Journal of Knowledge Management Practice, August 2004

Assessing Customer Relationship Management Strategies For Creating Competitive Advantage In Electronic Business

Colin Comb, Glasgow Caledonian University

ABSTRACT:

Increasing numbers of e-businesses view customer relationships as a basis for achieving increased efficiency and leveraging a competitive advantage. The development of customer relationship management is as a result of the optimism expressed by many managers that technology could provide a mechanism for storing, retrieving and disseminating knowledge that adds value to both the customers and the organisation. However, since the late 1990s many industry and academic commentators have expressed disappointment in the returns that CRM was delivering. This article assesses the CRM driven strategies that firms have adopted in pursuit of competitive advantage and argues that only an integrated system that includes the whole enterprise is likely to maximise the potential of information technology in this context.


Introduction

The development of e-business as a method of transacting has spawned a number of business models for creating competitive advantage. Most are geared towards market, price or cost criteria as the key focus for generating profits. However, in recent years more and more managers are becoming aware of the importance of customer loyalty in providing the basis for long-term viability of their organisation’s e-business ventures. It costs as much as twenty times to acquire a customer as to retain one (Lykins, 2002). Consequently, the issue of customer relationship management (CRM) has attracted the attention of the e-business and academic communities as online ventures increasingly adopt customer driven business models. This paper offers an assessment of customer relationship management (CRM) strategies designed for creating competitive advantage in the e-business environment. The assessment leads to the proposition that CRM alone is unable to affect a competitive advantage but should be part of a cross-functional enterprise system that includes enterprise resource planning (ERP). This integrated system is more likely to add value to customers, increase efficiency and create a competitive advantage for e-businesses.

Competitive Advantage: A Definition

Before assessing strategies for competitive advantage using CRM it is useful to clarify what is meant by the term competitive advantage. When a firm earns a higher rate of economic profit than the average rate of economic profit of other firms competing within the same market, then the firm has a competitive advantage in that market (Porter, 1980). A group of firms are in the same market if one firm’s production, pricing, and marketing decisions materially affect the prices that others in the group can charge. A firm’s profitability depends jointly on the economics of its market and its success in creating more value than its competitors. The amount of value the firm creates compared to competitors depends on its cost and benefit positions relative to its competitors (Besanko, Dranove and Shanley, 2000).

Advantages Of Consolidating Customer Information

CRM tacitly places the needs of the customer at the forefront of the business model. Thus, information regarding the buying behaviour and shopping habits of customers form the basis for developing long lasting relationships between customer and supplier. The bank of information gleaned from direct contact, online, fax or any other medium all passes into a common repository for later use (Dutta and Segev, 1999). The analytics for these multiple channels informs decisions for marketing new or existing products and services. Although building knowledge of the behaviour of customers is nothing new, not many firms have a consolidated view of their customers. From the late 1990’s many managers perceived this as a method of creating competitive advantage and the importance of CRM became more widely appreciated. Since then more and more firms in the e-business environment have joined the race to develop a CRM capability.

Many e-businesses sought to create competitive advantage through CRM as its potential became widely known. Certainly, to compete effectively required investment in a central repository for information. An electronic archive helps to foster stronger and longer lasting relationships with customers by providing added value in service based on all previous interactions. Thus, when customers enquire about issues of post-sales support or delivery times that interaction is logged and stored in a central repository. Future contact with that customer benefits from the knowledge gained from previous contact (O’Brien 2002). All departments within an organisation have access to the customers’ history of interaction and engage in communication armed with that knowledge. To the customer this may be perceived as customised service and added value thereby increasing the likelihood of return visits and increasingly loyalty. It can also help to create a hierarchy of customers such that everyone is aware of those with preferential status. The corollary of this being where unreliable or non-paying customers are known throughout the organisation and appropriate action can be taken when contact is re-established. To benefit from important customer information requires the integration of the CRM repository throughout the organisation. Having customer data spread across multiple platforms diminishes an organisation’s ability to gather important data on customers, products and services that can improve profitability and create competitive advantage. Top tier customers may be lost in the time it takes to trace important information from disparate sites.

Critical Success Factors In Implementing A CRM Strategy

A significant number of e-business managers report a reluctance to adopt a CRM business model because of the perceived high cost of introducing new technology. However, the cost of not doing so can be severe. Large numbers of businesses operate multiple interaction channels that undermine consistency in service to both customers and in-house information needs. To offset short-term costs of adopting a CRM strategy managers have to consider an evolutionary approach to implementation. In conjunction to the evolutionary approach there are five other identifiable critical success factors for effective implementation of a CRM strategy. This is illustrated in Figure 1.

Figure 1.  A Model for Customer Relationship Management

 

 

 

 

 

 

 


The first of these is invariably the most difficult to achieve. Senior managers must have the commitment to drive cultural change geared towards a clearly defined customer orientated business strategy. High rates of customer attrition has characterised the e-business environment adding to the costs incurred by companies. A CRM strategy begins the process of reversing this trend by focusing on retention and increasing customer lock-in and loyalty. The second critical success factor is linked to the first. Everyone throughout the organisation must have a customer centred view of the business where the bank of knowledge and understanding of customer needs is greatly enhanced. This necessarily involves understanding how each customer prefers to communicate those needs to the firm. Thus, method, type, content and outcome of each customer communication should be entered into the central repository for future reference by any department within the organisation.

A third requirement for a successful CRM strategy is a robust and flexible architecture. In the initial phase of adopting a CRM strategy managers need to develop the central repository for all customer information. However, to gain a competitive advantage this may not be sufficient. The key to success lies in the flexibility of the architecture in incorporating other systems such as enterprise resource planning (ERP) and business intelligence (BI). Combined, these systems present a powerful mechanism for creating good order information, increasing efficiency and enhancing customer value. Again, the added value to customers is conducive to retention and loyalty. To alleviate the fears of spiralling costs managers can invest in ready-made CRM solutions from the myriad vendors in the marketplace. This very often proves a cheaper and more efficient method compared to building one in-house. Although developing a CRM infrastructure internally can help create a competitive advantage it requires superior analytical and technical skills few firms possess.

However, acquiring the technology and building an appropriate and flexible CRM infrastructure goes only part way to determining a successful CRM strategy. The technology can be seen as both the enabler of CRM and its downfall. Technology can help reduce costs by standardising the information seen throughout the buying and selling process. Crucially, though, it is how the technology is implemented that will determine the extent to which firms can achieve the benefits associated with CRM. Too often, too many firms have failed to capitalise on the potential that the technology offers because of failures in managing one or more of the critical success factors. For example, firms may install the right technology but fail to adapt their corporate culture to one that is customer focused. Chief Executives may enthuse over CRM but fail to lead staff in its implementation. Mostly, firms do not spend enough on the technology and fail to acquire or train staff to utilise it effectively. Thus, the fourth critical success factor is people. Technology offers the capacity to succeed but not the ability. A successful CRM strategy relies on highly motivated and able staff to maximise the potential that the technology brings to the business.

Finally, to bring these criteria together requires strong leadership skills. It is essential that the CRM strategy is backed up by effective and inspirational leadership from the apex of the firm. The leader fulfils a number of crucial roles in driving forward the strategy including information visionary, troubleshooter, change agent and motivator. One of the most difficult tasks facing managers has been to effect a change in corporate attitudes towards one where a technology enabled customer focus is the dominant culture.

Organisations have been spending significant amounts of time and money ensuring that these critical success factors are in place. And yet much of the expenditure has been wasted. The worldwide success rate for CRM is around 3%. The vast majority of organisations have yet to realise any return on investment in CRM. Models for CRM need to go further than meeting the basic success factors. For most this entails overcoming barriers that prevent positive returns on investment. These barriers invariably cluster around issues of cost, deployment time, maintenance and the value of information.

Strategies For Competitive Advantage Using CRM

All CRM applications incur a risk. However, it is possible to minimise these risks by adopting pragmatic strategies that release the potential of using CRM. Firstly, e-businesses need to set clear and achievable business goals around a CRM driven project. The requirement should be exactly defined and not too ambitious. The solution should fit the needs of the firm and not be overly complex or sophisticated. The CRM technology market offers a wide range of applications including e-mail response, business intelligence, data-management and customer profiling. Firms need to focus on those applications that most benefit their needs. A CRM solution should also be cost effective and not too time consuming in its implementation. Here, it is essential that managers understand the value that the solution provides.  Firms must determine the annual direct benefits expected from a CRM solution. Placing a value on some of the benefits may prove problematic. Nevertheless, firms who aim to achieve returns on investment should ensure that the initial cost of software and consulting does not exceed 70% of calculated annual benefits. Deployment of the solution should be carried out within four months such that returns on investment can materialise within six months of the decision to adopt CRM. This may take slightly longer where customisation is required. Good IT support system should smooth the transition to becoming a CRM enabled organisation.

These constitute pragmatic guidelines for introducing CRM but, of course, they are meaningless unless measures are taken to ensure that the data is used effectively. Management need to use the data in a cost-effective way to meet customers’ expectations and, simultaneously, minimise the cost of managing relationships. Here, managers must provide clarity on how best to utilise data to support their business goals.  This can become complex if there are different groups within the organisation that have different CRM needs and objectives. Here, the capability of the CRM solution leveraging a competitive advantage depends on five key criteria against which firms should review their CRM strategy on a regular basis. These criteria are:

         Breadth. The return on investment of a CRM solution is closely correlated to the number of people or groups involved in using the system.

         Repeatability. The potential returns of the CRM solution depend on the frequency of the activity or transaction that the application supports.

         Cost. The cost of the solution must be lower than the cost of the system it replaces.

         Collaboration. CRM applications that support collaboration across organisations increase efficiency, lower costs and help leverage a competitive advantage.

         Knowledge. CRM applications that support knowledge sharing can create a competitive advantage.

It is also important that management have a consensus on the objectives that the CRM solution is designed to help achieve. Conflicting objectives leads to confusion, duplication of effort, inefficiency and, ultimately, a waste of resources as the lack of focus and coherence in the rollout of the CRM strategy results in failure. Alternatively, there are managers who argue that they assiduously follow these guidelines and yet competitive advantage remains elusive. There may be a number of reasons for this. There may be hidden problems in usability where staff members require additional training to glean maximum potential from the solution. There may be conflicting ideas about how best to use the data that leads to inefficiency. However, the most likely reason is that most firms adopt a stand-alone CRM solution without the sort of add-ins that make the difference between creating a competitive advantage and not.

Most CRM solutions are ideal for collecting and managing customer data. However, they lack features for problem solving or handling complex questions. CRM solutions lack knowledge management capability and, therefore, additional software (Primus being one example) is required to plug the gap. This allows employees to access the knowledge database, ask questions and get quick replies. They can also add information to the knowledge bank for others to use. Xerox is just one company who have adopted CRM solutions with a range of add-ins to build a modern knowledge-based organisation. Managers sometimes need to look beyond the basic CRM solution to leverage a competitive advantage. Those organisations that have knowledge management at the heart of their strategy are now looking beyond the basic CRM solution to one that includes suppliers and employees as well as customers. Broadening the number of people and groups who utilise and benefit from a centralised database of information brings increasing economies of scale and the attendant relationship management efficiencies that stem from that.

Increasingly, firms are realising that a stand-alone CRM solution is unable to leverage a competitive advantage. Integration of the whole organisation has emerged as a critical issue for firms in all business sectors who seek competitive advantage. Vendors have recognised this need in e-business by offering CRM solutions within an Enterprise Resource Planning (ERP) package. ERP is a business operating system that is essential for supporting an effective e-business. Buying a CRM solution as part of an ERP vendor’s package can significantly lower implementation costs and help deliver the desired return on investment that, in turn, helps create a competitive advantage. Where CRM integrates and automates many of the customer serving processes in sales, marketing and product services, e-businesses use ERP to increase efficiency, agility and responsiveness to customer needs. It serves as a framework to integrate and automate many of the business processes that have to be carried out within the manufacturing, logistics, distribution, accounting, finance and human resources functions of an organisation (Kalakota and Robinson, 2001) [6]. Crucially, ERP provides cross-functional information to managers such that they are better equipped to make business decisions.

The combined applications of CRM and ERP packages integrate cross-functional enterprise systems that help firms break free of the boundaries of traditional business functions. This cross-functionality is a strategic use of information technology that facilitates the sharing of knowledge. In many modern organisations it is the creation, sharing and management of knowledge that is key to competitive advantage.

Problems In Measuring CRM Performance

Research into the adoption of CRM systems suggests that around 30% of firms are successful in its implementation. However, there are economic limitations that are likely to restrict continuous rates of success. The ubiquity of CRM across significant numbers of industry sectors has eroded the potential for competitive advantage by its utilisation. Also, there is no clear causal link between CRM and returns on investment. Even firms who report increases in revenues post-CRM implementation cannot be sure how much, if any, of the increase has been garnered through CRM utilisation. Similarly, the decreases in revenues of firms utilising CRM may not be wholly, or even in part, the responsibility of CRM systems. Other inflexibilities and inefficiencies in those firms or changes in the external environment may account for the downturn in performance.

Customer satisfaction has been another measure used to determine the success, or otherwise, of CRM. This is fraught with difficulties since the advent of the Internet has radically altered consumers’ expectations. Expectations of reduced delivery times are now fully embedded in the psychology of consumers and firms have had to meet those expectations. To date there is no evidence to suggest the Internet has increased satisfaction rates among consumers. Indeed, many firms struggle to meet raised expectations and run the risk of reduced satisfaction rates in the new economy business environment.

Finally, the extent of cost reductions has been widely cited as a performance measure for CRM utilisation. The most commonly cited example is the efficiencies gained from increasing the availability of information to customers. Again, there are difficulties associated with this measure because efficiencies can be eroded by the empowerment of consumers by allowing free access to information. Consumers can match prices, determine availability, reduce search costs and build communities to increase their market power based on information garnered from Websites. Efficiency gains from CRM utilisation needs to weighed against the potential for diminishing competitive advantage in the face of increasing consumer power.

Another source of potential savings using CRM is in the acquisition of customers. It costs less to increase sales to existing customers than it does to acquire new ones (Birkin and Harris, 2003). However, there is still the process of industry saturation to contend with. Continued acquisition of new customers alongside increasing revenues from existing customers means the total market is being reduced. Firms may decide to focus on acquiring new customers or on existing customers, but to do both quickly erodes the market. Without tacit collusion (illegal) industry revenues would start to decline. This economic reality determines that firms need to pursue a strategy that brings industry leadership in order to gain and sustain a competitive advantage. Consequently, it is unlikely that industries with CRM at the heart of their operations will have a high success rate and this accounts for the disappointments associated with CRM.

Summary

Managers of e-business have to strive for competitive advantage in a dynamic environment. To succeed requires leadership skills in driving forward a customer-centric culture within the e-business. Managers need to marry the technology applications with the human resource skills available to them. They also need to understand what CRM solutions can offer their business and set clear and achievable goals. Placing a value on a CRM solution helps to determine acceptable returns on investment. However, a standalone CRM solution is unlikely to bring a competitive advantage. Most e-business managers now integrate CRM with other packages such as enterprise resource planning (ERP) as part of a drive towards cross-functional enterprise system. It is the effectiveness of this integration that is most likely to determine if a firm can create a competitive advantage in the e-business environment.

References

Birkin, S.J., Harris, M.L. (2003) E-Business and CRM: Directions for the Future, from Proceedings of the International Association for the Development of Information Systems (IADIS) Conference, Lisbon, Portugal, June 3-6, pp 121-128.

Besanko, D., Dranove, D., Shanley, M. (2000) Economics of Strategy (2nd Edition), John Wiley, New York. pp 387-390.

Dutta, S., Segev, A. (1999) Business transformation on the Internet, European management Journal, 17.

Kalakota, R., Robinson, M.. (2001) E-Business 2.0: Roadmap for Success, Reading, MA, Addison-Wesley. p 243.

Lykins, D. (August, 2002) Focus on Your Customers, E-Business Advisor, Advisor Media, San Diego. Pp 10-13.

O’Brien, J.A. (2002) Management Information Systems: Managing Information Technology in the E-Business Enterprise (5th Edition), McGraw-Hill, New York. pp 128-132.

Porter, M.E. (1980) Competitive Advantage, The Free Press, New York.


Meet The Author:

Dr Colin Combe, Lecturer in management, Division of Management, Glasgow Caledonian University, Hamish Wood Building, Cowcaddens Road, Glasgow, UK  G4 OBA; Tel. 0141-331-8811. E-mail: C.Combe@gcal.ac.uk

Colin Combe is a Lecturer in Management at Caledonian Business School. Previously he was Director of Studies at Northumbria University where he led the development and implementation of one of the UK’s first online doctoral programmes. He holds a PhD for research into multimedia corporate strategy.