Transcript E-Commerce Introduction

From Bricks to Clicks
Professor Joshua Livnat, Ph.D., CPA
311 Tisch Hall
New York University
40 W. 4th St.
NY NY 10012
Tel. (212) 998-0022 Fax (212) 995-4230
[email protected]
Web page: www.stern.nyu.edu/~jlivnat
I wish to acknowledge access to Media Metrix traffic data and
Factset Information Services databases.
1
Overview
• The adoption of Brick and Mortar
companies to the new economy.
• Entry strategies into the digital economy.
2
Two Questions
• 1. What type of business is more likely to
succeed on the Web?
– A five-step evaluation process.
• 2. How do Brick and Mortar companies
adapt to the Web?
– Which companies should plunge into the Web
immediately?
– How should they proceed?
– Which companies should delay entry into the
Web?
3
Which Brick & Mortar Companies Are
Most Likely to Gain From The Web?
• Companies with:
– Substantial reductions in transaction costs.
• Online stock trading.
• Tickets on the Net.
– Operations in areas where network externalities
are possible.
• Market making such as E-Bay.
– Available content
• Media companies.
4
Web Venture Potential Costs
• Initial investments:
–
–
–
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Web site construction.
Integration with current systems.
Marketing.
Content, if relevant.
• Price transparency.
• Cannibalization of existing products or
services.
• Internal conflicts.
5
Costs of Waiting
• Losing the first mover advantage.
– Crucial if the first mover can benefit from
network externalities and/or high switching
costs.
– Detrimental if first mover enjoys brand-name
recognition.
• Will be more difficult to capture market share.
– More dangerous in areas where the industry is
concentrated and other firms can “crowd the
market”.
• The battle for development of next generation
products.
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Benefits of Waiting
• Another firm spends the necessary
resources to develop the technology and the
market familiarity:
– Somebody else’s trial and error.
• “Educating the consumer”.
• Development of best practices.
• Ability to better utilize existing resources.
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Amazon Vs. Barnes & Noble
• Amazon is the first mover. Started selling books in
July 1995, music in June 1998, and other items
subsequently.
• Amazon transferred initial technology to other
markets (CD’s, DVD/video, electronics, auctions,
toys, software,…).
• Amazon patented some best business practices –
“One click shopping”.
• Amazon enjoys better opportunities from ECommerce affiliation programs.
– Amazon recorded revenues of $95 million and gross
profit of $72 million from affiliates in 1999.
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Barnes & Noble’s Strategy
• B&N can leverage its existing brand name
in creating its online brand name.
• B&N can have lower fulfillment costs –
large inventory and distribution center to
support current operations.
• B&N can use its existing IT infrastructure
and databases to develop content for its Web
site.
• B&N can use existing relationships with
publishers to secure preferential treatment.
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Operating Data
First three quarters of 2000
Amazon
Sales
Cost of sales
Gross profit
$1,789.6
($1,358.1)
$431.5
Amazon
Barnes & Barnes &
Noble
Noble
$215.5
-76%
($179.3)
-83%
24%
$36.2
17%
Marketing and selling
Technology and systems
General and administrative
Equity losses
($408.2)
($199.5)
($80.7)
($267.0)
-23%
-11%
-5%
-15%
($90.6)
($26.7)
($18.0)
($21.9)
-42%
-12%
-8%
-10%
Net loss
($866.1)
-48%
($29.0)
-13%
Net operating cash outflow
($378.1)
Long-term debt
Cash and marketable securities 9/30/00
($2,082.7)
$900.0
($151.3)
$0.0
$286.4
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Barnes & Noble Strategy
• Savings due to delayed entry:
– Amazon spent over $760 million on its operations and
fixed assets during 1997-Q3/00, whereas B&N spent
only about $400 million during that period..
• Price wars hurt offline and online profits (Amazon
discounted books to get customers).
• Internal conflicts with existing operations can be
reduced:
– Installed online terminals in existing stores.
• Joined forces with Bertelsmann (which invested
$200 million in the online operation).
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Amazon and Barnes & Noble
• It is unclear that Barnes & Noble has lost
substantial long-term advantages to
Amazon:
– Amazon has little or no network externalities.
– Switching costs are low.
– Amazon proved the concept, but invested large
resources in setting up distribution centers and
physical inventories.
• Barnes & Noble has yet to capitalize on its
existing brand.
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Form of Entry Into The Digital
Economy
• One of several major approaches:
–
–
–
–
–
–
Internal development.
Forming a separate subsidiary.
Forming a separate business.
Acquisition of another company.
Joint venture with another company.
Investment in another company.
15
Entering New Businesses:
Roberts and Berry (SMR, 1985)
• Two factor model:
– Familiarity with technology.
– Familiarity with market.
• Three levels of familiarity:
– Base, New familiar, New unfamiliar.
• Entry strategies:
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–
–
–
–
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Internal development.
Acquisition.
Licensing.
Joint venture.
Venture capital or venture nurturing.
Educational acquisition.
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Successful Entrance Strategies
• For “base” and “new familiar” markets and
technologies, use internal development,
acquisition, or licensing.
– Company has sufficient knowledge to manage
the entry successfully.
• For “new unfamiliar” category, use joint
ventures, venture capital, or educational
acquisitions.
– Use other entities’ superior market or
technology knowledge.
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Brick and Mortar’s Move to the Web
• A mixture of “base” and “new familiar”
market.
– Tapping existing and new online customers.
• A “new familiar” or “new unfamiliar”
technology.
– New system development efforts.
– New culture.
– New business practices.
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Entry Strategies
• The most conservative approach is to invest
in other firms.
– Rite-aid holding a stake in Drugstore.com.
• A medium-risk approach is a joint venture
with an online company with a proven track
record.
– Toys-R-Us with Amazon.
• A high-risk approach is internal
development as a separate company (Barnes
and Nobel), or a subsidiary (Staples.com).
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Conclusions
• It is not clear that the best strategy for a
Brick and Mortar company is to develop
immediate online presence.
• When developing online operations, a Brick
and Mortar company should consider less
risky approaches.
• Not every Brick and Mortar company
should have online operations.
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