledge, by giving the five most important aspects of a competitive advantage, which are (1) competitive superiority, (2) imitability, (3) duration, (4) appropriability, and (5) substitutability. The link with some of Barney’s tests is easy to identify. Yet, wisdom has come with the years and new insights have provided us with new tests. A qualitative basis is used to perform the tests, which makes it hard to assess the true value. This is especially apparent because it is not defined when a resource passes the different tests. Rangone (1999) argues that the score should be medium to high in order to pass the test. Nevertheless, it remains unexplained when a medium or high score is met.

Even though the contributions of Rangone (1999) are a reaction on Barney’s tests, two of the proposed tests, namely the duration and appropriability test, have been subject to debate. The turbulent nature of today’s economy makes it very hard to apply the duration test. As long-term performance is extremely hard to predict nowadays, this test is difficult to comply. In addition, the appropriability test, which discusses to what extent a firm is able to exploit the generated advantages in the industry, is argued by some to be unnecessary. As logical thinking makes it illogical to think that a firm is not able to exploit its resources the moment it has passed the imitability test. In order to ensure a precise analysis, critiques will be taken into account. Yet, all five tests will be performed. Rangone (1999) her five tests are:

1. Competitive superiority

The competitive superiority-test analyses the extent to which the resource contributes in the process of differentiating the company from competitors.

2. Imitability

The imitability test is best described by Barney’s (1991) hard-to-copy-test. It shows how hard it is for current and/or future competitors to duplicate the resource. If a strategic resource cannot be duplicated by competition, the advantage is likely to be sustainable.

3. Duration

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21 4. Appropriability

This test verifies whether the firm owning the resource, is able to exploit the generated advantages in the market. There is partly overlap with Barney’s (1991) valuable test, as the test tries to capture whether a resource is able to exploit the generated advantage in the market.

5. Substitutability

The substitutability test is best described by the non-substitutability-test of Barney (1991). This final test entails that substitutability cannot exist once a resource can be replaced by a common resource that is widely available and provides a firm with the same advantage.

2.1.5 Criticism on the RBV

Over the past decades, the RBV has not only been widely used, but it received considerable critics as well. Kraaijenbrink, Spender and Groen (2010) performed a review of these critiques. They argue that the criticism can basically be grouped into eight categories. Their conclusion is that five of these categories are not completely valid, while three categories are not possible to dismiss. The authors reject the criticism that the RBV has no managerial implications, implies infinite regress, applicability is too limited, SCA is not achievable, and the RBV is not a theory of a firm. The authors argue that the RBV has an overemphasis on the possession of individual resources and insufficiently acknowledge that importance of human involvement in assessing and creating value (Kraaijenbrink, Spender and Groen, 2010).

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22 A competitive advantage might not last forever (Besanko, 2007). Changes in the environment can result in a competitive advantage, which took years to create, to be lost one moment or another. Where the RBV does not assume any dynamism in the environment, today’s economy is far from being stable. Audretsch and Thurik (2001) argue that the economy of today is characterized by great turbulence. This turbulence can also be found in the online market for apparel as well. Competition is high with both traditional bricks-and-mortar retailers and pure plays fighting for sales. On top of that, firms should try to reinforce their strategic resources in order to sustain their advantage over competitors. Therefore, it is necessary for a firm to appropriately react on the environment to sustain its competitive advantage. It is important to understand customer expectations. This justifies the literature review with respect to the success factors that apply in the market of e-commerce with respect to customer satisfaction and performance levels.

Despite criticism on the address of the RBV, a major contribution of the theory is that an emphasis is placed on the importance of the internal environment in the creation of an advantage over competition. In this research the flaws of the theory as suggested by literature will be kept in mind. In other words, an external analysis will be conducted. This is in line with Rangone (1999) who argued that a firm’s internal resources on its own can not predict a firm’s performance. The external analysis places attention on the dynamics in the environment as trends and developments will be discussed.

2.1.6 Conclusion internal analysis

The inside-out approach of the RBV places an emphasis on the firm itself. The first step in this research is therefore to create an understanding of the firm’s operations by identifying the strengths and weaknesses. A categorization of the resources is made with the use of P.R.O.F.I.T. To rephrase, these are (1) physical assets, (2) reputation and brand, (3) organizational resources, (4) financial resources, (5) intellectual and human resources, and (6) technological resources.

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2.2 External analysis

In explaining firm performance and to position the firm well, practice shows that the external environment should be taken into consideration as well (Besanko, 2007; Alsem, 2009). Many factors in the external environment have to be taken for given and are not controllable at firm level. Different competitive activities of different actors in the industry might impact the firm’s operation and performance. Furthermore, macro-economic factors tend to influence operations. For small firms the need for analyzing the environment might be even greater with respect to larger counterparts. The size of an organization positively affects the possibility to use its power to manage the environment and reduce its dependence on such constituencies as suppliers, competitors and financial resources (Robbins and Barnwell, 2002). For small firm owners it is important that, rather than changing the industry with their strategic actions, their actions need to be carried out in order to adapt as good as possible to the external environment. In line with the main research question, a special emphasis will be placed on the online market.

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2.2.1 Customer analysis

Modern marketing literature stresses the importance of delivering value to customers (Alsem, 2009). For a firm it is essential to create customer satisfaction and customer loyalty. A customer analysis is a useful tool to assess these customer demands. The main problem here is that it is hard to get a detailed picture on individual customer demands. Future behaviour and demands are extremely hard to predict. Once consumer’s have experienced higher standards, it is unlikely that they retain satisfied with old standards. The findings from the customer analysis should therefore not be taken as a direct guide, but rather in combination with the other analyses (Alsem, 2009).

The choice for how to define and execute the customer analysis depends on the goal of the analysis. Alsem (2009) makes a distinction between four types of customer analysis, namely (1) segmentation and selection of a target group, (2) positioning within the industry and identifying strengths and weaknesses, (3) performance analysis and impact study, and (4) competitive analysis. The goal of the customer analysis within this research is to create a clear understanding of the firm’s strengths and weaknesses. Customers and store’s visitors are therefore briefly interviewed to learn their opinions, perceptions and experiences with respect to the firm. The customer analysis will start with a brief analysis on the current consumer trends and developments within the industry.

2.2.2 Industry analysis

The main purpose of conducting an industry analysis is to explore the attractiveness of the market and gain an understanding of the opportunities and threats that apply to the industry. The analysis explores both macro- and meso-economical factors. The large influence the Internet is argued to have on the industry and the emphasis within this research, justifies special attention on the topic of e-commerce.

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25 Alsem (2009) argues that macro-economic analysis within an external analysis is justified for a number of reasons:

• In most cases all firms operating in an industry are affected;

• It has a direct influence on market size and thereby the attractiveness of the industry; • It might affect other functional departments within a firm as well, like personnel and

production.

Political factors

Political factors include governmental regulations and legal issues and define both formal and informal rules under which the firm must operate. Political regulations might create both opportunities and threats, which for small firms shall be taken for granted.

Economic factors

Interest rate, exchange rates, inflation rates and economic growth rates are included in the economic factors. These factors might influence firm decisions and performance to a large extent. Within this research special attention is given on the current economic situation, which is likely to influence consumer behaviour within the industry. In this research interest rates, exchange rates and inflation rates are of marginal importance, and will therefore not be discussed.

Social factors

Social factors include the demographic and cultural aspects of the population. These factors include age distribution, lifestyle and values and conceptions that apply to a society. Demand of products or brands might be affected and, thereby, indirectly affecting firm operations.

Technological factors

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2.2.3 Competitor analysis

Competitor analysis is one of the four pillars of market orientation. The market structure of the industry is one best characterized by monopolistic competition. While the products of the firms in the industry are similar slight differences exists. As such, firms operating in the industry are influenced heavily by competition, yet they have a small degree of market control. A competitor analysis usually covers two aspects (Alsem, 2009). The first is an analysis of the intensity of rivalry, while the latter is an analysis of individual competitors. The first classification is mainly covered by the industry analysis, placing emphasis on the latter description with respect to the competitor analysis. However, the competitor analysis discusses the first classification briefly.

2.2.4 Supplier analysis

Suppliers are having an important function in an industry as they supply a firm with the products in their assortment. A good supplier analysis can ensure a firm to achieve good supplier relations (Alsem, 2009). A supplier analysis can be performed on three levels: (1) macro, (2) meso, and (3) micro (Alsem, 2009). Whereas only a general understanding of the suppliers within the industry is argued to be sufficient in the light of this research, the main focus will lie on the first level. Retailers purchase apparel products directly from brands or agencies. Whereas retailers traditionally only faced competition from other retailers, the rise of the Internet gave rise to individual brands selling their products directly to customers.

2.2.5 Conclusion external analysis

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2.3 Online analysis

The firm under study has recently launched a Web site as a new mean of selling their products and in an attempt to improve customer service. Over the last couple of years, the number of Web sites selling products has grown to nearly 40.000, of which a substantial number are in the industry of clothing and apparel. The current Web site clearly lacks quality, making it practically impossible to fully exploit the benefits of the Internet. This combination of fierce competition and a low standard qualitative Web site, make it critical to revise the Web site in order to improve their online presence. Numerous authors have written on the subject of online performance and have identified different dimensions that are said to influence an online presence and performance positively. Whereas the current Web site lacks quality and the Web site scores low on almost every element, these dimensions will be taking into consideration as an external element. An examination of these factors with respect to the current Web site is therefore not likely to be helpful. Conclusions and recommendations will therefore be written in the light of these external findings in order to improve the firm’s current Web site.

2.3.1 P.R.O.F.I.T. and e-tailing

Dollinger (2003) devotes part of his book on the role resources have in e-commerce categorized on the basis of P.R.O.F.I.T. Not every resource classification is argued to play an important role in the success on a firm operating online. An examination of the resource classifications follows below.

Physical resources will seldom play a decisive role in the success of an e-business. These resources are the tangible property the firm uses in production and administration. A number of capabilities are said to be of importance. It is critical to manage the inbound and outbound logistics properly for an e-tailer. This is the ability to successfully complete a customers order. One of two alternatives can be used in order to achieve this successfully. A firm can invest in it’s own fulfillment capability or it can outsource the capability by hiring a third party. Hiring an external party here is often too expensive for small firms. A final issue is whether or not the e-tailer should invest in a physical location as a complement to its online presence. This issue will be covered more extensively in the external analysis.

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28 The remoteness of many forms of e-commerce, makes trust critical in the eventual performance. Furthermore, branding is important, but it is no guarantee for success. Word-of-mouth advertising is said to be a more effective mean as will be discussed more extensively in the following section.

Organizational resources are argued to be very important for an e-tailer as well. This classification includes the firm’s structure, routines and systems. Customer demands are argued to be extremely high nowadays. For an e-tailer it is therefore critical to act in accordance with these standards to keep customer satisfaction high, retain customers and benefit from word-of-mouth advertising. It is critical for the whole organization to deliver accordingly.

A firm its monetary assets are embodied by the financial resources. This includes, among other things, the capacity to borrow and the ability to raise new equity. Financial resources are valuable and necessary. Nevertheless, in most cases these resources are insufficient to be a source of competitive advantage. A lack of small firm’s financial resources makes it relatively hard to fully exploit the benefits of the Internet.

Human resources and intellectual property are undoubtedly of great import in the search for strategic resources. Within the area of e-commerce this resource can form the basis of competitive advantage as well. It includes, amongst other things, the knowledge, characteristics, training and experience of the entrepreneur and the employees.

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2.3.2 Key success factors and e-tailing

The Internet is an attractive, but increasingly competitive, consumer marketing venue. The Internet caused a significant raise in the competitive alternatives consumers can choose from. The large growth of retailers offering clothing and apparel online makes it interesting and worthwhile to identify those resources that are considered to be of influence for operating online. Even though few managers, business owners and industry experts are denying the potential of online retailing, many retailers are struggling how their firm can exploit the benefits from the Internet. The Internet is not a strategy, but a tool (Huizingh, 2002). Determining on how to take advantage of the opportunities is not easy. The online world brings not only opportunities, but challenges are evolving as well. A lack of knowledge on how to successfully adapt the firm into an electronic business is one of the most important causes for failure. Non-buying behaviour, for instance, shows to be closely related to online retailing. Conversion rates in bricks-and-mortar stores are around 20%, while online it typically is around 3%. For a firm it is therefore important to create awareness on the factors that trigger non-buying behaviour and, if possible, anticipate on these. Creating user and customer satisfaction should be a key target as a means of exploiting the benefits of the Internet and eventually improve performance. From research, different resources are identified that, when managed properly, are likely to lead, directly or indirectly, to higher performance. To exploit the benefits from the Internet for the firm under study, contributions to the literature review are examined, analysed, compared and bundled. Table 2 presents the authors and their proposed dimensions used in the literature review. A revision of these dimensions led to eleven dimensions that are presented in the following section. The eleven proposed dimensions are:

• customer service (1,3,6,8,9,11,13,15,16,17,18,20,21); • communication (4,5,9,11,15,18,22,23);

• informational content (1,3,4,8,10,14,16,18,19,22,23); • Web site aesthetics (4,5,9,14,16,19,22,23,);

• Web site design (1,2,4,7,8,9,10,11,12,13,14,15,17,22,23); • Web site quality (3,4,5,6,8,9,16,19,20,21,23);

• trust and security (2,4,5,6,7,9,10,12,13,15,16,17,21,23); • customer and market knowledge (24);

• community (11);

• retail price and availability (3,4);

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Nr. Authors Dimensions

1 Liu and Arnett (2000) Information and service quality, system use, playfulness, system design quality 2 Szymanski and Hise

(2000)

Convenience, site design, financial security (assessing customer online satisfaction)

3 Yang, Peterson and

Huang (2001) Product cost and availability, customer service, online info system quality (information) 4 Zeithaml, Parasaruman

and Malhotra (2000)

Access, ease of navigation (design), efficiency, flexibility, reliability, personalisation, security/privacy, responsiveness, assurance/trust, site aesthetics, price knowledge

5 Cox and Dale (2001) Accessibility, communication, credibility, understanding, appearance (site design), availability

6 Gommans, Krishnan

and Scheffold (2001) Trust and security, customer service, Web site and technology, value proposition, brand building 7 Yoo and Donthu (2001) Ease of use, design, speed, security

8 Cho and Park (2002) Product information, customer service, purchase result and delivery site design, ease of use, additional informational service

9 Madu and Madu (2002) Website performance, features, structure (design), aesthetics, reliability, storage capability, serviceability, security, trust, responsiveness, product differentiation, product customisation, policies reputation, assurance, empathy 10 Ranganathan and

Ganapathy (2002)

Informational content, design, security, privacy 11 Srinivasan, Anderson

and Ponnaloyu (2002)

Customisation, contact interactivity, care, community, cultivation, choice, website design

12 Szymanski and Hise (2002)

Convenience, site design, financial security

13 Yang and Jun (2002) Reliability, access, ease of use, personalisation, security, credibility 14 Montaya-Weiss, Glenn

and Grewal (2003) Navigation structure, information content, graphic style

15 Santos (2003) Reliability, efficiency (ease of use), support (technical help, personal advice), communication, security, incentive

16 Trocchia and Janda

(2003) Performance (delivery fulfilment and transaction efficiency), access, security (trust and assurance), sensation (aesthetic aspects of the websites), information (credibility considerations)

17 Wolfinbarger and Gilly (2003)

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31 18 Kim and Stoel (2004) Informational fit-to-task (information), transaction capability, response time 19 Muylle, Moenaert and

Despontin (2004)

Information, connection, lay-out

20 De Wulf, Schillewaert, Muylle and Rangarajan (2005)

Content, organization and technology

21 Parasaruman and

Zeithaml (2005) Efficiency, fulfilment, system availability, privacy 22 Kim, Kim and

Kandampully (2007)

Convenience, customization, information, communication, website aesthetics 23 Loiacono, Watson and

Goodhue (2007)

Informational fit-to-task, tailored information, trust, response time, ease of understanding, intuitive operations, visual appeal, innovativeness, emotional appeal, consistent image, online completeness, relative advantage

24 Colton, Roth and

Bearden (2010) Market orientation, entrepreneurial orientation, brand strength, supplier relations Table 1. Online quality dimensions

Customer service

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32 For an e-tailer it is crucial to act in accordance with the customer demands you have created. If you, for instance, state that delivery will be made within one day, you have to act accordingly. Due to the physical distance that exists between buyer and seller, quick and accurate order fulfilment is a perquisite. Offering technical help and personal advice are contributing to service quality as well (Santos, 2003).

Poor and slow customer service is a factor that frustrates online consumers (Elliot and Fowell, 2000). E-tailers that continue to fail to satisfy their customer demands will eventually lose all the customers they have. In addition, because of the fact that human beings are social creatures who interact with each other, it is likely that no new customers will ever visit the Web site anymore. In order to remain competitive, a company must continuously work at enhancing perceived value for customers to discourage switching to competitors. Individual online customers have been categorized to be demanding and unforgiving (Mamaghani, 2009). After a failed transaction, a majority of the customers stopped using the Web site ever since. In general, consumers are not likely to repurchase again once failure has been experienced. In his research he reveals ten commonly made e-tail failures together with matching recovery strategies. He emphasizes that it is important to not make the mistake in the first place, but once it accidently happens, proper recovery is a way customers can be preserved. In other words, loyalty does not always disappear once a delivery mistake has been made. Good communication in this respect is critical, as will be discussed in the following section.

Communication

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33 Consumers demand for personalisation grows (Zeithaml, Parasaruman and Malhotra, 2000; Yang and Jun, 2002). Service personalisation is referred to as the interaction between a company and a customer on a one-to-one basis. Two-way communication is important here (Srinivasan, Anderson and Ponnaloyu, 2002). Traditionally, communication between customer and retailer has been characterized as one-way only. Interacting with your customers as a retailer is the new way of doing business. Timely answering to e-mail questions is therefore a perquisite. The phenomenon of social media is another means. Some e-tailers have even incorporated a chat function on their Web site enabling customers to come up with questions, which are directly answered by sales associated of the firm being online.

Informational content

The increase in access and choice and product information is a main trigger of consumer’s choice of this new channel of sales (Mukherjee and Nath, 2007). Information is an important aspect of operating in an online industry. By definition the Internet provides virtually costless and unlimited information. Nevertheless, different authors found information quality to relate positively to user satisfaction (Liu and Arnett, 2000; Yang Peterson and Huang, 2001; Ranganathan and Ganapathy, 2002; Montaya-Weiss, Glenn and Grewal, 2003; Trocchia and Janda, 2003; Kim and Stoel, 2004; Muylle, Moenaert and Despontin, 2004; De Wulf, Schillewaert, Muylle and Rangarajan, 2005; Kim, Kim and Kandampully, 2007; Loiacono, Watson and Goodhue, 2007).

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34 Furthermore, De Wulf, Schillewaert, Muylle and Rangarajan (2006) showed that a Web site with relevant, up-to-date, complete and trustworthy information resulted in higher levels of pleasure for consumers. In addition, informational content is argued to be positively influencing the development and maintenance of consumer trust, which is assumed to be critical in e-commerce (Mukherjee and Nath, 2007). Additional informational service (Cho and Park, 2002) and knowledge about prices was of influence as well (Zeithaml, Parasuraman and Malhotra, 2000).

The moment a consumer feels he has obtained enough characteristics of a product, including colour, sizes, fabrics and price, the eventual purchase will be made. One clear weakness of purchasing clothing and apparel on the Internet is that a consumer is not able to see, feel and/or fit the product. The Internet addresses only two out of the five senses, which are sight and sound. This impediment is hard to overcome in the fashion industry. Different authors found support that the informational content of a Web site influenced the visitor’s experiences. The provision of multimedia elements, such as graphics, audio, video, and backgrounds, are considered to enhance Web site content and increases attractiveness (Bellizzi, 2000).

Web site aesthetics

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35 Web site design

Despite the growing interest in e-commerce pushing it beyond only technological factors of conducting business online, a well-designed Web site remains to be an important aspect. The Web site is key for communication and the primary interface for Internet users who are searching for either information or products (Kim and Stoel, 2004). Web site design refers to the structure of a Web site and the easiness of finding what a user is looking for. Ease of use and convenience are argued to be critical with respect to customer satisfaction (Liu and Arnett, 2000; Zeithaml, Parasaruman and Malhotra, 2000; Yoo and Donthu, 2001; Ranganathan and Ganapathy, 2002; Cho and Park, 2002; Srinivasan, Anderson and Ponnaloyu, 2002; Szymanski and Hise, 2002; Yang and Jun, 2002; Montaya-Weiss, Glenn and Grewal, 2003; Santos, 2003; Wolfinbarger and Gilly, 2003; Kim, Kim and Kandampully, 2007; Mamaghani, 2009). The content of a Web site should be organized and presented in such a way that visitors can easily find what they are looking for (Huizingh, 2002). Users facing difficulty in locating product and service information default their search and will move their purchasing habit to known brands or stores (Mamaghani, 2009). Easiness of use is a factor that is being value by online users (Elliot and Fowell, 2000). Liu and Garnett (2000) showed support that easiness of use is one of the factors determining the success of a Web site. Loiacono, Watson and Goodhue (2007), on the other hand, found no positive linkage between ease of use and the intention of reuse. Kim and Stoel (2005) did find a direct and positive relationship between consumer’s intent to purchase and the easiness to search for information. Szymanski and Hise (2002) showed that convenience was one of the predictors of e-satisfaction. Additionally, support is found that ease of navigation and navigation structure influence customer loyalty (Montaya-Weiss, Glenn and Grewal, 2003). Ease of navigation does not only deal with browsing through the Web site, but also with fast check out and payment.

Web site quality

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36 Inertia suppresses the impact of e-satisfaction on loyalty (Yoo and Donthu, 2001; Anderson and Srinivasan, 2003; Mamaghani, 2009). Overcoming time constraints of consumers is therefore critical. The moment a page takes too long to load, the visitor leave (Gommans, Krishnan and Scheffold, 2001). Online customers expect (1) page downloads in less than eight seconds and (2) completion of the shopping process in less than ten minutes from opening the retailer’s homepage (Mamaghani, 2009).

Elliot and Fowel (2000) demonstrate that users are frustrated if they experience a lack of quality on a Web site. If consumers face difficulties with using a Web site, they are likely not to visit the Web site in the future. Liu and Garnett (2000) found support that the quality of a Web site has a direct positive relation with online success. Access, availability and connection show to be important as well (Cox and Dale, 2001; Zeithaml, Parasaruman and Malhotra, 2000; Yang and Jun, 2002; Troccia and Janda, 2003; Muylle, Moenaert and Despontin, 2004; Parasaruman and Zeithaml, 2005). On top of that, appropriate tool building and other features showed to have impact on the quality of the Web site. The provision of multimedia elements, such as graphics, audio, and video, should be supported. Finally, a Web site designer needs to assure that the site will run smoothly in every browser.

Trust and security

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37 Privacy is closely related to trust (Madu and Madu, 2002). The moment trust is created privacy concerns diminish. Online trust is different from traditional offline trust for several reasons. Physical distance between the buyer and seller, absence of sales associates and separation between the buyer and the product, are distinct features. The physical distance between a consumer and an e-tailer makes it critical for trust to be created among consumers (Mukherjee and Nath, 2007). The greater the degree of trust that is being created, the higher the willingness for purchase will be. Different issues concern customers, like identity theft, credit-card fraud and non-delivery. Mukherjee and Nath (2007) argue that the best way to create customer confidence is through third party endorsement being even stronger the moment it is from a peer customer.

Customer and market knowledge

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38 Community

Small businesses should create a solid relationship with the shopper to build loyalty and encourage repeat business (Liu and Arnett, 2000). The creation of a community is argued to be an effective tool (Srinivasan, Anderson and Ponnaloyu, 2002). A virtual community can be described as an online social entity comprised of existing and potential customers that is organized by an e-tailer to facilitate exchange of opinions and information regarding offered products and services (Srinivasan, Anderson and Ponnaloyu, 2002). The development of social media has become an important tool to create a community. Social media offers small firms the possibility to stay in contact with customers, share information and be a platform in which current and potential customers can discuss. The best way to create customer confidence is said to be through third party endorsement (Mukherjee and Nath, 2007). This effect shows to be only greater once it is from a peer customer. Srinivasan, Anderson and Ponnaloyu (2002) describe several reasons why a community could potentially affect customer loyalty. Communities are found to be highly effective in facilitating word-of-mouth. Furthermore, it offers customer the ability to exchange information and compare product experiences, which are said to add to customer loyalty. This is fuelled by the phenomenon that many consumers turn to other consumers for advice and information on products and services that they wish to purchase. Finally, communities enable customers to identify with a larger group and even randomly social interactions facilitated within online communities can be valuable for customers.

Retail price and availability

Price is showed not to be the most important factor in an online purchase decision (Reichheld and Schefter, 2000). Nevertheless, product price is argued to influence the success of an e-tailer (Yang, Peterson and Huang, 2001). The transparent nature of the Internet facilitates easily made product comparisons. The introduction of specialized ‘compare’-Web sites makes comparing products on features, like price, even easier. Within this respect sharp priced products tend to do well.

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39 Assortment and supplier relations

Last, but definitely not least, is the assortment. The Internet makes it possible to display a larger assortment compared to the limited physical space in a physical location (Srinivasan, Anderson and Ponnayolu, 2002). From a consumer’s perspective the overall increase in choice showed to be an essential ground for ‘going online’. In theory, consumers can purchase anything from anywhere in the world leading to a higher variety of products to chose from (Jones Lang Lasalle, 2009). A large assortment has a positive influence on the sales process of an individual e-tailer (Srinivasan, Anderson and Ponnaloyu, 2002) and on Web site traffic (Madu and Madu, 2002). Web site traffic refers to the total number of visitors. A research by Szymanski and Hise (2002) on e-satisfaction and product offerings found no significant relationship. Feinberg and Kadam (2002) argued that the product and service that is sold online is really determining the success of an e-tailer.

The brands in the assortment form an excellent indicator of the products an e-tailer offers. Apparel branding has been found to reflect consumers association with certain groups. One might say that a brand signals the aspiration of the brand wearer. Consumers use brands as extrinsic cues of e-tailers offerings (Griffith and Gray, 2002). This entails that consumers are pulled towards a Web site when it offers strong, exclusive and/or popular brands. Gommans, Krishnan and Scheffold (2001) argue that an e-tailer should offer brands that are well known, of good product quality and guarantees. This is in line with Ward and Lee (2000) and Kim and Stoel (2005) whom indicated that potential customers in search for designer apparel will typically search for designers names rather than the retailer’s name, that is until they have had a positive direct experience of buying from the company, which makes the retailers name increase in significance. In addition, the assortment is an important predictor of what sort of consumers one will attract. A product’s brand name is important in the consumer’s decision to buy online (Park and Stoel, 2005). Brand familiarity and previous experiences with the item of purchase showed to be positively related to purchase intention. Consumers use brand familiarity as a core internal source of information in terms of product characteristics. Differences are suggested the moment an assortment includes well-known or more exclusive brands.

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40 Supplier relations, assortment and effective market orientation show great overlap. A good relationship with suppliers might create privileges, like having the sole right to sell products in a geographical region. An effective market orientation entails, among other things, that a retailer knows which products and/or services to offer to their customers. Offering an effective and attractive assortment means that you have a clear view of what your, potential, customers want and know the suppliers who can stock you with these products. In this respect strong supplier relations are critical for enabling e-tailers to deliver superior service, meet customer demands, and to offer an attractive assortment (Colton, Roth and Bearden, 2010).

2.3.3 Conclusion online analysis

This section of the research provides insight to the dimensions that are argued to influence online performance positively. Whereas the firm’s current Web site lacks quality and scores insufficient on, almost, all eleven dimensions, the dimensions will not be used for the internal element. To recapture, the eleven dimensions are customer service, communication, informational content, Web site aesthetics, Web site design, Web site quality, trust and security, community, customer and market knowledge, and assortment and supplier relations. Physical, reputational, organizational, intellectual, and technological resources are all of importance. Even though financial resources are not directly mentioned these resources determine to a large extent how a firm can invest in the quality of the Web site.

2.4 Combining the internal and external analysis

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2.5 Conceptual model

The following conceptual model can be derived from the foregoing theoretical review:

Figure 1. Conceptual model

Internal evaluation

• Identification strengths and weaknesses

• P.R.O.F.I.T.

External evaluation

• Identification opportunities and threats o Customer analysis o Competitor analysis o Industry analysis o Supplier analysis SWOT Strengths Weaknesses Opportunities Threats Identification strategic resources • Competitive superiority • Imitability • Duration • Appropriability • Substitutability Online KSF’s • Customer service • Communication • Informational content • Web site aesthetics • Web site design • Web site quality • Trust and security

• Customer and market knowledge • Community

• Retail price and availability • Assortment and supplier relations

Recommendations

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42 Dimensions Interpretation dimensions

Customer service • Delivery fulfillment • Transaction efficiency • Policies reputation • Support

Communication • Response time

• Informational fit-to-task • Support

Informational content • Content

• Tailored information • Product information • Image quality

• Shipping information • Contact details Web site aesthetics • First impression

• Lay-out • Playfulness • Sensation Web site design • Clear structure

• Ease of navigation • Convenience

• Information fit-to-task Web site quality • System availability

• Connection • Reliability

Trust and security • Informational safety • Privacy concerns • Financial security Customer and market knowledge • Customer knowledge

• Market knowledge • Technological knowledge

Community • Social media presence

• Two-way communication • Empathy

• Sharing

Retail price and availability • Competitive product prices • Shipping costs

• Availability Assortment and supplier relations • Brands

• Products

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3 METHODOLOGY

Chapter 3 provides an overview of the research process, the research method and data collection. It contains an analysis of the steps that are followed during the research in order to answer the main research question, and to provide the firm with operational and strategic recommendations. The research process is structured as a combination and adapted version of the work of Gibbs (1988) and De Leeuw (2003). Where De Leeuw (2003) offers a useful approach with respect to the different components of a research, Gibbs (1988) offers guidance on the sequence of steps to follow within a research.

3.1 Research process

De Leeuw (2003) describes and summarizes in his book the main activities of a research process. The research design can be described as a coherent set of thoughtful decisions about problem statement, theoretical concepts, data sources, measurement and observation methods and analysis and reporting. Problem statement and theoretical framework form the heart of the research, while the latter three are the actual approach. He argues that a research is a set of coherent decisions that are interrelated and these decisions have to act in correspondence with one another. In line with De Leeuw (2003) this research sees the different components of the research as interrelated. Decisions with respect to the problem statement, theoretical framework, data sources, measurement- and observation methods, and the eventual analysis and reporting are made in accordance with each other. The theoretical framework and the associated conceptual model form, together with the problem statement, form the foundation of the research.

Escape from the herd