nba 600: session 7 e-commerce retailers 11 february 2003 daniel huttenlocher
TRANSCRIPT
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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