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The Physical-Virtual Future

The technology issues associated with creating a clicks-and-bricks enterprise are staggering, but so are the underlying business challenges. Don't forget: It all begins with a business strategy

By Don Peppers & Martha Rogers

One of the greatest challenges for customer relationship management (CRM) strategists like ourselves, and for you technology managers, is the creation of an integrated view of customers. So far, most of what we have been hearing and reading centers so much on the technological issues, such as how we integrate and optimize the knowledge gleaned from our virtual interactions (clicks) with our physical operations (bricks). One goal of this work is essential: the creation of an enterprise that can focus on the state of one customer at a time. But as we will explain, before you can optimally address the technological issues involved, a handful of fundamental strategy issues beg your attention.

Keep Up the Good Work

As champions of the need to create a single, organizationwide view of your customer, and as enthusiastic proponents of the view that process must precede technology, we appreciate the ongoing work occurring in the area of enterprise application integration (EAI). Initiatives to integrate supply-chain management (SCM), CRM, legacy, and other leading-edge applications, though daunting, are essential. This step is a critical one for traditional organizations that developed in a less customer-focused time. More important, these initiatives represent a critical step toward the integration of the physical world with the virtual world. To the extent this work leads to improved one-to-one relationships between individual customers and the firms that serve their needs, we believe it will prove to be a powerful business model.

In case you’re not 100-percent familiar with it, one-to-one marketing is the dynamic that results when a customer is known to the enterprise, interacts with the enterprise, and the enterprise responds to the interaction in some discernible and useful (to the customer) manner. In effect, the company says: “I know you. Tell me what you want, and to the best of our ability we will change the way we treat you based on what you tell us.” That’s a one-to-one transaction, and the ability to form a single view of any customer is a necessary precondition. The process only becomes possible because an enterprise can, and does, have a unified view of a single customer across the entire enterprise, one customer at a time.

But the genuinely compelling benefit of engaging a customer in this kind of a process is the fact that the customer himself (herself, itself) is now investing in the continued benefits of the relationship. At the next opportunity, the business says: “Did you like it that way? Would you like it more this way? How about this?” And with every interaction and re-interaction, every refitting of the enterprise’s behavior to the customer’s more and more precisely defined specifications, the benefits to the customer of continuing this relationship increase. It soon becomes easier, cheaper, and more convenient for the customer to simply continue doing business this way, rather than going to the trouble of trying to re-create this relationship with a competitor.

We call this type of ongoing, interactive relationship a learning relationship — a relationship that gets “smarter and smarter” with every customer interaction. Whether you use the example of one-click ordering from Amazon, Peapod remembering your grocery list, Cisco Connection Online recording your system configuration, or RS Components filing your equipment-specification pages, the power of a learning relationship to command a customer’s loyalty should be self-evident.

Such one-to-one transactions are the true building blocks of CRM as a business process, rather than a technology suite. One-to-one marketing, with the productivity improvements, cost benefits, and customer convenience that flow from it, is the true engine of competitive advantage in the 21st century. Still making just products? That is so Industrial Age. Make shoes, make computers, even make floral arrangements, but in the Internet Age, the most important thing you can make — and the most valuable — is a long-term, one-to-one customer relationship.

Not only are the Internet and its related technologies elevating the benefits of cultivating a customer relationship, they are also making it extremely difficult to do business without such relationships. In the Internet Age, the customer is only a few clicks away from better pricing, on any product or service offered by any company. So if you want to sell products in the frictionless environment of the Internet — with no customer relationships to help you and no barriers to entry to protect you — you’d better be prepared to sell your products at prices lower than those offered by your stupidest competitor.

One Customer, One View

This flavor of CRM implies entering into a learning relationship that incorporates everything you could possibly know about your customer from both the traditional physical and increasingly virtual worlds. What is the total value of a customer? And what does this customer want, individually? The only way an organization can know the answer, and differentiate or customize its services for that customer, is to create a single view. Moreover, you need to do more than simply collect this information; you need to act. You have to actively mine that knowledge and act upon what is learned in a way that pleases, or better yet delights, the customer. The CEO may know this intuitively, but it is just as important for IT managers to understand where their efforts should be heading.

Here’s where one customer, one view, really comes into play. We’re actually still in the era of transition from the purely physical world to the partially virtual world. During this transition, customers have greatly valued the Internet’s innovations while ignoring many of its limitations. In other words, they have tolerated multiple or otherwise disconnected views of their relationship: “You know me online, or for that matter through your call center, but I’m a stranger in your store,” or vice-versa.

But as we careen toward the next level of integration — the virtual-physical world — this tolerance will diminish. Customers will expect to be recognized and known. Customers will make no distinction between their online relationships and their physical ones. If they bought it through your catalog or Web site, they’re going to want to pick it up or exchange it at your storefront. Conversely, whether they bought it through your store or at your ticket counter, they may want to review it online. Tolerance for disintegrated views of the relationship will vanish. Companies that create a single view — and act upon it — will discover enormous competitive advantage.

Winds of Change?

Just two years ago the balance of power seemed clearly in the hands of the “dot-coms.” The Web had eliminated barriers to entry: The Web costs nothing, after all; you don’t need an installed base, and there are no physical assets to buy, lease, or rent. Your organization can be totally virtual and yet still have unlimited potential for seizing customers from lazy, industrial-Age organizations. The poster child, of course, was Amazon.com Coming out of nowhere with no physical inventory or warehouse, it instantly became the world’s largest “bookstore.” With Amazon serving as the ideal, the accepted wisdom soon became: The Internet gives the biggest advantage to companies that aren’t dragged down by their physical assets. Dot-coms will soon take over the economy, because they aren’t tethered to the “dirt world.” They are free to soar through the new, frictionless environment of the “cyber world.” (Remember Esther Dyson’s joke? “Question: Why did it take God only six days to create the world? Answer: Because she had no installed base.”)

But now, following so many years of bashing traditional businesses and business models, two trends have emerged:

Clicks are buying bricks. Quietly, the new dot-com companies realized that unless you’re selling a product that is in fact itself virtual, at some point you do have to have a presence in the physical world. Even if you don’t make a product yourself but sell the products made by others, you still have to have logistics — either doing your own “pick-and-pack” or outsourcing it and standing behind it; ensuring proper shipping, tracking, and installation; and attending to order fulfillment, complaints, servicing, and returns. All of which has led Amazon and a good number of other serious dot-coms to begin acquiring dirt-world assets, spending some of the generous financial wealth showered on them by Wall Street to erect physical infrastructure. They’re struggling to create bricks to support their clicks.

Bricks are adding clicks. And guess what? It turns out that an installed base isn’t so bad after all. Leading Industrial-Age companies have realized that if they want to avoid becoming underperforming relics, they have to get serious about dot-comming their own businesses. As they explore this thinking, some of them realize that the physical assets built up over years of executing traditional business represent a significant advantage over their cyber-competitors — an advantage just sitting there waiting to be exploited by creating synergy with the Web.

And regardless of the business model — back to one customer, one view — the losers will be those companies that fail to integrate everything they know about their customers. The real power is in the melding of clicks and bricks to create a customer-focused, full-service, anywhere-anytime-anyhow, wholly integrated enterprise. Efficient e-commerce capabilities in back; customer facing e-commerce online; physical capabilities or even storefronts in a town near you. Who holds the competitive advantage now? The integrated, CRM-focused, one customer, one view, physical-virtual enterprise. In short,traditional companies, once they get religion, hold a very strong hand.

Sleeping Giants

It’s taken a while for companies to reach this realization, but just imagine if they had done so sooner. Look at Barnes & Noble. Its initial reaction was to dismiss Amazon.com — and given what most board members and shareholders knew about the Internet at that time, this reaction was understandable. When it woke up to the reality of the situation the company proceeded to throw what is reported to be more than $100 million into the creation of BarnesandNoble.com — its very own frictionless, untethered cyber-competitor to Amazon.com

That step was significant, but given what we know today, and given Barnes & Noble’s position in the physical world, let’s think a bit about what its response could have been. By setting up BarnesandNoble. com as a separate and distinct operating entity, the company in essence gave up on applying any leverage from its own installed base of hundreds of retail bookstores. At the time, the need to get some presence onto the Internet — any presence — might have justified this course of action. But in effect, Barnes & Noble set up a separate “click” business to go with the “brick” business of retail bookstores.

Suppose, instead, it had tried to integrate the two businesses, in order to establish a true clicks-and-bricks operating enterprise. The new combined company would have one foot planted in retailing and the other in e-tailing, but with the body and head of the company navigating skillfully between these two very different arenas, in order to leverage individual customer relationships. First, this approach would mean integrating BarnesandNoble.com with its network of storefronts. So now, were you to find the book you want online, you wouldn’t have to wait three to seven days to receive it. If you wanted to, you could determine, online, the nearest B&N retail store carrying this particular book in current inventory, reserve it there, and go pick it up this evening. If you wanted to, you could return something to the store that the dot-com part of the business had delivered to you last week. Also, while you’re in the store, you could grab a latte, sit down at a kiosk, and see the same collaborative-filtering generated recommendations I used to get from online only. These in-store computers would even tell you in which aisle to pick up a copy.

BarnesandNoble.com could send you emails saying: “We know you like Elmore Leonard novels, and your local Barnes & Noble store will be hosting an Elmore Leonard book-signing next month. We’ll reserve a seat for you.” Or, because it knows you’re a science-fiction reader, “We’re having a science-fiction festival on Tuesday evening at the Cranberry Mall store, and Wednesday evening at the Elm Avenue store.”

Had this been Barnes & Noble’s approach from the beginning, Amazon.com would have had tough competition. Now, however, Amazon.com has morphed itself into an online department store, offering not just books but CDs, videos, grocery deliveries, retail drugstore items, consumer electronics, financial services and a continually increasing list of other products and services. One benefit to Amazon.com for this strategy, of course, is precisely the fact that it makes it that much more difficult for any clicks-and-bricks competitor to pose a serious challenge. The other benefit, however, is that it gives Amazon.com an increasing and ever more important basis in which to form individual, one-to-one relationships with its millions of customers, buying multiple products, one customer at a time.

Awakenings: Circuit City and Wal-Mart

Meanwhile, a small but growing number of traditional companies have smelled the clicks-and-bricks coffee. For example, in Summer 1999, Circuit City, one of the country’s leading retailers of brand-name consumer electronics, launched its new E-Superstore. Now Circuit City shoppers can access extensive product information and conduct side-by-side price and feature comparisons, all while shopping at home. And, if customers ever have a problem with a product, they can return it to any Circuit City store. Also, once registered on the site, customers can have all their billing, shipping, and store-location preferences stored online. They can receive email announcements about products and sales. And, if they order something via the Web but it turns out that the retail outlet would have been cheaper, Circuit City will adjust the pricing automatically to reflect the lower price.

Or consider Wal-Mart, which is not only a good example of integrating clicks with bricks, but also of one-to-one marketing in general. Walmart.com is designed to feel like your local Wal-Mart. For example, there’s a “virtual greeter,” and a site layout built around a virtual department-by-department floor map. And like Circuit City customers before them, Wal-Mart customers can now return or exchange items bought off the Web at the physical store nearest them. But beyond closely emulating the weekend Wal-Mart visit, there are also a handful of decidedly one-to-one features. For example, there’s a click-and-compare button (the firm encourages shoppers to look around the entire Internet), a gift-finder option (Who are you shopping for today?), a personal shopping list function, and a reminder calendar.

One of the most intriguing features is the integration of in-store photo-processing with Walmart.com Customers can securely view, manipulate, or email photos processed by any Wal-Mart — and even authorize purchases by password-enabled friends and family — via the Web site. This integration of the physical world with the virtual world increases traffic in both worlds, and raises the bar in terms of providing a highly personalized experience for customers.

Certainly, the Wal-Mart site has received criticism. For example, many point out that in its current form, there are not enough product choices, certainly not enough to challenge an Amazon.com in books or a CDNow in music. Furthermore, although the functionality is planned, as of yet Walmart.com can’t send personalized messages to customers relating to events and specials “at a Wal-Mart near you.” Nor is the site ready to feed personalized, geographically specific information to registered users (for example: “Hi John. Did you know there will be a NASCAR personality at your store next Saturday? And don’t forget, all Pepsi products are half price.”) But improvements are ongoing. The point is, if this giant of the retailing world completes its integration of physical and virtual capabilities — and if it doesn’t skimp on comparable attention to CRM principles — Wal-Mart et al presents a formidable challenge to pure dot-coms. Some people may consider Amazon “the Wal-Mart of the Internet world,” but Wal-Mart is the Wal-Mart of the Internet world.

EIGHT IS ENOUGH

CLICKS-AND-BRICKS CHALLENGES

These issues, left unresolved, will block your path to a successful customer-focused clicks-and-bricks strategy.

Command and control
Corporate culture
Channel conflict
Measurement of results
Outsourcing of additional customer services and products
Management of data accuracy
Sales-force compensation
Privacy

But Challenges Remain

If we’re making it sound easy, we don’t mean to. The business-process problems encountered when trying to make a clicks-and-bricks operation actually work are in fact much more complex than the technology issues. That is not to say that the technology problems are simple, just that they are increasingly resolvable. What represents a significantly greater strategic challenge, and one where the CEO and board have to weigh in heavily, are the business issues inherent in a clicks-and-bricks strategy. The list of these issues is formidable:

• Command and control: We know who’s in charge of products, but who’s in charge of this particular customer’s business?

• Corporate culture: All our customers are equal!

• Channel conflict: New and robust channels mean more potential sales but also more cannibalization — and some channels accept pain less readily than others.

• Measurement of results: Who gets credit, what strategies are working, and how do we know the difference?

• Outsourcing of additional customer services and products: How do we integrate with partners?

• Management of data accuracy: Are we sure we’re obtaining all relevant data in a timely manner, and are we making appropriate interpretations?

• Sales-force compensation: How do we alter incentives to create the motivation, cooperation, and results we need?

• Privacy: How do we ensure appropriate use and safekeeping of customer information?

We could devote an entire article or even a book to any one of these strategic challenges. For now, we’re going to focus on the channel-conflict issue.

You can always configure systems to talk with each other. But can you do the same with businesses? Circuit City and Wal-Mart had a relatively easy time developing their business-integration strategies because of the nature of their sales and distribution channels: Corporate headquarters owns both the online and the physical storefronts. Though undoubtedly considerable attention is paid to the issue of maximizing sales and profits, ultimately top management will make the decision on how revenue is credited, and sales outlets will follow.

But what if a physical sales channel is not wholly owned and operated by the enterprise? “Dirtworld-cyberworld” integration is exponentially complicated by third-party sales and distribution channels.

One approach for resolving such conflict comes from furniture manufacturer and retailer Ethan Allen. In summer 1999, the company was contemplating a dot-com entity that would sell only those items from the product line small enough for shipping via third-party carriers such as UPS. As the company examined the strategy more closely, it recognized that it could already distribute both small and large deliveries through its existing retailer and franchisee network. Moreover, these physical outlets were fully capable of providing full service to customers. So the real value lay not in the creation of a separate, limited offering company, but rather in the full integration of Web sales with physical sales.

Then, rearing its head, came the channel conflict. Out of 310 retail stores, approximately 270 were owned by independent franchisees. The problem was this: If the online store sells to a customer within a franchisee’s territory, isn’t that a violation of the intent of a franchising agreement? Who is entitled to the value of the sale?

This challenge required significant break-the-box thinking. Working with franchisees, the company developed a proposal whereby franchisees would receive 10 percent of the value of online sales to customers in their territories where the product is shipped directly from the factory; 25 percent of the value if the local store manages the delivery of the products. The plan was approved, is up and running, and now the Web site’s product line includes almost all the company’s wood merchandise along with a limited selection of sofas and chairs.

Need another channel challenge? What about companies selling through distribution chains that are not only non-owned, but also, nonaffiliated? Hewlett-Packard sells via CompUSA, Computer City, and many other distributors. So does Sony, General Foods, and hundreds of other major brand names. How will they create a clicks-and-mortar personae? One idea is the creation of alliances that focus on the entirety of a customer’s needs surrounding a given product. For example, imagine a Nike virtual-physical alliance that also includes vitamins, exercise equipment, and orthopedic surgeons.

Another Real-World Giant Awakens: Ford

Or consider all the CRM activity now going on at Ford Motor Co. It recently announced a partnership with Trilogy, a leading, one-to-one-oriented, e-business software developer. The new company, as yet unnamed, will spearhead the integration of Ford.com with the operations of thousands of local dealerships. While the Ford.com site addresses the needs of both would-be buyers and established owners, the partnership with Trilogy will focus on helping local dealerships ramp-up their own complementary online capabilities. The ultimate goal is a complete integration of physical and virtual assets to create a full-service, greater customer-focused whole.

The company has also formed content relationships with a major portal (Yahoo) and a community site (iVillage); steps calculated to attract more “eyeballs” to its online presence. In Florida, Ford is piloting a “name your own price for automobiles” with Priceline.com Meanwhile, Ford is also giving computers to its employees (along with discounted, $5-per-month Internet access). The final proof that Ford now understands the power of clicks and bricks is its new initiative with DaimlerChrysler and General Motors to supercharge the supply chain by creating the world’s largest virtual marketplace.

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The power of clicks and bricks is not lost on dot-coms, either. We’ve talked about Amazon building its physical infrastructure, and many others are doing the same. In the future, we predict many dot-coms will take the next step of forming partnerships with established retailers in order to create a strong physical presence. Also notable: Staunchly virtual E-Trade has just announced it will open its first branch office in late 2000.

Meanwhile, the hottest new Web-based companies combine online ordering with ultrafast physical delivery. Companies such as Seattle-based Home Grocer or the San Francisco Bay Area’s Webvan deliver a broad array of groceries and prepared foods directly to customers’ doorsteps in a matter of hours. In addition, third parties are moving in to give dot-coms needed distribution infrastructure; one investment group is seeking funding to create a nationwide network of warehouses that can be stocked with various online wares. While UPS and other express companies today fulfill the vast majority of Internet sales on a next-, two-, or three-day basis, the near future could be a world of online fulfillment within hours.

Clicks and Bricks: You Need Both

The point is, systems integration aside, you can glean all manner of competitive advantages by integrating an existing business model with an online model. We greatly respect and appreciate the contributions of IT strategies such as EAI. But we urge business leaders to never lose sight of the fact that in most companies, most of the work lies in solving the challenges of distribution, channel management, and channel conflict. The solutions to these challenges are only partially about systems integration, and much more about business management and strategy.

Don Peppers and Martha Rogers, Ph.D., are partners of Peppers and Rogers Group, a management-consulting firm based in Stamford, Conn. You can reach them via their Web site at www.1to1.com.