Transcript 6 - InGesFor

BRICK TO CLICK
Traditional companies
and e-commerce
BA 572 - J. Galván
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OVERVIEW


The adoption of Brick and Mortar
companies to the new economy.
Entry strategies into the digital
economy.
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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?

BA 572 - J. Galván
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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.
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WEB VENTURE POTENTIAL
COSTS

Initial investments:
Web site construction.
 Integration with current systems.
 Marketing.
 Content, if relevant.


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Price transparency.
Cannibalization of existing products or
services.
Internal conflicts.
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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 brandname 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


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
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

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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
($2,082.7)
Cash and marketable securities 9/30/00
$900.0
BA 572 - J. Galván
($151.3)
$0.0
$286.4
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BARNES & NOBLE STRATEGY
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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

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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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COMPARING
PERFORMANCE
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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.

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ENTERING NEW BUSINESSES:
ROBERTS AND BERRY (SMR, 1985)

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Two factor model:
 Familiarity with technology.
 Familiarity with market.
Three levels of familiarity:
 Base, New familiar, New unfamiliar.
Entry strategies:
 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.


A medium-risk approach is a joint
venture with an online company with a
proven track record.


Rite-aid holding a stake in Drugstore.com.
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

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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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ANYWAY…
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