Entrepreneurship and innovation: critical literature review of contemporary challenges

¶ … 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.

Webvan

WebVan was not to be an ordinary e-business. It started with initial funding of $122 million from companies such as CBS and Knight Ridder and had the support of some of the top-notch capital firms including Benchmark Capital, Sequoia Capital and Softbank. Webvan was first launched in San Francisco Bay Area on June 2, 1999. Louise R. Borders and his associates decided to hire some high-profile people to head this e-business. For this reason, Accenture CEO George Shaheen was selected and Webvan was armed with just the right arsenal to take the world by storm. The firm wanted to revolutionize the way people did grocery shopping and tried not to repeat the mistakes made by other grocery stores including Peapod. According to them, their e-business strategy was foolproof and folly-free which meant there was little likelihood of this business venture failing. However this was not to be so. In just two years of its inception, Webvan had lost $1 billion and its stock came down from $34 to mere cents. The volume of orders also dropped significantly in the last few months of its short-lived existence. As Wilson (2001) quotes one customer of Webvan:

Even as I placed a regular, twice-monthly order with WebVan and marveled at the ease of it all, I had to wonder how long it would last. It simply didn't make sense to me that I could sit at my computer and do shopping in 15 minutes that normally would take an hour or more, then have my groceries delivered at no noticeable premium. The savings to me, in time, gasoline and frustration, were obvious, but WebVan's profit potential wasn't. The company said it could achieve profitability at certain customer volumes, but it bled too much cash trying to reach those volumes.

In recent months, as WebVan struggled to survive, it continually made special offers to keep us shopping. I was shopping anyway, but no one turns down $20 in free groceries.

I had to wonder, however, whether those $20 rebate offers weren't just cutting deeper into WebVan's bottom line. Considering that its drivers were always on time and courteous, the goods were delivered in special packaging for freshness - each green pepper got its own ZipLock bag - and each order came with some special freebie, WebVan appeared to me to be working too hard for too little money.

WebVan had hoped that people would switch from brick-and-mortar to electronic clicks in no time but this was sadly not to be the case. Customers could see no genuine benefit of shopping online when their supplies would arrive hours later anyways. It was argued that WebVan had expanded too fast too soon and its presence in multiple cities had proved too costly. While the demand had increased, the capacity to handle that demand had not.

eToys case study:

eToys was another brave new concept in the world of e-business back in 1996. The company started operating online in 1997 and had to shut down its operations in 2001. While the firm had experienced huge increases in sales, there were also dramatic increases in losses- making eToys another e-business that failed to make any profits during its short existence. The firm was not a failure because of lack of demand. This is clear from the fact that the sales, which were $24 million in 1998, had gone up to $182 million in 2000. This is no mean victory by any standard. However at the same time when demand was increasing, the company was also losing money rapidly. The losses were around $35 million in 1998 but climbed to a staggering $137 million in 2000. The stock came crashing down to pennies from a high price of $86.

eToys had opened its doors to the public as a web retailer with array of children good. The products included everything from toys, videos, and games to music and software. It was felt that eToys was the perfect solution to the traditional way of toy shopping. Not only did it offer an easy layout and search facilities, it was also less time-consuming. The firm asserted that with the choices as broad as traditional names brands such as Mattel, Hasbro, and Leggo to more luxury brands like Brio, Playmobil, and Learning Curve- eToys was just the right place to shop for children's goods. They were right to some extent. The sales soared to $151 million in 2000 but the same year, the firm also lost $189.6 million. Stock price crashed to $5 and it was clear that eToys was not making any profits. This venture again was a total failure.

Discussion:

To understand why these or some other e-business strategies failed, it is important to draw lessons from vast body of literature present on the subject. (Ayers, Dahlstrom, and Skinner 1997, Berggren and Thomas 2001, Brown and Eisenhardt 1995, Datar, Jordan, and Srinivasan 1997, Howells 2001, Ittner and Larcker 1997, Kessler, Bierly and Gopalakrishnan 2001, Leonard-Barton, Wilson, and Doyle 1995, Madique and Zerger 1984, Rangan and Bartus 1995, Srinivasan, Lovejoy, and Beach 1997). Though considerable effort had been made by companies to understand the reasons why e-business strategies failed, it was found that failure rate of new business was still quite high. Arthur D. Little reports that around 85% of 700 companies that he studied were dissatisfied with their e-business ventures and strategies. (Berggren and Thomas, 2001). The following recommendations could be collected from various studies:

1. Successful managers of e-business innovation are required to learn from their mistakes. (Howells 2001).

2. Successful managers understand the importance of matching goals with capabilities. They do not have an unrealistic picture of their venture and neither do they have unrealistic expectations. (Kessler, Bierly and Gopalakrishnan 2001)

3. Successful managers keep in view the needs of the customer and design their e-business strategy accordingly. (Berggren and Thomas 2001).

Important lessons from the big organizations:

Leonard-Barton, Wilson and Doyle (1995) studied Hewlett-Packard's case and discuss in length the pains HP took in 1980s to learn from past successes and failures. A study was conducted and its findings were to be incorporated in HP's new product development process. This study took help from the findings of 1976 study called Project SAPPHO, by Sussex University. It was important to learn how innovation managers developed successful business strategies. Some of the key findings included

Innovation managers had to have a better understanding of customer's needs

They need to pay greater attention to marketing of the product or service

Development work needed to be more efficient but not necessarily swifter.

Technology was to be used in specific areas

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.