Strategy Centre

Chain Reaction Cycles – A Case Study in the Implications of Ecommerce Alignment

  
07 September 2016 13:22
  

“Watch, listen, and learn. You can’t know it all yourself. Anyone who thinks they do is destined for mediocrity.” — Donald J Trump

Introduction

It has been interesting reading about the history of Chain Reaction Cycles (CRC).

For those of us who worked on the IRP platform, the CRC story began in 2000 and has some wider business interest because it is essentially one of growth — how we assisted a small UK company to scale in the bike industry without taking on investment.

Export Technologies produced the web technology platform and much of the online strategy for the entire (and only) phase in which CRC saw online sales growth. Being central to that experience puts us in a good place to understand what happened in that market — and, importantly looking forward, the business lessons that can be learned for other clients in ecommerce.

The bike market in 2000

The bike market was ideally placed in 2000 to see a transition to online selling. It was unknown to anyone working in the bike industry at that time that it represented such a good opportunity. The market was large, highly fragmented and had big tailwinds as the number of people in the sport grew. This market was ideally suited to the new ‘online sales channel’ that allowed international reach and could transform how the entire market operated.

In a nutshell, the bike market was a large and growing market that operated at a very local level with lots of small independent operators. There were really no large players in the retail end of the market. It was a very unusual situation and one that was ripe to be exploited.

2000 — The beginnings of CRC’s growth phase

In business terms at least, from 1984 to 2000 there was really not much to note about CRC. By 2000 they were a small, local bike company with five or six people working out of a small warehouse in a local town in Northern Ireland. It had taken 16 years to hit a turnover of round £500K. To the outside world nothing indicated that there was anything much different to come.

But in 2000 a meeting took place in a Queen’s University building in Belfast between a lecturer in informatics, Dr Simon Loughlin, his brother (myself) and two key people from CRC. The purpose of the meeting was to discuss the creation of an ecommerce website.

It was early days in ecommerce, but we knew we could code up what was required to get CRC online and selling.

Setting up a deal between Export Technologies and CRC

It was small-time stuff: two small companies working out a commercial arrangement on a scrap of paper in a Queen’s University office. But a key decision was made that I was to understand later would make a huge difference: Simon suggested that “the technology company operated on commission on sales for writing the software”.

No one saw any significance in this at the time. But what this did was to align a capable software provider to the thing that matters in ecommerce — sales. On the other side of the agreement, CRC were driven by sales and happened to be sitting in a deeply inefficient market. And as far as the bike industry went, incredible as it seems for such a small company, they were about as operationally capable as any company anywhere to get on with online mail order.

This commission deal created an alignment such that a small software company with strategic capability in IT was fully engaged in understanding and exploiting the opportunities of the online bike market.

This was not known at the time, but the key fact that a deal was set up on commission was a firm foundation for CRC’s future success. The deal created ‘Alignment of Interest’.

Foundations for growth

Alignment forms the foundation for growth, where groups of people are required to pursue a common goal. Without an operational ability to implement, alignment in itself in business is pointless.

As things indicated that scaling was going to happen, both parties were aligned to ensure that the opportunity would be resourced. The operational growth meant that CRC had to keep pace with the growth by adding the warehouse staff and they did this very successfully, building the operational infrastructure to increase sales.

The technology company was busy recruiting graduates from Oxbridge and the best talent from the local universities to head up development of their IT system and online marketing strategies.

With the innovation and operations being resourced, the setup was ready to see growth happen in a pretty spectacular way. It was helped by the fact that CRC were driven by sales, ambitious, commercially savvy and passionate about their market.

2000 to 2004 — Early days of CRC in ecommerce

The early period of ecommerce from 2000 to 2004 did not include many clear marketing channels so the growth, while strong for a small company, was generated from a combination of factors.

With a software company in place developing the technology for the website, CRC had a setup wherein they could focus on their business without having to worry about web technology.

There were some significant choices made for the technology — and these were down to early adoption and the insight by Export Technologies that it was key to cater for international sales. There were a few early outliers that international sales were simple enough to facilitate — building the technology to cater for the basic blocks of currency, shipping and language in 2002 was going to pay off in the future.

November 2004 — Introducing selling technology to CRC to outperform their market

Export Technologies had to take a long-term view of the technology and the core elements that were required to facilitate what was an obviously international market.

In 2002 work started in parallel with the existing system to create software that was fit for the future. The project operated under something called the ‘Commerce Engine’ and two years later it was launched in November 2004 as the ‘IRP’ (International Retail Platform).

The IRP could handle converting customers when they arrived from any country — but it could also handle the distribution of this information in key languages all around the world. When it was launched in November 2004, the results were instant: sales shot north. The IRP technology underpinned the aligned business model and sales moved immediately off the stairs and into the elevator.

2005 to August 2013 — Rapid and sustained growth powered by commercials, alignment & IRP technology

The eight years from 2005 to 2013 were a period of rapid and sustained growth for CRC, powered by the IRP technology platform. With commercial alignment, the IRP technology and the online strategy by Export Technologies constantly gravitated to actions that increased sales — sales were in everyone’s interests.

Without having to worry about creating the web technology, CRC could focus on the huge operational and logistical challenges to sustain the growth. All this was helped by the additional tailwinds, such as favourable exchange rates, that continued to blow behind the market.

During this period the technology was strong, strategy was strong, the market was strong — growth was non-stop. CRC continued to build out the commercial strength to deal with the scaling.

It seemed that there was no real reason for that to change … however the driving force of alignment was about to disappear.

2011 — The beginnings of misalignment

Commission was the thing that aligned the companies’ interests and created the dynamic of success.

Despite the success and ongoing revisions, the commission model had become an issue.

From an accountancy point of view, commission and web marketing costs were viewed as an ‘overhead’ and not a ‘cost of sale’.

Had the accountants adopted a ‘cost of sale’ model it might have meant sticking with the current formula. However these things can take on a certain trajectory. The alignment and technology that had been the driver behind the growth was set to change.

As the concept of a new system and new online marketing providers took hold, perhaps so did the thinking that the technology didn’t really matter so much in CRC.

At this stage in August 2013, CRC was the world’s largest online bike store.

September 2013 — Replatforming & reversal of sales growth

By August 2013 — when the previous 12 months’ sales on the IRP had hit £177 million GBP — CRC was highly profitable and had experienced compound growth at 69% since using Export Technologies’ technology in 2000.

For most technology companies, the idea of technology and sales are not truly linked. If a company provides an IT system and it works, why would they really concern themselves with sales? I mean, IT people are the last people in the world that should be involved in sales — right?

But ecommerce technology is different. Ecommerce technology is like a sales person or a stock market trader — and anyone who works in sales knows that results from different sales people vary a great deal.

When any site ports, there can be a dip in sales. Depending on the new technology and online marketing tactics, sales will pick back up, generally as the ecosystem of connections from the traffic channels is reset.

On 31st August 2013 CRC replatformed. The IRP was removed … and sales growth moved quickly to sales contraction. After sustained compound growth for 13 years, sales had finally and suddenly reversed.

There are few other areas of business where such risks could be taken. The technology and alignment — that had not been obvious to any of us — had just disappeared as easily as it had begun.

Sales were never to get back to the levels of August 2013 for CRC as an independent company. In 2016 CRC was taken over by their main competitor Wiggle.

Alignment in complex environments like ecommerce

The CRC experience taught everyone involved a lot about ecommerce.

The unusual thing about complex environments is that it can be difficult for any organisation to understand exactly how things work.

This is the reason, in my view, why mid-market companies fail in areas as complex as ecommerce. It is difficult to know what the key drivers are.

In complex environments, I believe that it is the alignment of interests that is the key to success — and without internal and external alignment it can be difficult to succeed.

Correctly aligned people will continually work to bring the agenda back to what counts — and in ecommerce this means SALES.

Conclusion — Lessons in technology and alignment

So how did a company from Northern Ireland make so much of an opportunity in a market? There are a whole host of reasons — but I put down the fundamental driver for growth to Dr Simon Loughlin’s insight to form the agreement based on commission. This set up alignment between people — and businesses are just people — and alignment allowed the market opportunity to be taken.

In the very complex business of an ecommerce sales channel, this solid alignment on sales can create great results. It may be an unusual conclusion for a technical company like ourselves to come to — but in complex environments, in the end, it all comes down to the alignment of people.

Subsequent to CRC we have gone on to see 70% growth rates again — but this only ever happens in highly aligned companies.

Alignment is more important than the IRP technology itself.

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