Now that the technology bubble is no more than soap scum circling the economic drain, how is the power of the Internet really transforming business? Most indicators suggest that the dot-com crash was actually good for the technology sector for at least three reasons. First, salaries in the sector are now more reasonable, and firms are not suffering labor shortages felt just a couple of years ago. Second, the destruction of a significant portion of the dot-com industry has created a more level playing field for innovation to rise up amidst the rubble. And, third, business models are now subject to more scrutiny, thus filtering out bad ideas that might have been funded during the technology boom.
Several economic indicators suggest better times ahead for e-commerce companies. Internet research firm Harris Interactive (link no longer accessible) reported holiday spending of $13.8 billion in 2001, a 15% increase over numbers for the year 2000. This increase occurred in spite of overall sluggish retail sales in November and December when the economy was in the throes of an economic slowdown. Reports also indicate that the number of consumers online continues to increase. A recent study by the Department of Commerce (link no longer accessible) pointed out that half of all Americans (143 million) were on the Net as of September 2001. In addition, two million new users are added each month. Further evidence of an e-commerce recovery is that in the fourth quarter of 2001, venture capital investments increased for the first time in several months.
HOW BRICKS AND MORTARS ARE COMPETING
What has been the experience of traditional retailers through the technology boom and bust? Early on, traditional retailers were caught off guard when the e-commerce side of the Internet exploded. Most stood by and watched as the new start-ups attempted to lure customers to explore a whole new world of shopping. Many traditional retailers were reluctant to develop Web sites that were much more than a few items of merchandise and the standard company information and press releases. Many stores feared that a strong Web presence would cannibalize the performance of their physical storefronts and were unsure of how to manage channel dissonance.
In the end, though, challenges faced by online retailers were more severe than those of their brick-and-mortar colleagues. “Pure play” online retailers, those without a brick and mortar presence, learned early on that due to the competitive nature of e-tailing, unless they could attain the scale of an Amazon.com, they would be unable to establish themselves so as to consistently earn a profit. In the effort to grow very quickly, however, the fixed costs of setting up large distribution centers overwhelmed the balance sheets of many online retailers.
The odyssey of Webvan illustrates this last point very well. With an initial public offering of $375 million in November 1999, Webvan built an enormous infrastructure, in an attempt to establish a presence in multiple geographic regions. In the summer of 2000, Webvan acquired their biggest competitor, HomeGrocer, in a $1.2 billion all-stock deal. Shortly after this acquisition, however, the company started shutting down some of its operations, and a year later they closed their warehouses permanently. From a high of more than $30 in November 1999, Webvan’s shares were worth just six cents when they ceased operations. Although some of Webvan’s demise can be blamed on a slowing economy and smaller than expected demand, it’s clear that the fixed costs associated with a get-big-fast strategy contributed significantly to the company’s failure.
This is where traditional brick -and-mortar retailers possess a clear advantage. They are able to use the Web to extend their reach without substantially increasing fixed costs, something the “pure-plays” are unable to do. In addition, some of the novelty of online retailing has worn off, and the established brand recognition possessed by traditional retailers has aided their sales. There was a time pure-play retailers with a handful of employees and no physical storefronts were valued at several times their brick-and-mortar counterparts, many of which had thousands of employees and hundreds of physical stores. Even during the dot.com frenzy, many analysts viewed this scenario as nonsensical, and the correction of the markets seems to support them. The value that should have been attributed to established distribution networks and brand image was missing amid the technology frenzy.
COMBINING FORCES: THE E-COMMERCE TOOL KIT
Beyond leveraging inherent advantages already mentioned, what can retailers do to reap benefits in the e-commerce arena? First, partnerships between online and brick-and-mortar business can prove very profitable. Partnerships allow firms to reach outside their core competencies, and benefit from the natural advantages possessed by their partners. They open new channels, create operational efficiencies and, in the long-run, save money. Traditional media and retail companies are partnering with the Net titans that rose to prominence during the 1990’s and survived the downturn. For example, Amazon.com now claims Toys ‘R’ Us, Target and Circuit City as online partners, and eBay is connected to Disney and Home Depot.
These types of partnerships make good business sense. Circuit City doesn’t have to worry about driving traffic to its online channel; it can leave the ‘heavy lifting’ of traffic creation to Amazon, an established outpost on the Internet. Amazon, on the other hand, gets more legitimacy, more revenue, and greater traffic from brick-and-mortar partnerships. While providing benefits for large companies, alliances may be even more critical for small businesses. Small Websites are not likely to create the revenue once hyped without arrangements with companies that have an established presence.
Another way in which retailers, as well as other businesses, can save money and increase internal efficiencies is to take advantage of the Web services that are emerging to streamline operations. Key corporate Web services include:
Importantly, the core technologies underlying these tools are still complex and come at a significant cost. For the small firm or business practitioner without the resources to set these up itself, the growing number of third-party consumer Web services can be useful. These include: Â·
Alerts: When business practitioners need to keep track of real-time changes, they can set-up a service to receive an alert. For example, if you are bidding for a product on eBay, you can be automatically notified by e-mail or pager when someone submits a better bid. These services are increasingly adaptable to business operations and vendors, and even consumer portals are available to assist. Â·
Travel: As travel schedules change, all parties that are scheduled to meet can be automatically notified when a flight is about to land or even when sales are available on flights to pre-selected destinations. Third party vendors like Expedia.com gladly provide this service to consumers and business practitioners alike.
These are just some of the basic Web-services that firms are using that directly affect the bottom-line. There are a host of others with less obvious return-on-investment. Individuals can find smart ways to capture and use consumer Web-services to streamline what they do and provide a competitive edge. Furthermore, lean and agile netroprenuers can also look toward emerging markets if they keep their tool-kit small, flexible and adaptable.
If some companies missed the first wave of consumer demand for electronic commerce, a second one is coming. On top of an American market that is continually increasing, growth from Europe is expected to be very significant over the coming months and years. The growth rate in Internet usage in Europe is already outpacing the growth rate in the United States. Data from Germany illustrate this accelerating growth. At the beginning of 2000, 8 million Germans reported regular Internet use. In November 2001, that number had grown to 27 million, representing 43 percent of the German population. In the past, growth in Internet usage in Europe was hindered by pay-by-the minute local phone service, but now that flat-rate service is becoming available, the time spent online is expected to dramatically increase. This growth will be bolstered by e-commerce growth in mobile technologies, an area where Europe already holds a considerable edge over the United States.
Asian markets also hold promise. In particular, growth prospects for B2B commerce are especially strong in Asia, as supply chains are relatively inefficient in this region, leaving a greater range for improvement. Data on consumer usage in Asia also contain some promising signs. Although data suggest that Asians spend more time at news and information sites, and less time at retail sites, relative to Americans, they spend more time online than Americans overall. In addition, broadband connections tend to be more ubiquitous in Asia. As an example, while fewer than 10 percent of Americans enjoy high-speed Internet access, more than 30 percent of Koreans do.
A LOOK TOWARD THE FUTURE
The shakeout in the technology sector has left a more even playing field among technology companies that remain, and has re-established the inherent advantages enjoyed by brick-and-mortar retailers. A recent survey from McKinsey (link no longer accessible) reports that 20 percent of e-commerce companies are earning a profit, evidence which offers reason to believe that the era of dot.com profitability has begun. Positive economics signs, coupled with expected increased demand from Europe and Asia, provide opportunities for retailers, traditional and otherwise, to capture significant profits in the days ahead. Keys to success include alliance formation between the bricks and clicks, and the acquisition of the numerous tools available to businesses, small and large, to take advantage of the new opportunities provided by the Internet.
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