UNDER
CONSTRUCTION
Internet
and Channel Integration: The Example of Financial Services
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Exploratory Study -
Introduction
The
financial services sector has for many years enjoyed some of the longest
lasting customer relationships in the business community. In some industry
segments, such as retail banking, the longevity of customer relationships
is also reflected in the willingness to pay some of the highest customer
acquisition costs for consumers (Reichheld and Sasser 1990).
Recently,
however, the use of Internet technology appears to be challenging traditional
relationships and, therefore, potential business models. For one thing,
companies use the Internet to build electronic direct sales and distribution
channels. For another, companies use these channels for more than just
complementing or bypassing traditional intermediaries. Some companies
use direct electronic channels to sell new, related services such as
insurance products (i.e., Deutsche Bank's www.deutsche-bank24.de).
This bundling or cross-selling of related consumer services is often
referred to as "Allfinanz" (Spremann 1996, p. 59; "German
Finance Three into one will go" 2001). Other companies use electronic
direct channels to increase the extent to which customers are involved
in service production and delivery. This is a relatively new strategy
and is only feasible in consumer mass markets because of new developments
in the area of information technology. It can allow for the reconfiguration
of business relationships in the financial services sector. With many
new inter-organizational, Internet-based information systems, such as
electronic exchanges, the reconfiguration potential extends beyond the
customer connection to include business processes and supplier relationships
upstream in the value chain.
Choice
of Industry Domain
This
research aims to analyze the role of Internet technology in the reconfiguration
of relationships in the financial services sector, especially in its
asset management segment.
Financial
services in general presents a potentially rich domain for the investigation
of the role of digital interactive technology in the reconfiguration
of channel structures.
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First,
financial services account for a major share of Internet transactions,
which implies that financial services are among the early adopters
of digital interactive technology rather than being laggards. This
ensures that effects can be observed.
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Second,
financial services are digital goods. Advertising, sales, and fulfillment
of digital goods can be conducted electronically. Physical goods,
on the other hand, can only be advertised and sold on the Internet.
Therefore, the Internet could have a more significant impact in
digital goods industries.
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Third,
asset management firms in particular could create rich consumer
profiles without expensive incentive programs. Customers have an
obvious incentive to volunteer sensitive personal data, such as
salary information, because potential benefits from financial-advisory
services depend upon the quality of this information.
Research
Issues
Based
on interviews with business executives and a study of pioneers we chose
to categorize Internet-related observations into three groups: (1)
distribution channel, (2) cross-selling, and (3) strategic reconfiguration.
This classification scheme reflects different strategic choices regarding
Internet use. It is consistent with Venkatraman's concept of IT-enabled
business transformation, which distinguishes between the operational
and strategic effects of IS (1994). Furthermore, our three categories
are aligned with the firm structure literature on vertical/horizontal
integration in industrial organization theory. Other classification
concepts recognize, for example, the Internet impact on transparency,
differential pricing, and dis-intermediation (Clemons and Hitt 2000,
p. 4-5, and Table 1, p. 35-38).
1.
Distribution Channel/Forward Integration. Financial services
organizations use the Internet to build a new direct sales and distribution
channel. The Internet’s low transmission cost and its multimedia capabilities,
such as streaming audio and video, allow for rich and interactive
information and transaction services.
2.
Cross-Selling/Horizontal Integration. Financial services organizations
can use online channels to add new products and develop cross-selling
opportunities. Because every vertical industry sells to the same consumer,
cross-selling could save customer acquisition cost and improve the quality
of user profiles.
3)
Reconfiguration/"Virtual" or Electronic Integration: Once
customers are online, companies can use Internet technology and Web
services to automate back-office processes and link them with online
clients to allow for customer self-service.
For one thing this can increase customer satisfaction and loyalty,
which, in turn, may allow for the installation of switching cost in
an otherwise volatile environment.
For another thing, if business processes are automated and integrated
so that customers can configure and trigger the delivery of services
to their desk, this can eliminate entire steps that are currently handled
manually and can thus reduce labor and transaction costs. In other words,
a highly automated provider could "outsource" some operations
to its customers. All that would be left to do would be to provide and
maintain the underlying information technology infrastructure.
An
excellent example is Dell Computer Corporation. The firm is not using
its electronic direct channel to do a better job of selling heterogeneous
products or to reach new customer segments but rather to allow
its customers to trigger the entire production system. In fact, Dell
has reorganized the system so that customers can pull the product through
production as opposed to Dell pushing it into the market. Furthermore,
the company has also reorganized organizational structures. Today, it
considers itself "virtually" integrated,
controlling upstream operations through information management rather
than through financial ownership (Magretta 1998).
Our
study is particularly focused on the extent of customer involvement
in service production and delivery and the role of marketing, distribution
and IS strategy.
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Figures: Asset
Management Value System and Internet Impact |
Research
Approach and Exemplary Literature
Many
studies on the role of information systems in changes in industry structure
have been based on transaction cost theory. Brynjolfsson et al. (1994)
showed that the use of information technology (IT) reduces firm size,
because it reduces external coordination costs more than internal costs.
Dewan et al. (1998) and Hitt (1999) revealed that increased IT use is
negatively associated with vertical integration and weakly positively
related with diversification, because of reduced internal and external
coordination costs.
In
the financial services sector, examples of transaction cost-based research
include Zaheer and Venkatraman with their study of the determinants
of electronic integration (1994).
However,
our interviews and our study of pioneers revealed the importance of
the customer relationships. This is also confirmed in recent research
on Internet retailing. Research by Brynjolfsson and Smith has revealed
that the customer relationship and its impact on branding, awareness,
and trust remain important sources of heterogeneity among Internet rivals
(2000). Therefore, we propose to complement transaction cost-based analysis
with a customer relationship view. Specifically,
we argue that social exchange theory could be helpful in analyzing the
importance of customer relationships. Social exchange theory analyzes
the exchange of information and other goods between individuals in order
to explain their interaction (Thibaut and Kelley 1959, Kelley and Thibaut
1978).
The
marketing sciences literature has successfully applied and adapted social
exchange theory in research on marketing channels (Frazier 1983) and
manufacturer-distributor relationships (Andersen, Narus 1984, 1990).
This research also provides the underpinnings of the relationship marketing
literature (Morgan and Hunt 1994).
Industry
Participation
We
would greatly appreciate your completing the enclosed survey document.
Because the validity of the results depends upon obtaining a very high
rate of response, your participation is crucial to the success of this
study.
Several
tests have revealed that it takes less than 30 minutes to complete
the questionnaire.
Finally,
be assured that your answers will be held in the strictest confidence.
We
will give access to exclusive results to participants only.
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Survey Document
(to be added soon) |
Researchers
Professor
C. Schlueter Langdon (Principal Investigator)
Strategic IS, Marshall School of Business, USC
| Voice: |
310.594.8466 |
| Fax: |
213.740.7313 |
| Email: |
clangdon@marshall.usc.edu |
|
Marshall
School, USC
IOM Department
Bridge Hall 401
Los Angeles, CA 90089
|
Prof.
Dr. Gary Frazier
The Richard & Jarda Hurd Professor of Distribution Management,
Marshall School, USC
Dr.
Gordon Guth
University of Kaiserlautern, Germany
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