Broker Models For Mass Customization Based Electronic Commerce

While the competitive advantage of mass customization has been widely substantiated in management theory since more than a decade, its implementation in business can be observed just within the last years. In this paper we demonstrate how modern Internet technologies and possibilities of e-business work as success factors for mass customization. Especially, we deploy how intermediaries can add new value to mass customization based business models in electronic commerce. Mass Customization and Electronic Commerce The objective of mass customization is to deliver goods and services for a (relatively) large market which exactly meet the needs of every individual customer with regard to certain product characteristics at costs roughly corresponding to those of standard mass produced goods. Mass customization shall give an answer to “smart customers” (Glazer, 1999) demanding more and more individualized and personalized products. Explanations may be found in the tendency towards an experience economy, the growing number of single households, an orientation towards design and, most importantly, a new awareness of quality and functionality which demands durable and reliable products corresponding exactly to the specific needs of the purchaser. Until today, mass customization is connected closely to the potential offered by new manufacturing technologies (CIM, flexible manufacturing systems) reducing the trade-off between variety and productivity (Ahlström/ Westbrook, 1999; Anderson, 1997; Kotha, 1995; Pine, 1993; Victor/Boynton, 1998). But while the concept has already been discussed in the literature for more than a decade (e.g. Davis, 1987; Kotler, 1989; Pine; 1993; already Toffler, 1970 described the basic idea), increased practical implementation of this strategy can been found in business only in the last few years. This time lag may be explained by the fact that only within the last years sufficient technologies exist to handle the information flows connected with mass customization. Customerrelated value added of mass customization is produced on the information level. Especially as mass customization enters more and more consumer markets, new Internet technologies can be seen as its main enabler. Thus, from a conceptional point of view mass customization can be categorized as an application of electronic commerce. Electronic commerce is understood as the integrated execution of all informational constituents of economic processes via digital channels (Wigand/Picot/Reichwald, 1997). In the simplest of cases, this can mean the exchanging of messages by e-mail. More advanced forms are the extensively automatized exchange of data between applications (electronic data interchange/EDI) or the up-and-coming area of electronic commerce based on the Internet or World Wide Web (WWW). Web-based electronic commerce greatly assists in reducing information costs, chiefly by considerably simplifying and increasing the effectiveness of communication relations between customers and producers (Choi/Stahl/Whinston, 1997; Peterson/Balasubramanian, 1997). Furthermore, electronic commerce facilitates the collection and employment of numerous data concerning the individual customer thanks to its characteristic feature of permitting interaction between economic units connected via networks. A characteristic feature of mass customization is that the goods and services are produced only after the order of a particular customer is placed, based on the customer’s wishes and needs. These needs are transferred into a product specification during the configuration process. While in business-to-business markets personal sale and configuration is common, in consumer markets Web-based electronic commerce has to take this part. A personalized chocolate bar like CyberChocky (www.caliebe.de) with a retail value of 5 € can not be sold in traditional channels. The same is true for many other mass customized products with a relatively small margin. Therefore, mass customization can be seen closely related to e-business and new possibilities connected with the Internet economy. The use of the Internet as a communication medium facilitates the efficient production of customized goods as well as the individualization of customer relationships. Literature often mentions the market entry of new intermediaries as a significant characteristic of the Internet economy (Beam/Segev, 1997; Elofson/Robinson, 1998; Robinson, 1997; Shapiro/Varian, 1998; Wigand/ Picot/Reichwald, 1997; Zerdick/Picot/Schrape 2000). But while mass customization is seen by more and more scholars as an innovative e-business strategy, there is almost no research of the function of brokers and other intermediaries for mass customization (some remarks can be found in Turowski, 1999; Elofson/Robinson, 1998). However, within the last months new and heavily funded players entered the mass customization market regarding themselves as brokers for mass customization (the most prominent examples are getcustom.com, custome.com, and digichoice.com). Therefore, we will examine in this exploratory paper which new business models can be created by including brokers in the mass customization value chain. Our discussion will show that intermediaries bring new value added services into a mass customization concept – in contradiction to traditional economic theory that in specific and individual purchasing processes the direct interaction between the supplier and customer is preferable. In Section 2 we will discuss briefly different channel strategies for mass customization as transaction cost theory suggests on the first view that only direct sales are efficient. Section 3 examines the advantages and capabilities of brokers for mass customization from the customer’s and the manufacturer’s (“mass customizer”) point of view. In Section 4 we will introduce a systematization of different business models for brokers in mass customization concepts. Four particular business approaches can be presented, each with different demands to e-business. Section 5 gives a brief conclusion. Retail and Configuration Channels for Mass Customization The integration of the customer into the production process is a distinctive feature of customized production. One can look at the relation between the customer and supplier as a cooperation providing benefits for both sides, but demanding inputs of both participants, too. In mass customization processes, this integration of the customer is required primarily during configuration. Configuration can be seen as the most important task of the sales process. It substitutes the traditional retail tasks of arranging and distributing a competitive product range according to the characteristics and needs of the target customers (bundling of demand and supply). For complex, specific goods that are purchased individually transaction cost theory recommends on the first view a direct interaction between manufacturer and buyer to fulfill the configuration and purchasing process without any intermediaries (Williamson, 1981; Williamson, 1985). A retailer would do nothing else then transferring the product specification to the manufacturer where each order has to be proofed, planned and fulfilled separately. Thus, a retail channel would just add an additional cost-generating level to the transaction chain, especially as today electronic commerce allows manufacturers to communicate and trade with large groups of consumers directly and efficiently (Alba et al., 1997; Peterson/Balasubramanian, 1997). Therefore, most of the prominent examples of mass customization are based on direct sale strategies. Large consumer good companies like Mattel, Levi Strauss, P&G or Nike, normally using multi-level retail channels, sell their mass customized products efficiently via the Internet in direct interaction with their consumers. However, one of the major obstacles of mass customization are the uncertainties and risks from the customer’s point of view during the configuration process (Huffman/Kahn, 1998; Pine, 1993; Gilmore/Pine, 2000). Especially in consumer markets customers often do not have sufficient knowledge for the definition of the product specification which corresponds to their needs. As a result the configuration process may last pretty long, and customers may experience an increasing uncertainty during the transaction process. Comparison processes are more difficult because of smaller transparency of supply compared to standardized goods or services. Uncertainty about the behavior of the manufacturer exists, too. The newer and more complex individualization possibilities are, the more information gaps are increasing. Configuration process for mass customization are characterized by an asymmetrical distribution of information − a typical principal agent constellation (Ross, 1973; Jensen/Meckling, 1976): The customer (principal) orders (and pays!) a product he has never seen at a manufacturer he often doesn’t know and has to wait some days or even weeks to get the product. Without a clear reference point for the definition of an optimal performance it is also difficult to judge whether a case of warranty arises compared to purchasing standard mass produced goods.. Additionally, online buyers of mass customized goods are facing the additional risks of online shopping (see for a discussion Kollock, 1999). The customer’s uncertainties can be interpreted as additional transaction costs of the customer in mass customization processes. One of the most important tasks of the mass customizer it to ensure that the customer’s expenditure is kept as small as possible, while the benefit she experiences has to be clearly perceptible. Leading mass customizers have implemented strong instruments to build trust and reliability in order to reduce the risk seen by prospective customers in mass customization processes. Examples are the participation in certified trust agent networks or an “trustful” screen design (Mandel/Johnson, 1999). Other instruments minimizing the purchaser’s risk are strong warranties (“no questions ask exchange policy”) or the use of an established brand name (transfer of reputation). Intermediaries in Mass Customization Concepts Although mass customization offers plenty of new opportunities, there are numerous hazards faced by customers and suppliers alike. Atracted by the huge market potential of customized goods (Cox/Alm, 1998), new third party services established themselves to manage these risks. Economic players like getcustom.com, custome.com or digichoice have the objective to improve mass customization specific transaction processes between customers and manufacturers. While the use of third party services has been compiled by a number of scholars in regard to secure online transactions in general (Barret, 1996; Kollock, 1999), the specific benefits of brokers and similar intermediaries for mass customization have not yet been discussed in academic research. We will start our discussion from the customer’s point of view before we will examine the perspective of the manufacturer. As an overview, Figure 1 shows some important tasks of a broker in mass customization environments. Figure 1. Functions of a Broker for Mass Customization quality risk configuration