Living Outside The Box

MKT9M6 – Living Outside The Box

A report to the founder of the new online company

16/04/2013

Executive Summary

This report aims to establish the appropriate business model to adopt for a new online retailer. The content of this report will cover the changing trends in the current market environment that will affect the prospects of this new company, focusing on four key areas, technology, ethics, population and the recession.

The technology trends will cover the rise of e-commerce, showing how it is overtaking classical sales channels such as high street retail, giving this business the opportunity for quick and sustainable growth.

The report will then go on to dicuss the global recession, showing how consumers are becoming more price aware due to having less disposable income, thus spending more carefully, whilst categorizing some of the key consumers in the recession. It will then go on to explain how successful business models exist even through recession, using the example of Gumtree.com, who have seen increased growth through the recession.

Next, ethical trends will be covered. Ethical trends are ones that are becoming increasingly important, and CPE must be taken into account, meaning that this business must undertake ethical behaviour, however that due to the recession in the short term, ethical behaviour should not be the only USP, as spend is being limited, and as such, so are ethical purchases. Expanding on this, the report will cover ethical and privacy issues in the online industry, covering what key aspects need to be focused on when setting up an online business.

Population trends will then be covered, showing how exponential population growth is leading to less wasteful consumption becoming a necessity, relating back to the successes of Gumtree.com in taking issues like this into account, and recommending a similar business model be applied.

The report will then go on to discuss blue ocean strategy and Rogers innovation adoption curve being two important models to apply to this business in order to increase the likelihood of a successful entry into the market.

Drawing on all this research, the report concludes by giving recommendations as to the business model this business should adopt. Leading on from Gumtree.com, it is advised to create a similar site, however focusing the market, unlike Gumree.com have done, in order to reach people who want to ‘live for less’, being able to make purchases ethically without increasing the cost. In addition to this, it is recommended that the site takes advantage of these targeted consumers by making communities on the site, either by geographical location or similar interests in order to create lifelong customers and give customers a unique experience.

Discuss and show how the current marketing environments affect prospects for your case company.

Discussion

The market environment is an ever-changing entity, and understanding the changes is key to success for this company. This is a report carried out by a research firm employed by the new online company, and will cover changing consumer trends in four main areas, which are ethical, technology, population growth and the recession. Analysis of these trends is necessary as they change the way in which consumers choose to consume, and understanding this is key to a successful entry into the market.

1. Technology /Online Trends

The development of technology and e-commerce is another factor affecting businesses. Research from Hazan (2011) shows that online expenditure accounted for 3.4% of overall GDP in the countries studied (see Fig 1.1 for more information). Furthermore, research by IMRG (2012) states that ‘Total B2C e-commerce sales in 2010 are estimated to have grown to €591bn, an increase of close to 25%’. This online growth trend means the market size is growing rapidly, while more classical sales channels are in decline. For example, by mid-2011, British chain retailers were shutting stores at an average of 20 a day, with 4,000 storefronts closing before the first half of the year was over (McLaren, 2012). This shift in consumer behavior shows that online retail is growing quickly and is overtaking classic sales channels, and so developing strong USP’s and establishing yourselves is important. This report will discuss key aspects to focus on and ways in which to do this.

2. The Global Recession

The trends discussed in this report are creating ‘conscious consumers’ (Pepper, 2009). Arguably one of the most influential current consumer trends is the recession. The recession has had a lasting effect on the economy, meaning ‘Families will have £1,000 less disposable income by 2013’ (www.telegraph.co.uk). De Nardi (2012) states that the negative wealth effect and decreased income means that there is a drop in overall consumption. A report from the Harvard Business Review (2009) shows that ‘discretionary thrift’ is occurring, ‘Many desire a more wholesome and less wasteful life’ and research from Decitica (2009) shows that 60 percent of consumers are either ‘involuntary penny pinchers’, those who have been severely affected by the recession, and ‘pragmatic spenders’, who have limited spending but try to stick to past spending patterns. This global recession means that consumers are much more careful about how and when they spend, and this needs taking into account in the development of the business model as the recession will have an effect in the short term.

2.1 Successful Business Models Through The Recession

An example of how this has had an effect can be seen with companies such as Gumtree.com. Gumtree.com has seen large growth through the recession since 2008 (www.companycheck.com), see Fig 2.1 in the appendix for more information. This is because their business model works with those that are limiting spend, giving consumers the ability to live for less. Adopting a similar business model to this is highly advised, as it appeals to every type of consumer, meaning longevity and profitability is achievable even during recession and over the long term.

3. Ethical Trends

This section of the report will discuss the different ethical trends and issues that are occurring both globally and specifically to the online market.

3.1 Global Ethical Trends

While ethical consumption is changing the way consumers purchase, ‘other social and economic forces impact on their behavior, such that positive ethical choices are not always made’ (Szmigin, 2009). It is worth noting that this research is not necessarily applicable across all sectors, however is still worth noting. Szmigin’s point is enforced by Bray (2011), that states that an ‘Ethical Consumption Gap’ exists. As previously mentioned, the recession has had the most significant impact on consumption behavior, and as such consumers are becoming more price aware and are buying ethical products less (Bondy, 2011). While ethical consumption is more difficult during the recession, consumer perceived ethicality (CPE) is still important to consumers (Brunk, 2011). Brunk’s research is again difficult to apply to all sectors of business, however the research is still important to consider. In addition to this, ‘there is a positive relationship between perceived ethicality of a brand and both brand trust and brand affect’ (Singh et al, 2012). This means that an ethical approach is undoubtedly necessary, as post recession will see a rise in ethical consumption, however it should not be the main focus of the company, as ‘ethical consumerism will take a backseat in this recession’ (Flatters, 2009) and as such ethics as a USP will not be profitable in the short term, as consumer expenditure is lower with less disposable income. Furthermore, for these reasons, enlightened self interest should be adopted (Frimer et al, 2011) (See Appendix Fig 3.1 for more information).

3.2 Ethics & Privacy in the Online Industry

Ethical issues also exist, along with privacy issues in the online industry. The main issue here lies in the storage of personal information, outlined by Kelly. E, and Rowland. H (2000) (see Appendix 3.2 for more information). Phelps, Nowak, and Ferrell (1999), state that businesses should adopt a proactive attitude to reducing consumers concerns about privacy issues (see Fig 3.3 in the Appendix for more information), however Caudill (2000) outlines the issue that there are not enough government restrictions on the storage of information. In contrast to this however, Turner (2006) states that in terms of privacy, there is statutory protection in place to protect payment via credit cards online. Transparency of information storage is an important factor, as consumer trust is important, and this should be factored into the business model.

4. Population Trends

Population trends are also a key factor in the shift of consumer behavior. ‘Between 1980 and 2000 total world population grew from 4.4 billion to 6 billion’ (www.worldbank.org)., see Fig 4.1 for more information on this. Recent figures show population figures in mid-2012 to be 7.06 billion (Haub. C, 2013). Expanding on this using Malthusian growth theory (Aghion & Howitt, 1998), we can see that population growth is exponential, and so population growth rates will increase over time. (See Fig 4.2 in Appendix for more information). This trend means that less wasteful consumption is becoming a necessity, as the available resources are not increasing at the same rate as population, and so taking this into account in the business model is essential. Gumree.com have done this, giving people the ability to resell and reduce waste, and developing on this business model would be highly advised.

5. Developing the Business Model

This section of the report will discuss some key ways in which to develop the business model based on the research carried out above.

5.1 Strategic Models

5.1a) Blue Ocean Strategy

As the online marketplace is very competitive, it is advised to adopt a blue ocean strategy as opposed to a red ocean strategy (see Fig 5.1 in the appendix for more information). This means that an innovative idea must be implemented in order to access a less competitive marketplace. Details of value creation through use of a blue ocean strategy is outlined by Yang (2011). As previously shown, the online marketplace is growing rapidly, and as such, competition is fierce, so a blue ocean strategy means there will be less competition, with more opportunity for growth and less barriers to entry from competitors. Research Technology Management (2003) has concluded that ‘accelerating innovation’ is one of the biggest problems facing technology leaders.

5.1b) Rogers Innovation Adoption Curve

Expanding on this, Roger’s innovation adoption curve shows the affect innovation adoption (Rogers, 2010), which shows that first and second adopters will see the most benefit if the idea is a successful one. Refer to Fig 5.2 and Fig 5.3 for more information on this. It is advised that second adoption would be more suitable, as it reduces the amount of risk involved of implementing a new idea. This enforces blue ocean strategy. The successes of this can be seen in companies such as IBM and Intel (Chesbrough, 2006). However, early adoption of innovative ideas can lead to failure, as is the case with multiple industries in the US electronics industry (Maidique, Modesto A, 1984). It is worth noting that this research was carried out for US companies only, and while this is applicable as online companies are by definition international, the US market may behave differently, however the research in this study should still be taken into account. This research does however enforce the point that second adopters reduce risk while still accessing a relatively uncontested market.

6. Recommendations

So, to put this research into context of a business idea, the proposal is as follows. We have established that ethical factors are important, however should not be the sole USP. We have also established that waste reduction and cleaner consumption is becoming a necessity with growing populations and cyclical recessions. Gumtree.com have developed a successful business, however lack any real target audience or aim. They target anybody who sells anything, and there is a gap in the market here. It is proposed that the business model should be based on that of Gumtree.com, however focus on the ‘living for less’ concept, reducing waste and being ethical. Ethical consumption will occur with every purchase, as every purchase will be from reselling or from an ethical seller. This means that consumers can buy ethically at a low price. In addition to this, there will be the ability to create communities of local sellers, creating a genuine community that is committed to better consumption. This will hone the Gumtree.com business model, targeting specific types of consumers while taking into account all the trends discussed above. It is also in line with Roger’s Innovation Adoption Curve, being one of the first to adopt such an idea, and also uses the blue ocean strategy, as while there is some competition, it is not a fiercely contested market. Furthermore, it enforces the use of enlightened self-interest. In full, this approach will take into account all trends discussed in this report, giving the business the best chance to survive in the long term by taking into account both short term and long term trends covered.

Appendix

A survey of the economies of 13 countries with large economies and of 4,800 small and medium-sized businesses in 12 countries and econometric analysis of the survey 's data are considered. It was found that the Internet accounted for 3.4 percent of gross domestic product (GDP) of the countries studied, which is a larger percentage of GDP than that generated by education, agriculture or public utilities.

Fig 1.1 – Online Expenditure and GDP

This graph shows the net worth of Gumtree.com since 2007. The recession hit in 2008, however it is clear from the graph that levels of growth increased the year the recession begun. This can be attributed, from the research carried out in this report that the increased rate of growth occurred due to changes in consumer trends. As people had less disposable income and are more price aware, the consumer looks for new ways in which to consume, trying to maintain their current lifestyle if possible. The Gumtree.com business model fulfills this for the consumer, as they can ‘live for less’, hence why growth has increased even during recession.

Fig 2.1 – Gumtree Growth (taken from www.companycheck.com)

Enlightened self-interest is the concept by which the company or individual will act ethically to benefit others or their consumers, but only because it serves their own interests. This company should act ethically, however the reasoning behind this is that acting ethically will gain the trust and loyalty of the consumer, ultimately benefitting the company. Ethics, especially in times of economic boom are an important factor in the purchasing process, and taking this into account it necessary to ensure consumers are happy with the business.

Fig 3.1 – Enlightened Self Interest

Kelly. E, and Rowland. H (2000) outline that there are many issues regarding ethics and privacy that exist in the online industry. They outline issues regarding Amazon.com for having a massive information database of their customers, so large that they welcome each visitor of their site as they enter. In addition to this, they have not agreed that they will not sell this information on. The issue here lies in the fact that there are no strict privacy laws, and while Amazon.com may not be breaking any laws by selling the information they gather, it is very unethical to do so. The report goes on to describe this behaviour as a Big Brother society, where consumers are constantly being watched by the sites they visit.

Fig 3.2 - Kelly. E, and Rowland. H (2000)

Privacy statement: All companies should have a policy on their privacy, not a legal document but rather something that the consumer can understand. It should also be widely communicated so that consumers know their privacy is being respected and their information not freely distributed.

Privacy audit: Studies by the company that collect data about how consumers feel about the way they gather and store information, and communicating these views to the consumer, as well as telling consumers if their information is sold to a third party.

Privacy technology: New technology that increases privacy should be adopted if possible. The company should actively search for technologies such as this, be it software, encryption messages or audit trails that determine who has accessed certain information, meaning the distribution of information is limited as much as necessary and possible.

Fig 3.3 – Proactive Attitudes To Privacy Issues This graph shows the trend of population growth. It shows that low income is the highest increasing sector of growth, however the population is growing overall. This demonstrates the issue faced globally, enforcing the point that less wasteful consumption is going to become increasingly important as time goes on.

Fig 4.1 – Population Growth Rates 1980-2000

This demonstrates the exponential growth rates of the global population compared to the available resources. It shows that as population increases exponentially, the available resources remain at a constant growth rate. This means that as time increases, resources become more scarce, meaning that consumption has to be more efficient and less wasteful. This graph is not completely accurate however, as death rates will increase as population increases at some point in time and population will decrease, however still accurately shows the global problem in the short term.

Fig 4.2 – Malthusian Growth Model

Blue Ocean Strategy focuses on creating a new market that is uncontested. It also focuses on creating a marketplace that has both product/service differentiation and focuses on keeping costs low. This is a good business model to adopt for multiple reasons. Firstly, it means that there are lower barriers to entry, as competitors are a lot less significant here. In addition to this, if applied correctly, it can create lifelong customers, as the business provides different products at low prices. In the long term, the blue ocean will turn into a red ocean, because as the market space becomes more profitable, competitors will enter. However, by that point, the first company will have built up large barriers to entry and have secured a large part of the market.

Fig 5.1 – Blue Ocean Strategy

Rogers innovation adoption curve shows how an idea is adopted over time. It shows that in the short term, innovators and early adopters take on this idea, and as time goes on, the early majority and late majority also adopt the idea. In the long term, the idea becomes dated, laggards adopt the idea, and eventually the innovation will drop close to zero. This relates to the case as it is recommended that early adoption, or second adoption is necessary in order to access a relatively uncontested market. Through early adoption, it becomes possible to secure a large part of the market share before it becomes too competitive.

Fig 5.2 – Rogers Innovation Curve

Fig 5.3 – Innovation Adoption Curve Information
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