E-business failure during the dot-com bubble: WebVan and eToys case studies

¶ … E-Business Entry

E-business may have been the most innovative idea to emerge from the birth of World Wide Web, but it was also the most misunderstood technology. Most firms believed that e-business would be easy. All you had to do was to offer your products or services online and then let customers visit you and make their purchases. But as it turned out, e-business turned out to be more complicated than that, resulting in massive shakeout in e-commerce sector during early 2000s. The dot.com bubble, as it was commonly known as, was one of the worst possible scenarios in the growth of e-business and it was believed that firms might never be able to harness the power of the Internet successfully. Brick and mortar option was considered safer and the sudden failure of most e-business was attributed to many things including poorly conceived business structures and models. During their study on e-business failure spanning 18-months from January 1999 to June 2000, researchers Agarwal, Arjona and Lemmer (2001) argued that most e-businesses had failed because of "fatal attraction" phenomenon. This is where you are capable of luring the visitors to your site but fail to convert them into buyers. They and some other researchers asserted that failure to follow some basic marketing rules had resulted in this e-business failure as Varianini and Vaturi (2000) explained:

When electronic commerce was young and the outlook was rosy, it seemed that the basic rules of marketing could be cast aside. The most important thing was thought to be a speedy launch to grab a share of the market space. Profit wasn't a near-term, or even a medium-term, goal. The aim was to get as many visitors as possible to your site, on the assumption that this would, at some stage, translate into profits. Today that strategy is in tatters.

Such explanations had some worth and value. But they only explained one part of the problem. While they offered useful information on e-business failures, they failed to take into account other factors such as organizational structure, external and internal strengths of the firm which were as responsible for the failure as poor business model and wrong marketing strategies.

Case studies

Let us now look at two important e-businesses that failed to take off and learn more about success and failure of this mode of business in the light of these case studies. We shall then explain why these businesses failed and where the core of the problem lies. Here we take into account the e-business failures of Web-Van and e-Toys- two firms that began their e-business operations with great deal of promise and were run by some of the most capable people in the industry. The primary purpose of studying these two cases is to demonstrate that the main problem with their strategy was the failure to see that their service was a new kind of service. Secondly it must also be borne in mind, that for an e-business strategy to be successful, it must focus on both the back-end and front-end work. It is important that back-end work is done as efficiently as the front-end. In the case of Web Van and e-Toys, it was noticed that while a great deal of attention was paid to the front-end where everything was expected to look attractive, the back-end was completely ignored, resulting in serious backlog and efficiency problem.

They must have good experience and knowledge of the work

These factors played an important role in the success or failure of a project. Based on these findings, HP undertook the study of 19 of its successful and unsuccessful innovative projects. It was found that the successful project complied with all ten factors (Table 1) while failed had a compliance rate of 17 to 67%.

Table 1: Factors affecting Success and Failure of 19 Innovation Projects at HP

Factors

Successful projects Compliance Rate (%)

Unsuccessful projects Compliance Rate (%)

Understanding of User Needs

67

Strategic Alignment and Consistency

67

Systematic Competitive Analysis

50

Product Positioning

50

Technical Risk Assessment

50

Using Prioritized Criteria for Decisions

50

Regulatory Compliance

33

Matching Channel to the Product

33

Project Endorsement by Top Management

17

Total Organizational Support

17

Source: Leonard-Barton, Wilson

Such studies made researchers and managers conclude that the most important reason an e-business strategy failed was because firms paid little attention to customer's needs. It would be wrong to assume that companies like eToys or WebVan did not pour in enough effort. Some companies would spend millions of dollars on studies and surveys to understand customer's mind and preferences but would still fail to develop the right strategy. It has been found that the problem exists with inability of the firms to identify correct target audience, to accurately gauge the usefulness of their products and to incorporate customer needs into design of their new products or services.

According to the research done by HP, following were some of the key factors for the success of a new product:

HP's Key Factors for New Product Success

Factors

Comments

Strategic Alignment

Link between product features and strategic goals

Customer Needs

Identifying correct target customers

Compliance Issues

Constraints and regulations

Competitive Analysis

Identifying competition

Product positioning

Where the product stands among rival products

Project priorities

Trade-offs

Risk management

Assessing risk correctly

Market Channels

Using correct channels to access customers

Leadership

Senior management's role

Resource availability

Staff and capital available

Dependency Management

External and internet dependent factors

Source: Adapted from Leonard-Barton, Wilson, and Doyle (1995), p. 289.

In another study, Cooper and his colleagues concluded that failure of a new product was primarily a function of not paying due attention to the market (Cooper 1992, 1993, 1998, Calantone and Cooper 1979, Cooper and Kleinschmidt 1986). Similarly yet another study by Souder (1987) that took into account 235 new product projects, it was found that inability to clearly identify user requirements was the biggest stumbling block. This gave rise to the 11 factors mentioned in Table 2 of HP product development. Leonard-Barton, Wilson and Doyle (1995) concluded that there could be four need-solution contexts that could be used when a new product was being developed:

1. An improved solution for a known need

2. New solution to a known need

3. A new solution to an anticipated need

4. An evolving solution to an uncertain need.

Mismatch of perceptions was another important idea put forth by Rangan and Bartus (1995). They argued that there might not always be similar perception guiding a person's decision on both sides of the sales. The supplier (innovator) and customer may not see eye-to-eye on a new product or technology resulting in conflict that makes way for failure. Similarly they contend that a product or technology may not be all that new for the customer while it is considered a breakthrough technology by the supplier. This is a very important framework for B2C operations and our current discussion. When companies like eToys and WebVan came into business and started this new venture, they probably were enamored by the technology while the customer was only looking for a better way to do the same thing he had been doing for ages i.e. shopping. As the result, while the very idea of making merchandise available on the web was a breakthrough for the supplier, it was not the same big issue for the customer. The customer was basically looking for ease and efficiency, which was missing as we saw in the case of WebVan where it took hours to deliver groceries.

We have studied all these theories and findings to put forth various reasons why a new e-business strategy might fail. In the stories of eToys and WebVan, it appears to be case of discordant perceptions. While both eToys and WebVan wanted convenience of the customer and understood the needs of the customer, they failed to provide the ease and efficiency that could be considered a breakthrough by both the supplier and the customer.

This has not just been the case with eToys and WebVan, several other companies went down because the perceptions and needs of suppliers and customers were not in harmony. Boo.com was one such company that opened with much fanfare and had the best aesthetic site possible. But the front-end wasn't all what the customers needed. The basic ability to browse various fashion products and compare them was missing, leading to confusion about buying decisions. The company invariably began losing money because while the firm was focusing on aesthetics, the customer was looking for faster delivery. One Boo-bashing post went like this: "Boo.com has been shut down for being the biggest bunch of marketing-led, content free morons in European e-commerce. Nothing happens on this page. Not much happens on any of the other pages either, except for rotating shoes and annoying helper applications. This site is designed for extremely wealthy people…" (Isaacs, 2001)

If you want to succeed in the e-world, you better come prepared with a strategy that plans to offer something new and better to the customers. The stores like toysmart.com and petstore.com should have been great successes but they failed miserably because there was nothing new for the customer to look forward to. No inexpensive products, no discounts, nothing new- in other words, it was just another web store.

EToys had some of the best brains working for it. Top Disney executives were hired and ideally the venture should have been a raging success. But like some other failed stores, eToys also assumed they knew what the customer wanted. Then they went on overstocking which resulted in huge inventories that quickly became so obsolete that they had to be discarded. This obviously resulted in serious losses. The idea that Internet was basically a disruptive technology that could case serious harm t traditional businesses led many innovators to believe they could use the "Instant-Company" approach (Useem, 2000). This is where you move in fast and try to take advantage of the new technology only to realize that "the eyeballs the websites managed to attract didn't turnout to be loyal," (Useem 2000, p. 84).

But Internet companies need to understand that just as it was easy to enter the market and seize first mover advantage, it is equally easy for the advantage to vanish in no time. This is because of no barriers to entry and when potential customers have millions of sites to make their purchases from, it is easier to forget the one that offers nothing exciting. With companies like iChoose present, it is close to impossible to boast of low prices if there are rivals offering even merchandise or services for even less. Tom Siebel of Siebel Systems said, "The Internet will only be a benefit if companies use it to grab hold of the customer and never let go." But this is definitely easier said than done. Siebel adds: "The issue isn't how I put my business on the Internet. That's easy. But the entire distribution channels have been forever transformed. It isn't either/or situation. Customers will buy from multiple channels, sometimes simultaneously. They will randomly transmigrate from a Web site to a showroom, to Web-TV, WAP-device, Kiosks-- and the dialogue thread must be continuous. That's the challenge." (quoted in Reed 2000, p. 57)

Big companies that have been immensely successful online including HP and Dell have years of research supporting their success. They did not base their decision to go online on the fact that everyone else was doing it. They made a conscious choice knowing they had to harness of the potential of the Internet but were at the same time, mindful of the potential pitfalls or obstacles they could face. They did adequate research and then decided to have a web presence based on the findings. Dell for example realized that while Internet was a powerful, it also encouraged searching which made it easier for customers to have access to numerous choices. (Harvard Business School Case, Dell Online, 1997).

Another major study by Deloitte Consulting that included 850 top executives is quite interesting and informative (Reed 2000). The study reveals that companies, which are successful online work on building loyalty networks and this, had so far been done by only 13% of the firms.

For companies like eToys and WebVan, we would recommend that they learn from all the lessons discussed above. Though they are failed companies, there will be several others, which would use their ideas and be more successful. These businesses need to augment their essential services and products by increasing brand equity i.e. adding value to their services. They must also work on creating competitive advantage, which is sustainable in the long run. One good to do so was to creating customer loyalty, offering quality that was consistent and building a delivery system which was always efficient. In short they need to have a more customer-centric e-business strategy.