Webvan. CIS Case 6. Spencer Kerber 11/19/2015

Transcription

1 Webvan CIS Case 6 Spencer Kerber 11/19/2015

2 Contents 1. Background The Problem The Mission Generic Strategy Internet Enabled Business Model... 3 Profit Site... 3 Value... 3 Scope... 4 Revenue Sources... 4 Pricing... 4 Connected Activities... 4 Implementation... 4 Capabilities... 4 Sustainability... 5 Cost Structure Porter s Five Forces... 5 Threat of new entries: High... 5 Threat of substitutes: High... 5 Supplier power: Low... 5 Buyer power: High... 6 Degree of rivalry: High Critical Stakeholders... 6 Webvan Shareholders... 6 Louis Borders... 6 Webvan Employees... 6 Webvan Customers... 6 Webvan Contractors Available Options Do nothing Purchase regional grocery chains Attempt to get bought out Exit the market Recommended Option Works Cited

3 1. Background Webvan was an internet based company that combined online grocery stopping with home deliver. On November 5, 1999, Webvan completed its much-anticipated initial public offering. Despite tiny sales and big losses to date, shares of the two-year-old company, which combines Internet grocery shopping with home delivery, shot to an 80 percent premium on its first day of trading. At the end of its first day as a publicly traded company, Webvan had a total market value of more than $8 billion, nearly half the capitalization of grocery industry leaders. Webvan was founded by Borders Books founder Louis Borders. Borders was confident that Webvan could prevail over its existing online competitors by expanding aggressively. In the Internet economy, Borders argued that first-to-scale, not first-to-market, counted. While Webvan had operated for a mere five months in San Francisco area, more than 10,000 people had signed up for the service. Webvan's 1999 sales were expected to amount to $11.9 million while losses would amount to $35 million. 2. The Problem Webvan faced several strategic decisions affecting its immediate future. Should Webvan use its large market capitalization to buy regional grocery chains in markets it was interested in pursuing? Should Webvan ever consider a takeover offer from a large grocery chain? should Webvan continue to push forward with additional product lines? The overall problem facing Webvan was what should their strategy be in navigating and growing in a new and unpredictable market. 3. The Mission Webvan s mission was to provide a safe secure online customer experience that offered nearly double the selection of products of a typical grocery store and at comparable prices. Webvan wanted to create a new and improved e-grocery industry. In order to attract customers away from the existing brick and mortar grocery industry Webvan would have to provide improved speed of service, convenience, personalization, and price (Kalakota). 4. Generic Strategy The strategy that Webvan followed was differentiation. Webvan hoped to differentiate itself within the online grocery market in two distant areas: operations and customer service. On the operations side, Webvan created proprietary systems that automated, linked, and tracked every part of the grocery ordering and delivery process. Border created the first Webvan distribution center in Oakland California at a cost of $25 million. This center was a prototype for the 26 other centers Webvan intended to build. The new 330,000-square-foot distribution center in Oakland, California, utilized these proprietary systems to service customers within a 40-square-mile radius around the San Francisco Bay Area giving it the ability to serve as many customers as 20 normal supermarkets. 2

4 Once orders were placed on the Web, they were automatically routed to the warehouse. "Pickers" were stationed throughout the distribution center to assemble the orders. The orders were loaded onto refereed trucks which took the orders to one of twelve docking stations throughout the Bay Area where they were loaded onto one of more than 60 vans so that drivers could take the orders directly to people's homes. Webvan expected that each facility would handle more than 8,000 orders a day, totaling 225,000 items, and generate annual revenues of $300 million. In comparison, a conventional stand-alone supermarket brought in $12 million a year. On the customer service side, Webvan aimed to provide its customers with 50,000 products from which to choose compared to a normal grocery store that carried 30,000 items. Webvan customer could order a shopping list of items and receive the groceries the next day within any specified 30- minute time period. Deliveries could be attended or unattended, meaning that the customer could either be home to receive the order, or the Webvan associate could drop off the order while the customer was away from home. Webvan's market position as the quality-driven gourmet online grocer with everyday grocery prices was an attempt to differentiate itself from competitors. 5. Internet Enabled Business Model When looking at the Internet Enabled Business Model we must look at how the choice of profit site, value, scope, revenue sources, pricing, connected activities, implementation, capabilities, sustainability, and cost structure in the context of Webvan. Profit Site The profit site is what an organization does better than its competition. In the case of Webvan, the product site would be the focus on operations as well as customer service. Webvan hoped to undercut the traditional grocery store industry by providing large distribution centers that would be able to serve as many customers as 20 normal supermarkets with half the labor and double the selection (Afuah). Webvan s focus on customer service was designed to provide a customized and personal shopping experience of which a traditional grocery store could not provide. Value The purpose of value is to maximize customer satisfaction. This can be done in two ways: Cost leadership and differentiation. Webvan was followed the differentiation path. It strived to differentiate itself from traditional grocery stores as well as online grocery competitors. It attempted to outperform brick and mortar groceries by providing more personalized customer service, fast grocery deliveries as well as a large product mix. Webvan hoped to outperform other online grocers by marketing itself as the quality-driven gourmet online grocer with everyday grocery prices (Afuah). 3

5 Scope The scope of a business is usually bounded by a geographically limited area. In terms of Webvan, the organization was limited to sales primarily by the range of its distribution centers. Webvan s prototype distribution center was built in Oakland California and had an approximate range of a 40- square-mile radius around the San Francisco Bay Area. This distribution center was designed as a prototype for the planned 26 other centers Webvan intended to build. While Webvan s scope was initially limited to the first distribution center, the end goal was to provide services to the entire North American market as well as possible expansions into Europe, South America, and Asia. Revenue Sources Using the internet enabled business model allows organizations to create revenue sources that traditional offline stores are unable to tap into. Online advertising as well as selling demographic data collected through online sales are highly profitable, but Webvan made the mistake of not utilizing any form of online revenue. Webvan received revenue solely from sales of grocery products and delivery fees. The company did not intend to sell its customer data to third-party database firms nor did it receive online advertising fees, since it wanted to remain neutral among the different product brands that it sold online (Afuah). Pricing Using the internet enabled business model allows businesses to use the internet to drive variable cost down. The traditional approach, as well as the approach followed by Webvan, is menu pricing which eliminates any negotiation and provides an efficient and quick sales process. Connected Activities To offer better value to the right customers, a firm must carefully choose which activities it performs and when it performs them (Afuah). In the context of Webvan, the primary activities performed are the user customization and the fast delivery process. These activities were designed to give Webvan an edge over its competition both online and offline. Implementation Implementation in an organization depends on the relationships between strategy, structure, systems, people, and environment (Afuah). How well these portions of a company interact is key in determining the success or failure of an organization. When looking at Webvan we can see that their organizational structure and strategy were efficient in their attempt to reach their goals. What failed Webvan was the environment in which they started their business. The environment at the time of Webvan s creation did not have a sufficient market for Webvan to profit. Capabilities The capabilities of an organization must be in line with the goal and strategy of that organization. In terms of Webvan, the cost required to provide the capabilities necessary to run the company were far higher than Webvan s profit. While Webvan had the capabilities necessary to serve a large 4

6 market the customers and therefore profit just did not exist in a large enough number for Webvan to survive let alone thrive. Sustainability The sustainability of an organization can be broken down into three strategies: run, team up, and block. An organization using the internet enabled business model must decide upon one of the three sustainability strategies in order to survive. A sustainability strategy is chosen by looking at an organization using the complementary asset model. This model determines what sustainability strategy an organization should follow based on its imitability and complimentary assets. Analysis of Webvan s imitability shows that the services it provides are easily to replicate leading to a high imitability. The complementary assets held by Webvan are easily accessible and free for competitors to utilize. A high imitability with free complimentary assets determines that Webvan must use the run sustainability model, the most difficult option, which forces an organization to be constantly innovating to stay ahead of its competition. The run model requires a large amount of talented people in order to survive. While Webvan did attempt to follow the run model as seen when it hired 80 software programmers to design its systems, it did not have the profits to keep up a sustained state of innovation. Cost Structure A firm s cost structure expresses the relationship between its revenues and the underlying costs of generating those revenues (Afuah). In order for an organization to stay in business it must create a profit. The underlying goal of every organization is to make money now and in the future (Goldratt). From its inception, the Webvan system was doomed. The high costs of creating enormous distribution centers vastly outweighed the relatively small revenue Webvan made from sales. 6. Porter s Five Forces Threat of new entries: High The threat of new entrants is high due to the tech bubble and high expectations of the online grocery industry Threat of substitutes: High The threat of substitutes is extremely high because consumers can shop at numerous different brick and mortar grocery stores as well as online grocery competitors. Supplier power: Low Supplier power is low because there are many sources of food and produce that Webvan needs in order to achieve their goals. 5

7 Buyer power: High Buyer power is extremely high due to the numerous amounts of substitute grocery options available to them. Degree of rivalry: High The degree of rivalry is high due to the constant competition for customers as well as perceived threat of new entrants. 7. Critical Stakeholders Webvan Shareholders After its IPO, Webvan s primary goal became providing profit to shareholders. Shareholders have a large stake in the success or failure of Webvan. Louis Borders As the founder of Webvan, Louis Borders has a large stake in the success of the company. He has both a monetary stake as well as his reputation on the line based on the future of Webvan. Webvan Employees Employees have a large stake in the wellbeing of Webvan. Webvan Customers In an industry that strives to create customer loyalty Webvan customers have a stake in the future of the organization. Webvan Contractors Engineering and construction firm Bechtel Group has a large stake in the success of Webvan. In 1999 they signed a $1 billion agreement with Webvan to create distribution centers and delivery infrastructure in 26 markets over the next 2 years. 8. Available Options 1. Do nothing This option would involve Webvan continuing business in its current state. If Webvan were to continue operations as usual, if the predictions were to be true then, by 2001, they would see sales of $518 million, with an overall loss of $302 million for the year. With its high operational costs and low grocery sales, Webvan would inevitably fail if nothing were done. If this option was chosen, Webvan shareholders would lose their investment in the company and Webvan would eventually go out of business. 6

8 2. Purchase regional grocery chains This option involves Webvan purchasing regional grocery chains in order to diversify into brick and mortar stores as well as their original online platform. These regional chains already possessed supplier networks as well as their own distribution centers. Webvan could possibly leverage some equipment from these distribution centers while attempting to replicate its existing distribution centers. This option would also eliminate a few competitors in these regions (Afuah). This option would be a large expense and could prove difficult for a company making losses. If this option was to be chosen, Webvan would be able to eliminate some competitors, create more infrastructure, as well as tap into existing customers bases. 3. Attempt to get bought out This option would entail Webvan being purchases by an existing organization such as Amazon. While Webvan did have a large valuation that provided some protection against takeovers, a buyout was still in the realm of possibility. This option would depend heavily on the organization that purchases Webvan. This option would allow Borders to eliminate his risk in the organization and allow Webvan to utilize the capital and assets of its new organization provided. 4. Exit the market This option would involve Webvan leaving the market and liquidating all assets. As Webvan was making a loss and financial forecasts only predicted more losses in the future, Webvan could cease all operations and exit the market. This option could potential save shareholders a large loss on their investment. While this option would cause Borders a good deal of embarrassment, It would much less than that brought on by declaring bankruptcy. 9. Recommended Option My recommended option would be for Webvan to exit the market. From its inception Webvan made numerous mistakes. Prior to Webvan entering the online grocery market, other companies in the market were not performing well. Despite the hype of Internet companies and e-commerce as the wave of the future, analysts and grocery industry experts were unsure about the actual growth potential of the online grocery market. Industry analysts estimated online grocery sales of $156 million in 1998, less than 1 percent of the entire grocery market. Market predictions for the year 2003 ranged from $4.5 billion to $10.8 billion. With such vastly different market projections, it appeared difficult to predict which online companies would do well, if any. Additionally, of the 53.5 million people who were online in the United States, only 435,000 ever purchased food online. This number represented less than 1 percent of the 14,5 million users who had made purchases online (Afuah). The lack of a market for a market in their industry is the primary reason they should close. Though existing e-grocery companies did make small gains when they opened, there was no rapid increase in customer bases, which meant that their service was not entirely desired. According to Vladimir 7

9 Zwass as stated in Electronic Commerce: Structures and Issues, For a chance of success in this marketplace, the firm must identify an actual customer need and the firm's relationship with the customer must build on the key feature of the medium, namely interactivity. Webvan failed to identify an actual customer need with their service. The best option the Webvan could take would be to leave the market immediately and cut their losses. Webvan had entered a market that did not have a profitable customer base and invested far too much in an insolvent industry. 10. Works Cited Afuah, Allan, and Christopher L. Tucci. Internet Business Models and Strategies: Text and Cases. 2nd ed. Boston: Irwin/McGraw-Hill, Print. Afuah, Allan, Denise Banks, Otto Driessen, Thomas Oh, German Scipioni, and Rachel Zimmerman. "Webvan: Reinventing the Milkman." (2001): n. page. Print. Barker, Robert, and Cash, James. Management of Information Systems. Print. Goldratt, Eliyahu M., and Jeff Cox. The Goal. N.p.: Gower, Print. Kalakota, Ravi, Marcia Robinson, and Ravi Kalakota. E-business 2.0: Roadmap for Success. Boston, MA: Addison-Wesley, Print. Porters 5 Forces Zwass, Vladimir. "Electronic Commerce: Structures and Issues." International Journal of Electronic Commerce Fall 1.1 (1996): Print. 8