From Bricks to Clicks

1
From Bricks to Clicks

• Professor Joshua Livnat, Ph.D., CPA
• 311 Tisch Hall
• New York University
• 40 W. 4th St.
• NY NY 10012
• Tel. [phone] Fax [phone]
• jlivnat_at_stern.nyu.edu
• Web page www.stern.nyu.edu/jlivnat
• I wish to acknowledge access to Media Metrix
  traffic data and Factset Information Services
  databases.

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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?

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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.
• 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 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 elses 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 (CDs, DVD/video, electronics, auctions,
  toys, software,).
• Amazon patented some best business practices
  One click shopping.
• Amazon enjoys better opportunities from
  E-Commerce affiliation programs.
• Amazon recorded revenues of 95 million and gross
  profit of 72 million from affiliates in 1999.

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Barnes Nobles Strategy

• BN can leverage its existing brand name in
  creating its online brand name.
• BN can have lower fulfillment costs large
  inventory and distribution center to support
  current operations.
• BN can use its existing IT infrastructure and
  databases to develop content for its Web site.
• BN can use existing relationships with
  publishers to secure preferential treatment.

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Operating Data
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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 BN
  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.

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Entering New BusinessesRoberts and Berry (SMR,
1985)

• 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 Mortars 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.