Transcript NBA 600: Session 7 E-Commerce Retailers 11 February 2003 Daniel Huttenlocher

NBA 600: Session 7
E-Commerce Retailers
11 February 2003
Daniel Huttenlocher
Today’s Class
 Finish last week’s 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
2
Example: Dell
 In early 1990’s Dell was a company built
around its internal information systems
– Like Fedex relentless focus on IT for
coordination and logistics
– Dell’s goal was to eliminate inventory
• At 35 days in early ’90’s; 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
3
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
4
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
5
Phenomenal Growth
 In first 6 months reached $1M/day sales
 By end of 2000, over $50M/day
– More than half of Dell’s 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 Smith’s claim that information
as valuable as package delivery
6
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
Dell’s 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
7
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 customer’s 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
8
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 Dell’s share
9
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
10
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
11
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?
12
Questions
 How much is information versus the
product or service itself
– For package delivery, PC’s 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?
13
E-Commerce: Amazon.com
 Launched in July 1995 with two goals
– World’s 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”
14
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 Amazon’s site
15
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
16
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
17
What Others Missed
 Many saw Amazon’s 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
18
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 Amazon’s revenue
19
Building Expensive Infrastructure
 Amazon’s 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% Q1‘99, 14% Q1‘01, 12% Q1‘02, 10.6% Q4‘02
20
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
21
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
22
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
23
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
24
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
25
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
26