February 25th, 2000
"The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty and we must rise with the occasion. As our case is new, so we must think anew and act anew..."[A1]
Abraham Lincoln, 1862
Electronic commerce is making a huge impact on the way business is managed. To remain competitive, traditional 'bricks and mortar' companies must adopt new practices and review their business culture. We take a look at the examples made in the book retailing industry with particular focus on Amazon.com as a leader in the on-line retail revolution.
When Tim Berners-Lee invented the World Wide Web as a way for scientists to share information easily and quickly he could never have envisioned where his creation would have ended up. In the last few years the Web has exploded and, more recently, a sort of dotcom mania has swept up businesses from small specialist shops to huge multi-nationals.
The advantage for these businesses is that for very little set up costs they are able to reach millions of customers.
The earliest e-businesses were little more than catalogues transferred to the web. Customers would come, browse the product lines and then phone up and place an order. However as the web entrepreneurs became more sophisticated so did the sites. The advantages of Web based versions is that you don't have the cost of producing, making and distributing bulky catalogues and products can easily be added and removed from the site with very little extra cost. Also the medium of the HTML (the language used to describe Web pages) is a lot richer than print - listen to extracts of music as well as a experience other multimedia enhancements not otherwise available. Products can have a list of items that the shopper might also like. Also shopper browsing patterns can be easily tracked and analysed in much the same way the loyalty cards have allowed the Supermarkets to do.
This paradigm had initial problems as shoppers were unwilling to accept that their credit card details could be safe. It is only recently, with a better public understanding of the technology involved leading to greater acceptance and better PR from the web businesses, that online shopping has really taken off, to the extent that it is possible to order your groceries from a number of the bigger supermarkets online and have them delivered to your door.
More recently an even cheaper way to make money on the Net has evolved. By selling information the business overheads can be bought down to an absolute minimum. By buying a user-name and password customers get access to a large database on a specialised subject. However these sorts of business are becoming rarer and rarer as an even newer model becomes popular. The only areas that tend to retain this model are pornography, those sites selling access to specialised academic journals and also large photographic archives.
The newer model is much like the previous one except that instead of charging customers the sites rely on advertising revenues to survive, roughly equivalent to television channels such as ITV and free newspapers.
What advertisers find particularly appealing about advertising on the web is the well defined demographics and the ability to track user trends. Web sites tend to cater to very specific markets because whilst there may be several thousand or hundred thousand aficionados of a certain niche market it is uneconomic to produce a magazine and distribute it to all of them. Web sites however do not suffer from this problem.
Correspondingly the current vogue for businesses starting out on the web is for so-called portals. These are web sites which provide information such as news and reviews on a specific subject. The information is changed regularly and so the same people come back regularly to check the updates, sometimes up to 4 or 5 times a day.
It seems that everybody wins in these situations. The advertiser gets a very specific demographic to target, the person who runs the web site gets paid to work on something they love and the demographic gets a centralised information source for free.
The role of traditional booksellers in today's marketplace is changing. Gone are the days when the large firms made huge profits simply by having huge buildings with endless rows of titles, all for sale for a slight discount over smaller stores.
The image of a company is important, no matter what niche of which market they are in. Large booksellers, who before e-commerce were the biggest fish in the written-word pond, have been forced to live with new competitors who have access to a larger marketplace and who have more money. They are forced to turn to ideas that were once used against them by smaller firms. The playing field has totally changed and it requires a huge change in Identity and Strategy by the traditional firms to still compete.
With the new dawn of online booksellers, traditional retailers have been forced to rethink their culture in order to compete. One area in which a change has been required is that of identity. The main drawing point for large companies before has been huge variety of titles at low prices. Because on-line companies can now better them on both of these issues they need some fresh concepts to attract the customers. One main point to utilise is the fact that on-line companies have little or no face-to-face interaction. This can be exploited by making this a selling point. Trying to promote the retailer as a customer friendly service with people who give you pleasant service and helpful advice. From many people's point of view, this service will always be preferable to an on-line 'recommendations' system however complex it may be.
An example of this is Waterstones who are changing their workforce rapidly. Out go the employees who are simply salespeople. In come the new: the mostly young graduates who are encouraged to bring a much more relaxed atmosphere to their stores by using their individual initiative. They do not wear a uniform and are encouraged to have their own working style, rather than be 'robots'. They are encouraged to input their own suggestions in terms of what happens in their particular store. The idea is to persuade the customer that they are individuals and to try and gain a relationship between themselves and the customer. The theory is that the customer will want to go back to that particular store, not considering it an inconvenience rather than ordering from on-line.
A second advantage they have over their on-line competitors is the physical building from which they trade. With on-line shopping, you have no contact with the vendor in their place of business. With traditional retailers, there is the possibility to add to the effect of the friendly service by also tailoring your premises to impress the customer. Environmental enhances, such as comfortable seating and cafeteria areas, are services that on-line retailers can not offer and are thus prime areas to capitalise on. It is also however a risky enterprise as it is diversifying into an area of expertise where they previously have no experience.
The strategy of the traditional bookseller is changing in the long term. In the past the main aim was to increase in size and thus use economies of scale to lever a competitive advantage over the smaller firms. The new competition from the on-line companies has led to this altering as traditional retailers are forced to diversify and find new niches. A lot of the smaller firms are specialising in the hope that that will enable them to keep their market share even if it is slightly shifted. For example Hargreaves Books only sell books about Yorkshire. Their aim is to monopolise this small market by being experts in their field and keep a very small but loyal market.
This however can not be the case for larger general stores. They also can not sit still though. One way in which they can diversify is to try to take the on-line firms on at their own game by going on-line themselves. The problems faced by this are that they do not have the initial advantages such as the low overheads that on-line companies are able to keep. This means it is difficult to compete on price.
Amazon.com has arguably been at the forefront of the online presence of book retailers. Up until now, it has led the online book industry with other retailers trailing behind. Because Amazon.com was born and bred a dotcom company, its whole structure is unique to this type of industry. It has not evolved and grown over decades as other large organisations have, but rapidly expanded in the space of a few years with over 1,000 employees.
Until the launch of Amazon.com in 1995, Barnes & Noble and Borders had been busily defining the business of book retailing. In time, they built up elaborate distribution schemes and opened store-fronts in hundreds of locations - they became the dominant powers in the industry. However, when Amazon.com came onto the scene, all the advantages of the large book retailers became disadvantages. Amazon.com traded only on the digital marketplace and as a result customers could buy books from any location at any time and Amazon didn't have the overheads of the distribution networks or the physical stores.
The rapidly-changing environment in which Internet companies operate means that their ability to have long-term direction is limited. They must change their goals depending on the market trends and constantly advancing technology. As more and more companies are moving to the Internet, Amazon.com must offer more value-added services to keep existing customers and entice new people to buy from them. The idea of building up a community attempts to mimic the off-line world where a customer establishes trust and loyalty with a company. This is important as one of the key reasons why people shop in a certain place time and time again, and where price is not necessarily the deciding factor, a customer will look for the shopping experience as the key to where they place their loyalties. The latest retail sector Amazon.com has broken into is power tools, thus demonstrating that they are quite happy to change their industry quickly according to a perceived niche in the market.
The management structure reflects this need to adapt constantly, with a relatively flat structure. Specifically, under the Harrison and Handy Classification System, a task culture could be the ideal structure to be able to adapt to market conditions. However, because the root of Amazon.com is just one person, Jeff Bezos, a more realistic culture is a power culture with the founding entrepreneur at the centre of such a web.
"We depend on the continued services and performance of our senior management and other key personnel, particularly Jeffrey P. Bezos, our chief executive officer and chairman of the board. We do not have "key person" life insurance policies. The loss of any of our executive officers or other key employees could harm our business."[C1]
This dependence has come about because the founder of the company is still part of Amazon.com and exerts much influence on the direction of it. Although this hero culture was cited as important to the success of an organisation by the likes of Deal and Kennedy, and Peters and Waterman, such great reliance is not healthy for the long-term success of the company.
Increasingly, many dotcom companies are offering employees stock options in them, in lieu of pay. This promotes employee interest in the company, not just their own role within the company, but a broader interest in the organisation as a whole. Although this can encourage perception of the business goals, the downside of this approach is that employees are directly affected if the company's stocks decrease. The current hype in "new technology" companies means that share prices are currently artificially high and when that bubble bursts, it will be employees as well as investors who are affected, sending a wave of discontent through companies.
In stark contrast to the off-line book retailer, employees of Amazon.com are not typically book enthusiasts, but in the sectors of IT, marketing and distribution. Job security is also an issue: off-line companies have the advantage of long-established financial models and are thus more stable.
"Due to our limited operating history and the unpredictability of our industry, we cannot accurately forecast our revenues"[C2]
This demonstrates the fluidity of Amazon.com, while being one of its greatest assets, it is also a worry to employees in their long-term job security.
Naturally there are those companies which straddle the on-line and off-line worlds. Such a "clicks and mortar"[D1] approach very much represents a hybrid approach, attempting to marry the two cultures.
A prime example of this hybrid mix is Barnes & Noble. Barnes & Noble is the largest bookseller in the USA with a market share of 15% and about 1,000 stores. Their on-line arm, barnesandnoble.com, is a joint venture with European media giant Bertelsmann, who also co-own bol.com. barnesandnoble.com competes directly with Amazon.com, but comes from a very traditional background.
There are also on-line retailers making partnerships, or outright purchases with real world firms. The first example was on-line auctioneer eBay's purchase of Butterworth and Butterworth in early 1999[D2].
Increasingly, in order to compete, companies from both sides of the fence are having to deliver the best the opposition offers. This is likely to lead to more hybrid developments as on-line firms find off-line partners and completely off-line firms begin using the internet.
In doing so the new venture must merge not only the assets of the two businesses, but also their cultures. Creating a well integrated culture in the new organisation can be difficult, particularly when a traditional business must face the level of funding that are ploughed into on-line ventures. Analysts suggest that this does not always happen. Meredith Medland of Jupiter Communications
"There is huge animosity between employees of parent companies and those in the spinoff ... Employees on the off-line side are seeing the Internet guys take in big salaries and bonuses, often for possessing similar or less skill levels. It doesn't sit well."[D3]
Consolidating the differences between the on- and off-line approaches is clearly not simple, and there will always be other companies waiting in the wings to capitalise where a company gets things wrong online. If they cannot, at the core of their business bring the cultures together, then there is little hope that they can present a strong, coherent approach to their customers; thus bringing the cultures together will be the key for any hybrid approach.
By using their physical stores across the USA, Barnes & Noble have recently begun to deliver on-line orders faster than rivals by sending, if need be, a member of staff from the shop floor[D4]. To compete, Amazon.com have taken a substantial stake in Kozmo.com, who specialise in rapid delivery from the web[D5].
Amazon.com to offer a 'no-hassle' returns policy, but it is still less attractive to many customers than taking the delivered book into a local, physical store to return it. Barnes & Noble offer this through their existing stores, at little incremental cost.
Of course, providing better service to customers in their physical stores has a number of consequences. CNET.com recently reported that some Amazon.com customers were returning books to Barnes & Noble's physical stores.[D6] However simple Amazon.com make their returns, without a real-world partner they may have difficulty in competing with the simplicity for those who have a local store.
At this time, we still know very little about customer behaviour in the on-line marketplace. Early adopters such as Amazon.com will have the power to control the way that e-commerce will develop over the coming years but they are also working at the bleeding-edge of the medium and if failure is to rear it's head then nowhere will it happen more spectacularly than with the early adopters.
Increasingly we see more and more startup initiatives in the online marketplace, we will see and equal number brick and mortar companies expanding their business to compete. With digitalisation comes new market forces that must be met and provided for, traditional businesses will have to learn to work in this new environment and to modify their off-line business to remain competitive.
Amazon was able to compete with the off-line book retail giants by offering the customer massive discounts of up to 40% but what is to stop another start-up company from entering the market place and offering the same product at an even cheaper price? Would such a practice lure Amazon's customers away? Yes. While Amazon.com has a grip on the market at the moment it must continue to improve it's service to the customer at the same time as making massive financial losses.
One technological advance that will threaten the existing retail model for book sellers is that of the electronic book. There are a growing number of publishers that are taking advantage of this new technology and now work only in the digital world. They have little need for retail outlets because customers can by their books online; if this format becomes popular the role of the off-line book shop comes into question.
Clearly, an on-line book retailer such as Amazon will already be well equipped to handle this new technology, and indeed, it is imperative that it takes it on for there will always be another start up that will try to steal the market by offering still cheaper prices.
It is not sufficient for a player in the on-line market to provide only a price advantage. In many cases 'real world' services are missing and it is these aspects that the on-line traders must provide. The technology needs to provide is a way for 'mass customisation' in to a level that is already provided by the off-line retail world.
This could be the 'make or break' of e-commerce. It is not in dispute that e-commerce is growing in popularity, but there are currently technological limits to what can be achieved in a purely on-line environment. If the established on-line companies such as Amazon.com can provide the customer with a truly convenient environment in which to shop then they should maintain their place as a competitive retailer. However, if they should fail to do this they will find themselves competing against new companies that move quickly to adopt new technology with the pace required by the digital marketplace.