Problem 2: Virtual competitors low prices competitions in the US
The contemporary downturn of world economy brought the competition to focus their competitive strategy on low prices and broad offer. In order to compete in the US and internationally, Zappos has to combine a low price product offering and maintain an outstanding customer service in order not to lose one of its most reliable sources of competitive advantage and distinctive feature.
Alternatives to Problem 2:
2. A) Producing Zappos’s own shoe-line to expand current US market share
Zappos.com owns a consistent share of shoe buyers’ market and maintains a solid and prominent position in online retailing. Although the numbers suggest that the company serves the US market like no other company, an expansion of its current share should be considered. Even though the investments that this would require, we agree that Zappos could expand and build a stable source of competitive advantage by producing its own shoes line, followed in the future by its own shoe related wear line.
The main issue regarding the expansion of online market and the low barrier at the entrance that characterize the e-business is that many other shoe resellers and low cost companies accessed the market, raising the level of competition. As cited on the provided case, an increasing number of users get to Zappos by using referral provided by Google, right after having compared the prices of the online shops for the same article. At the same time, Zappos has few possibilities to low down the prices over a certain point, has it has to buy from Nike, Adidas, and all branded producers that impose most of the price. In the final retail price Zappos has to include the high costs on customer service, shipping and overall experience; all these factors combine and most of the time exceed the prices offered by low cost resellers, which give up the quality of the service in order to be able to offer low prices.
Having a self made shoe line would be a solution for both of the latter problems, permitting Zappos to increase dramatically its market share and go over the difficulties provided by online search engines and low cost competition.
3. B) Focus on the main product and offer Zappos customer service experience as en extra
Even if this strategy may collide with the idea of the customer service focused company like Zappos has operated until now, according to recent trends in e-commerce the fragmentation of the service offering may represent an alternative, still less plausible than the latter proposed one.
As showed in the airline business, pioneer of the e-commerce for seats selling, low cost companies are dominating the market offering cheap prices flight to large audience. In order to achieve such a goal, airline companies are dismantling their offering in core service and optional features. The flight remains the main offer they provide, while all extras connected to it are paid separately. In our case, Zappos could compete with US shoe resellers by offering shoes at a discounted price and having the customer service WOW experience paid. In this way, the quality of their services would be the same and customers who don’t request the service would same money on their purchase. The only downturn would be represented by the fact that the customer wouldn’t be considered as unique anymore, having all services offered and included with the purchase. This could impact negatively on Zappos image but keep the pace with online competitors.
Problem 3: High Shipping Costs
To distinguish its service from the one of its competitors, Zappos made up a strategy of differentiation: Deliver WOW Through Service became the first point in its culture.
WOW delivery means three main things in Zappos’ strategy: one-day delivery, free shipping and free return within 365 days from the order’s date. Actually, Zappos guarantees five-day delivery, even if, it is going to delivery in only one day, unless there is any trouble with shipping company or with orders from suppliers. That is the main point of the WOW effect. Free shipping, and free return are offered to customers as a part of the service for orders of any dimension in the United States and in Canada, while in Europe shipping fees are charged on customers. Through this strategy we can identify Zappos philosophy: reproduce online a buying experience matching both advantages from ecommerce and retailer commerce.
For example, customers are attracted from the opportunity to order several pair of shoes, trying them at home, as if they are in retail shop, and buying some of them, returning the others for free, without loosing the comfort of online purchasing, such as home delivery, or a wide choice.
Nevertheless, Zappos’ strategy is very tough and constraining, because if on one hand they aim at impressing customers through their service, on the other hand, they cannot charge too high prices on products, making appreciably thin their markup.
As it is explained in the case, the economical crisis has made consumers more price oriented than in the past period, searching shoes directly from Google instead of going right on Zappos. Increasing prices, for Zappos, could only mean loosing market-share towards their competitors, because their offers will became more convenient than the Zappos one. Customers could renounce to buy on Zappos, preferring physical retailer shops; or they simply can save their money buying shoes online from competitors, paying orders delivery on their own, due to the elevated price gap. Thus, for all these reasons, Zappos growth opportunities are focused on reductions of costs, shipping costs in particular.
As explained in the case, for the purpose of delivering orders in only one day Zappos operates all of this orders with Overnight delivery provided from UPS.
As we know from the case, Zappos only have one warehouse, which is located in Shepherdville, Kentucky, less than 30 minutes from the UPS hub in Louisville. That warehouse has managed all orders of Zappos. Zappos bought that warehouse for several reasons.
Firstly, because of to meet the high-SKU needs for its business, in fact the new warehouse is 832,000 square feet instead of 265,000 of the initial one. Secondly, Sheperville is really close to the UPS hub in Louisville, allowing it in delivering orders faster and cheaper than from the old one. Thirdly, it was inexpensive, compared to other solutions.
Alternatives for Problem 3:
3. A) Multiple warehouses allow Zappos doing one-day delivery through the cheap UPS Ground.
Having multiple distributed warehouses will also allow Zappos to have a better products’ distribution over the country, both in term of efficiency than efficacy, allowing an important reduction of shipping costs.
In fact, Zappos can plan with UPS a cheaper way than overnight delivery, to reach each customer in one-day delivery time. Clearly, it depends on the location of UPS' hub and on how it is close to the warehouse. However, Zappos will reach its customers easier than now, significantly decreasing shipping costs.
Zappos may develop 5 warehouses in the 5 site of the US (the East, West, North, South, and central US) , each warehouse will manage orders of the respective area.
Having multiple warehouses will bring to Zappos an other advantage.
Through separation of the demand by area, Zappos can lead a more focused and precise study of customers needs, and better understand demand's periodicity. It means that each warehouse will be more oriented toward the particular customers of the area that it covers, in order to better match different necessities.
3. B) Partial replace of Overnight delivery with UPS Ground delivery.
Maintaining the original warehouse, Zappos should decide to back of from its desire to ship all orders for overnight delivery and using Ground delivery for customers closer from its warehouse. As estimated from UPS, using UPS Ground delivery could mean significant savings for Zappos.
UPS Ground could be able to reach 11 percent of its customers within one day, 49 percent within two days, 18 percent within three days, 21 percent within four days, and the remaining 1 percent would take five days.
Thus, a good compromise would be to use UPS Ground delivery for all customers that are within two-day delivery, 60 percent, and overnight shipping for the others, 40 percent, with an average shipping time around one day and a half.
Additionally, even more of the country could be served overnight by less expensive ground shipment over weekends, where overnight was considered to be the next business day.
Problem 4: High Customer Service fees
As stated more than once in the text, Zappos.com has been able to elaborate and pursue a detail and client oriented strategy, focusing mainly on the customers’ experience. Its policies regarding shipping, returns and assistance contributed to built the company’s source for competitive advantage. One of the components of this competitive advantage is surely the customer service: Zappos offers phone and mail assistance to its clients, making possible for them to have an immediate comeback on any issue they may experience during their shopping on the site, after the purchase and during the eventual return phases. As stated in the text: “Telephone support was essential for maximizing the customer experience”. Zappos employees are instructed to go deep on the problem, trying to solve it more than dismiss it. This outstanding experience constitutes a high fee for the company, which should reduce the expenditures but at the same time shouldn’t settle for a lower level customer service in order not to lose its competitive advantage.
Alternatives for Problem 4:
4. A) Implementation of a Customer Relationship Management (CRM) system.
As mentioned before in the problem analysis, the company relies on the customer service and mainly on the phone support in order to be able to provide a complete customer experience and assistance for any issue that may arise. In order to manage such a wide pool of customers that every day approaches the company, Zappos may organize its customer service to be a suitable part of a broader Customer Relationship Management (CRM) system.
By definition, CRM systems capture and integrate customers’ data from all over the organization, consolidate the data, analyze it and distribute it to various systems across all the company. Regarding the phone support system, the implementation of a CRM software system may be responsible for the streamlining of the amount of data arriving to the company. The usage of these systems may lead to the gathering of all data regarding percentages of return of customers, fidelity, shopping habits, and also preferred products, categories or styles. The aggregation of all this data would provide the company with a personal file for every returning customer (75% according to text), making possible to personalize the offer and “own” the customer.
Together with the Customer Service module, Sales and Marketing would be involved in this restructuring process. Sales module would provide detailed information on clients’ profitability, impact on revenues and return rate. This information can be used to provide ad hoc offerings, discounts and recommendations. Also these data can be used to answer customer specific inquiries, recording and storing past issues in order to provide an up-to-date, focused response to new issues that may arise. Zappos can also use marketing module to boost the parallel offerings; as mentioned before, the company enlarged its offer by selling a series of articles, from luggage to sportswear, related to shoe business. Marketing module can trace and analyze spending habits and provide a detailed and customized offer for every returning customer.
4. B) Creation of SOPs in response to call center reported issues.
Due to the extensive support provided by the customer center, Zappos.com has to manage almost singularly every issue that may arise from the phone call of any customer around the US. This may be reflected in a very broad range of topic or problems. Nevertheless, another important source of expenditure is the time that call centers employees use to solve the issue of the customer. Zappos commitment is to use all the time needed to solve the problem, assuring an outstanding experience and making the buyer feel special. This may be reflected in an increased expenditure for the company.
A possible strategy that the company may put in place to lower down the costs of answering long calls and issue personally all problems without giving up the quality of the customer service may be an indexing of the exceptions. The company, relying on the work of the Customer Service, may index and classify lists of problems that occurred in the past, in order to be easily searchable every time they occur again. Associated with the problem there should be the adopted solution to that specific issue. This process would permit to store a wide range of solutions for the same problem, and it could be the first step to the creation of a Standard Operating Procedures manual.
Indexing all SOP would permit the Call Center operators to address the problem personally as they would have done before but at the same time have an efficient and fully functional archive of working and tested solutions. This would save time for consultation and still maintain an above the average level of service. Zappos would keep the employees operative but address more issues in the same amount of time. In the end, the average quality would be enhanced, as all solutions would be the result of years of recordings and experiences. Nevertheless, the most common issues would give the hint to the company to permanently address the problems which are registered more often.
Problem 5: Security and Privacy breaches
As an online company, Zappos relies its transaction and manages information of customers, such as personal information and credit card accounts on the Internet. This way has two sides of effects. On the one hand, it is convenient to manage and arrange whole information on the Internet. The company can save some costs on hiring labor and file management. On the other hand, there are some Security and Privacy problems. In the modern society, these problems should be taken seriously.
Although this problem was not mentioned in the case, you can find there was a hacking incident. On January 16, 2012, the company announced that its computer system was hacked, compromising the personal information of 24 million customers. In response, the company required all of its customers to change their passwords on the site. The company also shut down its customer service phone lines, requiring its customers to email questions instead.
Despite the follow-up procedure, the brand of Zappos still affected. Also, it was considered the compensation, which Zappos had done was not enough. Maybe its customers cannot identify this solution and Zappos loses some. As the study on the textbook indicted, when the security of a large firm is compromised, the company loses approximately 2.1 percent of its market value within two days of the security breach, which translates into an average loss of $1.65 billion in stock market value per incident. (Cavusoglu, Mishra, and Raghunathan, 2004) Due to an event happened recently and the study estimated, Zappos has to pay attention on its information security.
Alternatives to problem 5:
5. A) Establish a good IT branch inside of the company to manage the IT platform and crisis.
Zappos can imitate the way of some large firms, which establish an Information technology branch. The IT branch has professional skills and knowledge to develop the protective firewalls. Also, the branch can deal with computer and Internet problems effectively and speedily. Last but not least, it can monitor threats periodically.
However, owning the IT branch also means that Zappos should restructure its company. Potentially, the costs on human resource and training increase, then the consumer service may affect.
5. B) Outsource security management to a professional company.
If Zappos doesn`t want to own its IT branch, it can outsource security management to a professional company. This way can cut costs on human resource and training, and maintain its original structure.
Nevertheless, Zappos still need to spend money on the security problem. maybe the fee of professional company isn`t adorable.
Problem 6: Supply Chain Inefficiency
As explained in the case, Zappos' supply chain contained some inefficiency. Firstly, inbound freight was difficult to be coordinated and resulted in uneven deliveries. Causes of the issue are the limited visibility of Zappos in the manufacturer supply chains and the high degree of uncertainty as to the actual day that a shipment will arrive at the warehouse. As a result, there were days in which traffic at the warehouse was backed up waiting to be unloaded, and other days in which relatively few shipments arrived. Secondly, shipping all the shoes destined for Zappos to the shoe companies, instead of to Zappos directly, affected the overall supply chain efficiency. Thirdly, many of the deliveries to Zappos were made with partial truckloads (LTL), resulting in a large than necessary number of trucks arriving at the Zappos distribution center, as well as the economic inefficiency of transporting partially full trucks.
Alternatives to problem 6:
6. A) Create a personal shipping company to handle suppliers’ pick-ups and deliveries.
At some volume, it might be more efficient for Zappos to have its own truck fleet that could make pickups from supplier warehouses and optimize cargo capacity. This solution can improve efficiency of the supply chain, straightening out shipment arriving at the warehouse, and decreasing the large of necessary number of trucks passing through the warehouse, due to partial truckloads.
The truck feet could also be used to delivery orders to customers sited one or two day delivery time, saving other money on shipping costs.
6. B) Improving the existing extranet with sellers.
Zappos had an extranet, which vendors could use to see the same information that the Zappos buyers saw, such as on-hand inventory, sales, pricing, and margins. Improving the extranet, coordinating and extending it toward product manufacturers will allow Zappos to receive supplies directly from them.
4 - Scenarios
More severe economic crisis (and people giving up customer service for low price)(Moderately Likely)
In case of a severe economic crisis, customers tend to maximize their utility more than they did before. At such a condition people will try to get the maximum with their money so they will search for the cheapest price. In our case, customers may give up from quality and customer service, in order to buy for lower prices. Competitor companies may decrease their prices to steal Zappos customers. Since internet is an effective tool to search alternative prices, customer will eventually go to other cheap opportunities.
Damage brand image with expansion (Moderately Likely):
As the company is expanding, there is a possibility that they will not be able to maintain the “wow” effect as good as in early times. It will be more difficult to have a high quality customer service as the number of customers increase, especially when they have customers from different countries. As a result of damage in the wow effect, the brand image may lose its popularity.
“Wow Effect” will become more difficult to maintain (Moderately Likely):
As customers gets used to the current quality of the service, it will require to do more to “wow” them again. Zappos will have to find other ways to make their customers impressed about the service.
UPS refuse to renew the alliance with Zappos (Unlikely)
In the case UPS would refuse to renew its contract in place with Zappos, the online shoe seller company would have to research the market for another company that would prove to be able to manage such a high volume of transactions, shipping and inventory items management. Nevertheless the know-how of UPS would be difficulty replaceable. On the other hand, UPS would lose a very powerful partner, as the market share held by Zappos constitutes a large and profitable business for Zappos.
Amazon takes over Zappos inventory management system (Moderately Likely)
Although Zappos relies part of its competitive advantage on its inventory management system, we can’t exclude that in a near future Amazon, which handles a larger volume of transactions per day and has important alliances with shipping carriers, may take over Zappos inventory management system. The expertise gained by Zappos is an asset the Amazon could difficulty replicate, and its part of its corporate culture. It’s in the interest of Amazon to keep Zappos as a separate identity and promote the company image more than merge all companies together.
5 – Recommendations
- Zappos offers WOW experiences by its excellent customer services. However, these customer services may account for high operation costs. By implementing a customer relationship system (CRM), Zappos can capture and integrate customers’ data from all over the organization and consolidate, analyze and distribute it to various systems across the company. Moreover, Zappos can develop SOP in response to call center so that it can save a lot of time and maintain the quality of service.
- Moreover, multiple warehouses allow Zappos to perform one-day delivery through UPS ground, which can partially replace some overnight delivery. Thus, Zappos can save money on its high shipping fees. Also, we suggest that Zappos could develop its own shipping company to handle suppliers` pick-up and deliveries, which would be more efficient than each supplier sending its inventory separated to Zappos. At the same time the alliance with Amazon could give the company an alternative on shipping methods and inventory management solutions. Furthermore, Zappos can improve the existing extranet with sellers in order to coordinate and extend it to product manufacturers, allowing Zappos to receive supplies directly from them.
- In order to maintain Zappos` competitive advantage, the company has to find a way to combine a low price product offering and outstanding customer service. If Zappos creates its own shoes-line, it can compete with competitors even on price, without giving up its distinctive customer service experience.
- Recently, the threat of hacking attacks and its inefficient follow up procedure has disclosed Zappos’ security problems: the company can build an IT department or outsource security management to professional IT companies to protect its information system.
- Although Zappos stands on a stable position in the US market, there still is a huge market for expansion. So, the next step for the company is to expand its market overseas. Due to its affiliation with Amazon, Zappos can use Amazon’s foreign services to access markets and to solve the problem of cultural difference. Moreover, Zappos may build long lasting relationship with local suppliers and shipping companies, getting the most out of their local expertise and knowledge of the market.
6 – Appendix
- SWOT Analysis
- Outstanding customer service – Zappos has its customer call center, efficient shipping and return policy, customer feedback system and customer- oriented SOP.
- Supply chain – Zappos develops its own inventory management and can count on important alliances with suppliers and shipping companies.
- Main brands – Main shoes brand supplier sell their products on Zappos.com such like UGG, NIKE, Adidas…etc.
- Extra mile and customer surprise (wow) – Fast shipping time proportional to distance of orders.
- Corporate culture – Zappos is a customer-oriented company with an important commitment from its employees.
- Middle man presence (powered by Zappos)
- Customer fidelity – Returning customers are 75%
- Shoe related businesses integrated – Expand its market from only shoes selling to bags, clothes, athletic products.
- No physical shop – It’s impossible for customers to try size, color, fabric of shoes, also impossible to have personal interaction with clerk.
- Major expenses in HR and Shipments – Zappos covers all the shipping and return fee, which cost it a lot of capital. Also, Zappos has to hire a lot of employees to maintain its call center, wages may be another main costs of Zappos.
- Poor marketing expenditure – Zappos has no any advertising except on the Internet, customers can’t receive Zappos DM or information from other resource.
- Poor brand recognition – Despite Zappos has millions of customers, it is still a very little percentage of the US.
- International Market – Zappos can expand its market out side of the US, and also develop partnerships with foreign sellers.
- Increase the share of shoe customer in local market – Zappos has only 3% of US customers.
- Many unique visitors - Possibility to increase customer fidelity.
- Proprietary line with brand name – develop its own Zappos branded shoe line.
- Social network for marketing – Use TV, radio and social networks as Facebook, Twitter, and Youtube to develop its advertising.
- Creation of a knowledge management system – Develop more efficient customer service SOP to decrease the time employees spend on each customer.
- Create customer relationship management system – manage all customers’ data, develop and maintain relationship with customers.
- International competition – Globalization make companies worldwide more competitive .
- Price comparison website – Website such as Ebay, Google, Yahoo Market, and other shoes seller companies like DSW provide same products as Zappos but they may have cheaper price in lieu of a complete customer experience.
- General bad economic situation – Global recession affects not only Zappos finance but it is a generalized situation.
- Impossible to maintain stable customer satisfaction during expansion.
- Very dependent from shipping companies – Zappos rely on UPS to ship its orders, if UPS cancel the deal with Zappos, it will face a serious problem
- Safety of data on the Internet and in the company – Hacking incident happened in 2012, which shows its problem of data safety.
- Porter Competitive Forces Analysis
In order to analyze the industry in which Zappos.com is actually pursuing its business, we can support the latter SWOT analysis by providing a study based on Michael Porter’s Five Forces analysis. This model is a framework for industry analysis created in order to assess the intensity of competition and the attractiveness of the industry itself.
b.1 Competitive Rivalry
An initial point to analyze the industry is to look at competitive rivalry. In this specific case, Zappos.com is operating in an industry that is subject to a high level of rivalry. Relatively small difficulties for companies to enter the shoes retail market mean a constant and persistent menace for Zappos business. Many new competitors represent a threat for the company, which still has the tools to maintain a prominent position in the online vendor panorama.
Competition is mainly focused on price as stated on the case papers. Customers are tending to approach the company using sideways more than direct traffic to the site to verify the existence of discount or price reduction possibilities. Nevertheless, virtual competitors live the same situation of Zappos, having to compete on a red ocean market. Bricks and mortar shops represent the 90% of the market, and have an appeal and an in-person consistency that Zappos can’t have due to its presence on the net. These shops that constitute the only real alternative to online shopping occupy the largest share of the market.
Zappos still holds the main position in online shoes retailing due to unique sources of competitive advantages, which for their nature are difficult to replicate: the service “Powered by Zappos” implies a deep and proven collaboration between the retailer site and the shoemaker companies, excluding other competitors; the Zappos customer service experience and the WOW effect, a unique feature that built the brand of Zappos and that constitutes one of its main distinctive sources of competitive advantage.
b.2 Threat of New Entrants
New entrants can lift the level of competition and reduce its attractiveness. The possibility of new companies to establish in a certain market is correlated to the height of the entry barriers: the e-business industry is characterized by low set-up costs lifting sensibly the level of this threat for the company. On the other hand, the service offered by Zappos has been perfected through a ten years experience making the company expert and competent about its business, and at the same time difficult to be emulated. In response to the attractiveness that new players may have in the market, Zappos can count on a solid and loyal customer base that has been built across all company life. In conclusion, Zappos has the largest shoes offer online, as a result of an extensive series of agreement with the main shoes brand.
b.3 Bargaining Power of Buyers
The bargaining power of buyers results very important in this market, as they can influence it by asking for higher quality products or services or lower prices, causing the whole industry consistent losses. In the e-commerce business buyers have a very high level of bargaining power, due to the possibility to compare the prices of the same article they are interested and switch at no cost between alternatives. Even in this case, Zappos can count on many techniques perfected during company life in order to maintain a solid customer base and keeping high the level of loyalty. The company has a loyalty program for customers and offers many policies regarding returns and refunds in order to keep the customer satisfied. Nevertheless, Zappos is able to maintain prices low in order to stimulate the comeback from past customers and compete with the threat search engines represent. In the case, returning customers make 75% of the selling.
b.4 Bargaining Power of Suppliers
Suppliers can exercise much pressure on companies, especially if their number is limited and the product the supply is hardly replicable, vital or possible to find elsewhere. These factors are not influenced by a company strategy and are preexisting in the industry structure. In the online business industry, bargaining power of suppliers is low. Zappos has many alternative suppliers so can exercise its power and obtain convenient conditions for the supply of products. Dealing with Zappos is an important asset for suppliers too, as the large customer base, the visibility of the company and the inventory management. On the other hand, a controversial situation may be the relationship between UPS and Zappos, which although the retailer company had the ability to manage, could represent a concrete problem in case the shipping company may refuse its services.
b.5 Threat of Substitute Products or Services
A substitute product is a product that can accomplish the same purpose as the product that the industry is producing. It will restrict the profitability inside the industry. There are no substitute products for footwear and most of major manufacturers are looped in by the company.
by
ildabu87 (student)
