NBA 600: Session 7E-Commerce Retailers

11 February 2003

Daniel Huttenlocher

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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

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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

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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 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

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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 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

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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 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

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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 Dell’s 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, 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?

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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”

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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 Amazon’s 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 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

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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 Amazon’s revenue

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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

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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