Northumbria University academics have published
research in world leading journal, European Journal of Operational Research.
Led by Professor Yu Xiong and Doctor Gendao Li from
Newcastle Business School, the paper in the European Journal of Operational
Research explored why major manufacturers use sham e-channels as part of
their online selling strategies. The research found that product durability
impacted significantly on the success or failure of selling through the
Internet – and that getting it wrong was costly.
Knowing the typical lifespan of a product – its
durability – appears to be crucial in determining whether manufacturers of say
computers used their websites to physically take orders and sell their goods or
merely provide information on them. These decisions can affect their own
profitability and that of the retailers selling the products on the high
street.
From the research, Professor Xiong says
manufacturers of durable products such as Lenovo, HP, Epson and IKEA, who are
expanding their business online face a great challenge in channel conflict. He
explained: “Online channels will often cannibalise more traditional physical
selling channels. To make things worse, when facing encroachment from a
manufacturer – as the upstream agent - a retailer of durable goods – as the
downstream agent - is in a far more difficult position than the retailer of
non-durable goods. This is because with durable goods, the retailer is not only
essentially competing with the new products from the manufacturer today but
also dealing with older product lines and associated servicing costs.
Durability has an important role in the channel decision, but is not clear to
practitioners and researchers.”
Professor Xiong and Doctor Li, together with their
collaborators used game theory – mathematical models of conflict and
cooperation between rational decision makers – to understand the business problem.
They set the research in a dual-channel context for a durable goods
manufacturer that can sell directly by its own e-channel and indirectly via an
independent reseller. This allowed them to investigate how product durability
and the channel structure create strategic issues that are significantly
different from those in managing a dual channel for nondurables.
Professor Xiong added: This research has generated
two important managerial insights for durable goods manufacturers. First, if
product durability is moderate, for any direct selling cost, manufacturer’s
encroachment is always detrimental to the reseller. Second, under certain
conditions, the manufacturer may be worse off selling online. It shows that
opening an inactive e-channel demonstrating product information only, rather
than taking orders online, is optimal for the manufacturer.”
By using data from the U.S. x86 computer server
market to test their results, Professor Xiong and his team found strong
empirical support that profitability of both manufacturer and reseller is
higher when product durability is sufficiently low or sufficiently high, and
lower when durability is intermediate.
Also funded by China’s National Nature Science
Foundation, this research is being conducted across three countries with
collaboration from Professor Junhong Chu, National University of Singapore, and
Dr. Wei Yan, University of Electronic Science
and Technology of China.
Professor Xiong already has several articles
published in leading journals to address the missing issues in omni channel
management practice. His team will consider how e-business can be used to
rescue high-street shops in challenging economic situations.
Professor Xiong concludes: “e-business should not
be a killer to traditional business, but a good addition to help develop high
street retailing market.”
