NBA 600: Session 7 ECommerce Retailers 11 February 2003

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NBA 600 Session 7E-Commerce Retailers11
February 2003

• Daniel Huttenlocher

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Todays Class

• Finish last weeks topic Dell.com
• Good transition to e-commerce
• Retail electronic commerce
• Look at Amazon.com
• Where they are today
• How they got there
• How quickly e-commerce changed
• What future holds shopping platform
• Leave eBay to communities, not a retailer
• Multi-channel retail
• Amazon.com one of the few pure plays left

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Example Dell

• In early 1990s Dell was a company built around
  its internal information systems
  
• Like Fedex relentless focus on IT for
  coordination and logistics
  
• Dells goal was to eliminate inventory
• At 35 days in early 90s 6 days by 99
• Direct sales model largely implemented by call
  centers
  
• Market segmented according to transaction versus
  relationship customers
  
• One-off purchase focused on system cost versus
  ongoing purchases focused on TCO

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Dell.com

• Established in 1996
• Initial focus on transaction customers
• Knowledgeable, not first-time buyers
• Enthusiastic about more access to information
• Configuration
• Tracking
• Support information
• Separate sites for each region and segment
• Business units controlled own content
• Dell online unit provided tools, managed servers,
  enforced consistency of look feel

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Dell.com More Value, Lower Cost

• Configuration of machines in sales and pre-sales
  process
  
• Support
• All technical and troubleshooting information
  that Dell had for own tech staff
  
• Access to specific material based on serial
  number
  
• Latest drivers, correct documentation
• Tracking
• Order status, manufacturing status
• Estimated and updated ship dates
• Post-ship tracking via Fedex/UPS

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Phenomenal Growth

• In first 6 months reached 1M/day sales
• By end of 2000, over 50M/day
• More than half of Dells total sales
• Less than 5 years after launch
• Unlocking demand from customers for better access
  to information
  
• Focus on bringing the customer inside the
  company sharing rather than guarding
  information on configuration, shipping, support
  
• Similar to Fred Smiths claim that information as
  valuable as package delivery

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Combating Internal Skepticism

• Many employees worried that Dell.com would
  replace their jobs
  
• Dell stressed would replace mundane parts,
  leaving time to help where really needed
  
• Was borne out in practice partly due to Dells
  overall growth in sales volume
  
• Some customers used site just for research, then
  phoned
  
• These orders allowed reps to be 50 more
  productive because customers better informed
  
• Calls about order status dropped by 2/3
• On average had been 3 such calls per order

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Dell.com Evolving Market Strategy

• Started with focus on knowledgeable transaction
  customers
  
• Early adopters
• After about 15 months developed Premier Dell.com
  for relationship accounts
  
• Customized to specific customers way of doing
  business
  
• Approvals, allowable configurations, etc.
• By end of 2000 had over 50,000 customized premier
  sites
  
• Dell online developed technology for easily
  customizing sites, content from business teams

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Dell Market Share Growth 2002

• Dell moved away from its long held strategy of
  ignoring lower end of market
  
• Traditional focus on knowledgeable consumers and
  companies more expensive machines
  
• Main growth of market was in consumer segment
  weak corporate spending
  
• Dell capitalized on this by using its low-cost
  online channel to be price leader
  
• Differentiated the segment through processor,
  software options
  
• Grew share from 13.2 to 15.2, while leader HP
  dropped to near Dells share

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Reflect Effects of Internet

• Both increasing barrier to entry and competitive
  advantage for Dell
  
• Better service for customers, lower cost
  structure, others unable/unwilling to copy
  
• Increasing barrier to entry for Fedex
• But not competitive advantage as UPS adopts
• Decreasing price differentiation for airlines
• CRS technology enabled, but broad distribution
  over the Internet challenges
  
• Majors hobbled by difficulty of exploiting cost
  savings and providing better service

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Reflect Industry Structure

• Travel industry large shifts in competitive
  landscape
  
• Diminished role for agents, loss of pricing power
  for providers, new channels
  
• Relatively little in way of using to advantage
• Package freight major role in e-commerce but less
  change in own industry structure
  
• Fedex and UPS driving smaller players out
• PC industry large shifts
• Dell.com applicable to every desktop segment
• Better service and lower cost than others

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Reflect Information Culture

• Fedex and Dell have explicit goals of informing
  the customer
  
• The information about a package is as important
  as the delivery of the package - Fred Smith
  
• used Internet browsers to essentially give
  that same information to our customers bringing
  them literally inside our business - Michael
  Dell
• Internet powerful value creation tool for such
  companies
  
• Is it neutral or value destroying for others?

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Questions

• How much is information versus the product or
  service itself
  
• For package delivery, PCs demonstrated to be
  high
  
• What about travel? Other industries?
• What information is valuable to your customers
• Does it improve or reduce your pricing power,
  differentiation from others?
  
• Does a model, such as differential pricing,
  depend on hiding information?

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E-Commerce Amazon.com

• Launched in July 1995 with two goals
• Worlds largest selection of books
• High value given large number of titles
• Convenience that delights the customer
• Now a broad-based online retailer
• Core business BMV (books-music-video)
• Sales of 3.9B in 2002 Q4 up 33 y-o-y
• 17 ROIC, low-teens cost of capital (Lehman)
• Company predicts 15 sales growth in 2003
• 25-30M unique visitors per month (Nielsen)
• Estimates of about 50M active customers

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Amazon Dominates Online Retail

• In addition to own site, operates sites for
• Toys-R-Us, Borders, CDNow, Virgin Megastore,
  Target, Drugstore.com
  
• These retailers have completely outsourced online
  presence
  
• Still may handle own fulfillment
• Sales partnerships with about 50 other merchants,
  including
  
• Gap, Office Depot, Eddie Bauer, Circuit City,
  Nordstrom
  
• Maintain own separate online presence in addition
  to one on Amazons site

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What Amazon Provides

• Online storefront user experience
• For own stores as well as for partners and
  Marketplace merchants
  
• Marketplace is mall of independent merchants
• 23 of sales in Q1 2002 (Jupiter Media Metrix)
• Extensive focus on delightful user experience
• Driven many innovations, adopted others
• Payment processing
• Fulfillment
• Via own warehouses and partnerships with
  distributors

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How Amazon Got There

• Relentless focus on its two main goals
• Selection and convenience
• Required a certain scale of business to provide
  selection profitably
  
• In early years pursued growth necessary to
  achieve that scale
  
• Did not scale business at expense of convenience
  (delighting the customer)
  
• Grew quickly
• 1.64B sales in 1999
• 2.76B sales in 2000

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What Others Missed

• Many saw Amazons focus on growth as the goal
• It was not selection and convenience were
• Many pursued growth at any cost
• Buy.com focus on lowest prices on earth
• At cost of horrible customer service
• Hard to recover from
• Focusing on price without the operational means
  to deliver low price
  
• Pets.com sales at below cost of goods
• Low value goods with high shipping costs
• Amazon did invest in it though

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Amazon Did Lose Billions

• Scaling while providing a delightful user
  experience was expensive
  
• But losses due to acquisitions, capital
  investments and operational inefficiencies
  
• Rather than cost of goods
• All could, in principle, be controlled over time
• Amazon did not engage in destructive focus on
  price
  
• Price leader relative to other channels, not
  other Internet sites
  
• Seems to have paid off, Buy.com has (est.) 10 of
  Amazons revenue

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Building Expensive Infrastructure

• Amazons initial model was to outsource
  fulfillment
  
• Largely to Ingram a large book distributor
• Found hard to delight customers
• Shipping delays were not under their control
• Flexibility to ship in pieces, etc.
• Potential logistical advantages of operating high
  volume business
  
• In 1999 opened own distribution centers
• Rapidly drove down fulfillment costs ( sales)
• 17 Q199, 14 Q101, 12 Q102, 10.6 Q402

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Capital Markets Forced a Change

• Profitability rather than growth as best strategy
  to achieve goals
  
• Q4 2000 Bezos March to profitability
• Lehman report questioned whether cash necessary
  to survive the year, Q1 2001
  
• Potential problem for supplier credit relations
• Critical for operational costs
• March became a dash
• More open about what was profitable and by what
  measures
  
• Pursued strategies market allowed

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A Page from WalMart Playbook

• In late 2001 Amazon started focusing more on
  price has driven growth
  
• Free shipping on orders over certain size
• Many studies show shipping costs are biggest
  impediment to shopping online
  
• Discounts on certain product categories
• E.g., books over 30
• Had achieved scale and operational efficiencies
  to enable price leadership
  
• Did not make price primary strategy until able
• Quickly dropping fulfillment costs gross sales

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Similarities in Successful Strategies

• Exploit three ways that the Internet can deliver
  more value to customers
  
• Better information, service, selection
• Focus on information as value-added component of
  product or service
  
• Use as differentiator from other channels
• As grow, use as differentiator from competitors
• Avoid competing on price until scale or
  efficiency allow it
  
• Start with premium product and move down
• Maybe be needed against established channels

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Next Time

• What is user experience, why is it important?
• Site experience, technology only enables
• Where is Amazon betting on growing?
• How Marketplace compares to eBay
• Where is Amazon cutting costs?
• Where price conflicts with selection and
  convenience
  
• Trends in electronic commerce
• Growth, who is buying

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Short Text Messaging Assignments

• Fairly evenly split on investment vs. not
• But pro-investment arguments urged caution
• Some issues raised
• Are times when voice not desirable
• Big differences in US market
• Higher Internet and lower mobile phone use
• Less need for privacy of text
• Americans more put off by awkward keypad
• Cost and pricing models paying for SPAM
• System incompatibilities largely addressed now
• Substantial eligible market
• Internet services such as IM could be viewed as
  either a complement or a substitute
  
• Mobile IM better option, next generation
  technology

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Other Assignments

• Wide range of areas of Internet impact
• Government/military
• Auto
• Banking/financial services
• Medical
• Travel
• Gaming (casinos)
• Computers and software
• Energy
• Some transforming industry competitive structure
  some not