EDI and Electronic Commerce in Banking:

Extract (3): Knowledge-Centred Segmentation

Extract's Table of Contents:

•  What Customers Want: the Simple/Unsophisticated Segment

Knowing the size of a company and the industry in which it is primarily involved is becoming less and less valuable as information on its own. Table 8.1 shows some leaders in toys, healthcare, and foods and general merchandise. The figures are taken from a book by James Brian Quinn which shows very clearly that not only are industry boundaries disappearing, but so are the distinctions between manufacturing and service. ²

What classification captures the new realities of these companies as customers for electronic commerce services? Segmentation is the central issue for any bank's electronic commerce strategy because it drives the customer relationship, in terms of service, product development and support. Figure 8.3 is one approach to electronic commerce segmentation. Several companies are using it as a starting point for identifying the customer of tomorrow and for deploying their organisational capabilities to mesh with the new segmentations.

This "knowledge-centred" segmentation views knowledge as the new determinant of the nature of products and services, and the nature of customers. The first dimension of the 2 x 2 matrix shown in Figure 8.3 is the complexity of a product in terms of its knowledge demands: how much does the buyer need to understand about it in order to make a sound decision? The second dimension is the sophistication of the customer in terms of knowledge in this domain of business. Each cell in the matrix points to a different relationship and selling process. Perhaps more importantly, the very same product or service is very different in terms of the relationship, depending on the customer's knowledge. The strategic issues for a bank are:

• Which segments it wishes to focus on;
  
  
• What it offers to each of them; and
  
  
• What knowledge it must build in the customer relationship.

The development of this segmentation resulted from working with many companies. It is not a theory or methodology, just a way of mapping the new territory of electronic commerce. It explains some interesting and consistent patterns in the successes and failures of companies competing in the electronic commerce marketplace. First, most of the successes have come from selling simple knowledge products to unsophisticated customers. ATMs, credit cards and basic EDI messaging are very complex operationally but can be explained to customers in a few minutes. Many of the failures in the electronic commerce marketplace come from using the same selling process to offer complex knowledge products to the same unsophisticated customers. For example, several Sunday newspapers in the UK devote a whole section to personal finance. They publish many complaints from consumers and small businesses about being ripped off or misled by their banks, particularly in relation to personal pension plans. Financial services in the UK is almost completely deregulated and there are many products on offer.

One interpretation of these accusations is that the customer is unsophisticated, and does not understand the complexity of the products. It is unlikely that banks are being deliberately dishonest. They are, however, selling these complex products through the same channels and in the same way as they sell simple knowledge products. Consumers here need, and increasingly find, non-bank personal finance advisers who help them deal with the knowledge complexity. Banks are failing in how they handle the different knowledge relationships by still segmenting mainly by customer categorisation - personal banking, retail banking, etc. They have to differentiate themselves for the very same customers by offering a relationship that focuses on advice, where that advice can tee trusted through a combination of bank knowledge and credibility by not selling unsuitable products to people who are unqualified to assess them.

One such trusted third-party adviser that constitutes a major power is the travel agent. The agents' role is such that, in many instances, the customer is theirs, and not the airline's or the hotel's. Figure 8.3 explains one of the main paradoxes of the electronic business era: the growth instead of decline of travel agents at a time when computerised reservation systems became the central element in distribution, marketing, competition and service. Logically, travel agents should have been disintermediated, but the very opposite happened. One explanation is that when customers have too many choices or feel bewildered by the complexity of the transaction, even where they could handle the business themselves if they so choose, they rely on an intermediary.

The profusion of new electronic channels and the breakdown of industry barriers increases knowledge complexity. There is a major opportunity for banks that move in the opposite direction from electronic disintermediation towards reintermediation. The bank branch of tomorrow needs to include trusted third-party advice, especially for small and medium-size businesses looking for help with electronic commerce. The very same product here, such as EDI for ordering, involves a different buying and selling process in each of the four cells of the matrix.

Figure 8.3 also helps to explain what sophisticated customers are looking for, and why they often do not see banks as providing it. The complex/ sophisticated quadrant is the one that contains the customers most knowledgeable about, and concerned with, integrated business logistics. They often do not rely on outside advice but when they do they typically get it from one of two sources: 

• Consulting companies that specialise in strategic planning, business process re-engineering, total quality management, the learning organisation, team building or comparable shorthand term for some aspect of organisational mobilisation; or
  
  
• Systems integration companies that know how to pull together the many largely incompatible software, hardware and telecommunications facilities that must work seamlessly across the business logistics chain.

It is no coincidence that many of the top boutique consulting firms have been acquired by systems integrators over the past few years, or that the Big Six global accounting companies have added strategic consulting and systems integration to their traditional activities; both consulting and systems integration expertise are at the core of relationships with these clients.

More recently, telephone companies have added systems integration capabilities. For example, MCI, the number two US company that is 20 percent owned by British Telecom, bought Systemhouse, a top Canadian company that specialises in the complex new mainstream of business computer and telecommunications called client/server computing, in 1996.

It is impossible to compete in this quadrant except as a value-added consultant or adviser. This demands expertise in the customers' relevant industry base and in the core logistics - distribution, JIT, Total Quality Management (TQM), quick response and so on - that drive their planning. The banks' main competitors here are often Andersen Consulting, EDS and IBM - not other banks.

What Customers Want: the Simple/Unsophisticated Segment

The main impact of IT on work and customer service over the past 30 years is summarised in an insight of Arno Penzias, the Nobel laureate. The Penzias axiom is that over time any person or procedure standing between a customer and a computer that can fully meet that customer's needs will be eliminated. This can take 20 years or more, but it constitutes a universal force. Cashing a cheque used to mean that the customer had to hand it to a teller who checked his balance on a computer; now, the same customer can interact directly with the computer through an ATM. It is possible to get credit card balances by using touchtone telephones; a computer generates a synthesized voice response. EDI removes all of the people that stand between two computers that can fully process a purchase order, payment or shipment of goods.

Unless the transaction is simple in knowledge terms, the computer cannot fully meet the customer's needs and some sort of intermediary is essential. It can meet unsophisticated needs in those transactions where there is no need for specialised knowledge. Over time, this simple/unsophisticated segment is the one that inevitably moves to customer self-service. ATMs are the most obvious example. Basic EDI is another. At some stage, perhaps by 2000, most consumer payments will be handled electronically with no intermediary step or people.

There are many interesting issues and opportunities that arise from the Penzias axiom. One is that a win-win situation for the customer and the provider can arise. ATMs, Federal Express' package tracking system now on the Internet, stores such as IKEA and self-service salad bars shift work to the customer who, in effect, becomes a data-entry clerk, loader or waiter. The customer sees this as a value-added service, not a cost. In general, customers do not want someone "helping" them in situations where this help does not add anything useful.

The very same customer may fall into the sophisticated and unsophisticated categories depending on the situation. For example, the success of PC sales by catalogue and telephone ordering that moved Dell from an idea to a billion dollar company in less than ten years is built on customers who know what they want in terms of the machine, memory and disk size. They get more responsive service from Dell than they would if they went to a store, which, in general, will have limited inventory and sales staff who know less than the customer. The same customer may, however, rely on an accountant for handling tax returns or go to a broker for life insurance. Here, the product is complex and the customer's knowledge unsophisticated. Similarly, the rebirth of large computer stores in the 1990s is built on the many new PC customers, especially families, who do need help and information, or at least feel that they do.

To compete effectively in the self-service simple/unsophisticated quadrant of the segmentation matrix, companies need super-operations capabilities. Their systems must be convenient to access, easy to use and thoroughly reliable. Much of electronic commerce is already simple in terms of the knowledge demands of the product, but few banks have managed to integrate their selling, systems and support so that, for example, small businesses can use their software without training, bewilderment, frustration and unnecessary effort, ie without the complexity of knowledge demands.

Today's front-end systems for electronic commerce, the PC screen and menu, do not deserve the misleading term "user-friendly". They are generally much less user hostile than before but, for many unsophisticated customers, they are still not user-natural. Most companies' IT delivery bases were originally built around the companies' own operational needs, typically on some combination of mainframes, minis and terminals. Over time, these central systems have been "distributed", with PCs taking on more and more functions as clients (departmental local area networks as the basic building block of client/server computing) and servers (which may be modern versions of mainframes or high-powered PCs) handling information and communication. Customers can access the company through PCs.

All of this is designed and built from the inside out - from the centre of the company to its decentralised operations and then to the customer. The immense challenge now is to build from the customer back. IT in general now rests on the customer's access tools, ranging from PCs, telephones, cellular phones, workstations and VSAT (very small aperture terminal "dishes"). In the future (one to seven years) access tools will include intelligent phones, Internet appliances (sometimes called lite computers or network computers), interactive television sets and a new generation of personal digital assistants. It is not easy to predict the pace of adoption or which of these devices will dominate the desktop, living room and office.

What is dear, however, is that much of electronic commerce will be based on self-service and that companies need not only to think like the customer, but to be easy for the customer to deal with. The average Windows-based menu, log-on procedures, manuals and interactive software are much better than the old systems in this regard but are they good enough? The new art form in IT will be building a new generation of customer-civilised, customer-natural and, lastly, customer-mundane delivery systems - mundane in the sense that the customer does not even know it is there.

^{2 Quinn. James Brian. The Intelligent Enterprise, Free Press, 1992.}

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