Harvard
`Business
`Review
`
`Competitive Strategy
`
`The Future of Commerce
`
`by Adrian Slywotzky, Clayton M. Christensen, Richard S. Tedlow, and Nicholas
`G. Carr
`
`From the Magazine (January-February 2000)
`
`As we enter the twenty-first century, the business world is
`consumedby questions about e-commerce. While the electronic
`
`sale of goodsstill represents only a small fraction of economic
`
`activity, the Internet seemsat this moment in history to present
`almost unlimited possibilities—as both a conduit and a disrupter
`
`of business. To shed light on the changes we mayseeas the early
`years of our new century unfold, we asked some close observers of
`electronic commerceto share their thoughts and speculations
`
`aboutthe future.
`
`Adrian J. Slywotzky, a managementconsultantand author, has
`
`written extensively on the evolution of business models. He
`believes that electronic commercewill accelerate the shift of
`
`power toward the consumer, whichwill lead to fundamental
`changes in the way companiesrelate to their customers and
`
`compete with one another. Harvard Business School professors
`
`Clayton M. Christensen and Richard S. Tedlow view the Internet
`
`as a classic example ofa disruptive technology, one that will alter
`
`the basis of competition in retailing. They examinepastretailing
`disruptions, and they find patterns that appearto be recurring, at
`
`least in part, today. Finally, HBR senior editor NicholasG. Carr,
`
`EX1055
`
`Roku V. Media Chain
`U.S. Patent No. 9,715,581
`
`0001
`
`EX1055
`Roku V. Media Chain
`U.S. Patent No. 9,715,581
`
`0001
`
`
`Business
`Review
`
`Competitive Strategy
`
`The Future of Commerce
`
`by Adrian Slywotzky, Clayton M. Christensen, Richard S. Tedlow, and Nicholas
`G. Carr
`
`From the Magazine (January-February 2000)
`
`As we enter the twenty-first century, the business world is
`consumedby questions about e-commerce. While the electronic
`
`sale of goodsstill represents only a small fraction of economic
`
`activity, the Internet seemsat this moment in history to present
`almost unlimited possibilities—as both a conduit and a disrupter
`
`of business. To shed light on the changes we mayseeas the early
`years of our new century unfold, we asked some close observers of
`electronic commerceto share their thoughts and speculations
`
`aboutthe future.
`
`Adrian J. Slywotzky, a managementconsultantand author, has
`
`written extensively on the evolution of business models. He
`believes that electronic commercewill accelerate the shift of
`
`power toward the consumer, whichwill lead to fundamental
`changes in the way companiesrelate to their customers and
`
`compete with one another. Harvard Business School professors
`
`Clayton M. Christensen and Richard S. Tedlow view the Internet
`
`as a classic example ofa disruptive technology, one that will alter
`
`the basis of competition in retailing. They examinepastretailing
`disruptions, and they find patterns that appearto be recurring, at
`
`least in part, today. Finally, HBR senior editor NicholasG. Carr,
`
`EX1055
`
`Roku V. Media Chain
`U.S. Patent No. 9,715,581
`
`0001
`
`EX1055
`Roku V. Media Chain
`U.S. Patent No. 9,715,581
`
`0001
`
`
`
`whohasedited a numberof the articles on electronic commerce
`
`that we’ve published over the last two years, examines the
`fragmentation of economicactivity taking place on the Web. He
`foresees a future of “hypermediation,” in which profits derive
`more from clicks than from sales.
`
`It should be no surprise that our authors offer very different
`
`visions of what’s to come. Out of such intellectual friction comes
`
`insight.
`
`The Editors
`
`The Age of the Choiceboard
`
`Adrian J. Slywotzkyis a vice president of Mercer Management
`
`Consulting in Lexington, Massachusetts, and coauthor of Profit
`
`Patterns (Times Business/Random House,1999),
`
`As customers gain control over the design of products,
`
`competition within and among industries will take on a whole
`new shape.
`
`The last time I boughta car, I looked at a numberof different
`
`models on dealers’ lots. Not one of them precisely met my needs.
`Even the car I ultimately purchased represented a compromise,
`
`providing somefeatures that I wanted (antilock brakes and a
`spacious trunk, for instance), somethat I was neutral about (a
`
`sunroof and power mirrors), and a lot of others that I had no need
`for whatsoever(from cruise control to fog lamps to heated seats). I
`boughtit, even with all the unwanted features, becauseI liked the
`way the car looked and handled, and becauseit was available at
`that moment. I didn’t want to wait a month to get acar witha
`
`marginally better mix of features.
`
`0002
`
`0002
`
`
`
`WhatI went throughis what all customers go through. Indeed,
`customerfrustration is designed into our business system.
`Companies create fixed productlines that representtheir best
`
`guesses about what buyers will want, and buyers make do with
`whatthey’re offered. There may be some minortailoring at the
`point of purchase—afew optionalfeatures or add-ons—but by
`and large theset of choicesis fixed long before customers even
`begin to shop. Whether they’re purchasing cars or clothes or
`
`computers, people alwaysgettoolittle of what they want and too
`muchof whatthey don’t.
`
`Of course, the fixed product-line system is nojoy for suppliers,
`
`either. Predictions of future demand, no matter how well
`
`grounded,are inevitably inaccurate. That’s why the pages of
`
`newspapers and catalogs teem with announcementsofsales,
`factory rebates, and dealer incentives, and whyoff-price stores
`
`are always plentifully stocked. Frustrated retailers and
`manufacturers spend tensofbillions of dollars in discounts every
`year to help dispose of merchandise that isn’t moving the way
`
`they thoughtit would.
`
`So why doesa system that’s bad for both customers and
`
`companies hold sway? Historically, there hasn’t been an
`alternative. The slow, imprecise movementof information up the
`
`supply pipeline and of goods downit has meantthat the
`
`manufacturing process must begin long before accurate
`information about demandexists. Our entire industrial sector
`
`operates on guesswork.
`
`From Product Taker to Product Maker
`
`Nowforthe good news. Thanksto the Internet, an alternative to
`
`the traditional unhappy model of supplier-customerinteraction is
`
`finally becoming possible. In all sorts of markets, customers will
`soon be able to describe exactly what they want, and suppliers
`
`will be able to deliver the desired product or service without
`compromiseor delay. The innovation that will catalyze this shift
`
`0003
`
`0003
`
`
`
`is whatI call the choiceboard. Choiceboardsare interactive, on-
`
`line systemsthat allow individual customers to design their own
`products by choosing from a menuofattributes, components,
`
`prices, and delivery options. The customers’ selections send
`signals to the supplier’s manufacturing system that set in motion
`the wheels of procurement, assembly, anddelivery.
`
`The role of the customerin this system shifts from passive
`recipient to active designer. That shift is just the most recentstage
`
`in the long-term evolution of the customer’s role in the economy.
`For mostof the twentieth century, customers were “product
`
`takers” and “price takers,” accepting suppliers’ goods at suppliers’
`
`prices. Over the past two decades, as customers became more
`sophisticated and gained greater power over the buying process,
`
`they stopped being price takers. Armed with more options and
`more information, they looked further, bargained harder, and
`
`eventually found lowerprices. But customersare still product
`takers. Even though suppliers havetailored their offerings to finer
`andfiner slices of the customerbase, buyers are ultimately forced
`
`to settle for the best approximation of what they want. With the
`choiceboard system, however, customers are product takers no
`
`longer. They’re product makers.
`
`The Coming Dominanceof Choiceboards
`
`Choiceboardsare already in use in many industries. Customers
`
`today can design their own computers with Dell’s on-line
`
`configurator, create their own dolls with Mattel’s My Design
`Barbie, assemble their own investmentportfolios with Schwab’s
`
`mutual-fund evaluator, and even design their own golf clubs with
`Chipshot.com’s PerfectFit system. But the choiceboard modelis
`
`still in its infancy. Despite its enormousbenefits,it’s involved in
`less than 1% of the $30 trillion world economy. Even whereit’s
`well established, such as in the PC business, it accountsfor only a
`small fraction of overall industry sales.
`
`0004
`
`0004
`
`
`
`Three things are holding choiceboardsback. Thefirst is simply
`
`their newness: many manufacturers can’t even imagine doing
`business through a choiceboard model. It would mean
`
`restructuring their entire manufacturing and sales systems. The
`secondis the lack of highly responsive supply networksthat can
`
`deliver components and services as needed. The third, and most
`
`important, is the lack of a critical mass of customersable to use
`choiceboards. Digital readiness, which I define as the numberof
`PCs times the degree of PC literacy times the breadth of
`broadbandaccess, remains low. Some industrial markets have an
`
`abundanceof digital-ready customers, but in most markets,
`
`especially consumersectors, the digital-ready segmentis still a
`tiny sliver of the customerbase.
`
`Butthat last roadblock will be dismantled quickly. PC sales are
`strong;digital literacy is spreading rapidly, particularly among
`
`the young; and the expansion of broadbandaccessis inevitable.
`
`Andas soon as the customersare there, you can bet that
`choiceboards and the supporting infrastructure will be in place.
`By the end of this decade,I anticipate that choiceboardswill be
`involved in 30% or more of total U.S. commercial activity, as our
`
`economy moves from a supply-driven to a demand-driven
`system. The big question isn’t, Will choiceboards dominate
`
`commerce?It is, Who will control the choiceboards?
`
`Changing the Terms of Competition
`
`Because choiceboardscollect precise information about the
`preferences and behaviorof individual buyers, they enable
`
`companiesto secure customer loyalty as never before. With each
`transaction, a company becomes more knowledgeable about the
`customerand hencebetter able to anticipate and fulfill that
`
`customer’s needs. That knowledge can beusedtotailor, in real
`time, the design of the choiceboarditself, customizing the options
`
`presented to the buyer and promoting up-selling and cross-
`selling. Once aggregated, moreover, the customer information can
`be used to guide the evolution of entire productlines and to spot
`
`0005
`
`0005
`
`
`
`new growth opportunities at their earliest stages. In such an
`environment,it becomesvery difficult for a competitor, lacking
`the in-depth customer information, to displace the existing
`
`provider.
`
`As weare only in the early stages of the choiceboard revolution,
`
`first movers stand to gain enormous advantages. As Dell’s
`experience has shown,successful choiceboardsact as magnets.
`They not only exert a strong pull over existing customers but also
`
`draw in each new waveof digital-ready buyers. And with each
`new customer, the company’s market knowledge growsstronger,
`propelling it ever further ahead of the pack. Equally important,
`choice-boardsattract key suppliers, which are also hungry for
`accurate and timely information about demand. Dell’s far-
`
`reaching supply contracts with IBM, for example, will helpit
`endure periods of restricted componentsupplies far better than
`
`manyof its competitors.
`
`Forall those reasons,the rise of choiceboards promisesto
`redistribute power within industries. I foresee three types of
`
`competitors vying for early choiceboard control. First is the
`individual manufacturer or assembler, such as a Dell or a Schwab.
`
`Second is a consortium of existing manufacturers; an example is
`the MetalSite choiceboard launchedby a group of leading metals
`
`producers. Third, and most threatening to existing players, is the
`
`new intermediary. Because choiceboardsare essentially design
`tools and conduits of information, they needn’t be controlled by
`
`the companiesthat produce the products. Point.com,for
`instance, uses a choiceboardto help customers research and buy
`
`wireless phones, service plans, and accessories. As it amasses
`
`more and more customerinformation andrefinesits choiceboard,
`
`it will pose an ever greater threat to entrenched
`
`telecommunication companies, particularly those that are slow to
`launch their own choiceboards.
`
`0006
`
`0006
`
`
`
`What’s abundantin most industries today is production capacity.
`
`What’s scarce is the ownership of customerrelationships. Because
`the companies that control choiceboardswill also control
`
`customerrelationships, they will be the ones that hold the power
`in an industry andreap the lion’s share ofthe profits.
`
`The War of the Choiceboards
`
`Once a companycontrols a choice-board in an industry, it can use
`
`its store of customer information to expand into new industries.
`This pattern is already playing out with Dell. It first used its
`
`choiceboard simply to sell computers. It subsequently expanded
`into selling computer peripherals and related services such as
`
`Internet access. And Michael Dell’s investment in CarsDirect.com
`
`last year suggests an intent to extend beyond computing.
`Information-rich customerrelationships need not—andwill not
`
`—endat the traditional boundaries between industries.
`
`In the not-too-distant future, therefore, I expect to see a war of the
`
`choiceboards.It’s impossible to predict exactly how this warwill
`
`play out, but it seems clear that the victors will be those with the
`best-designed choiceboards, the most responsive supplier
`networks, and the closest customerrelationships. Today,
`choiceboardsare essentially transaction devices; information is a
`
`by-product. Tomorrow, choiceboardswill be primarily
`information-collection devices and customerrelationship-
`builders. Companieswill use their choiceboardsto actively solicit
`
`from customers information abouttheir satisfaction levels, their
`
`buying intentions, and their requirements and preferences. And,
`
`by meansof sophisticated analytical techniqueslike collaborative
`filtering, they will use the information to predict customers’
`
`needs and behavioracrossvirtually all product and service
`
`categories. One-stop shoppingwill take on a whole new meaning,
`and commerce will take on a whole new look.
`
`0007
`
`0007
`
`
`
`Clayton M.Christensen is a professor of business administration
`
`at Harvard Business School in Boston and the authorof The
`
`Innovator’s Dilemma: When New Technologies Cause Great Firms
`
`to Fail (Harvard Business SchoolPress, 1997).
`
`Richard S. Tedlow is the Class of 1957 Professor of Business
`
`Administration at Harvard Business School and the author of New
`
`and Improved: TheStory ofMass Marketing in America (Harvard
`Business SchoolPress, 1996).
`
`The past may nottell us everything about the future of electronic
`commerce, but it reveals more than we might expect.
`
`Theentire retailing industry is in an acute state of uncertainty.
`
`Within every company,at every trade association meeting, in
`every product category, electronic commerce andits implications
`
`dominate the conversation. Fearful of missing an epochal
`opportunity, investors and executives are rushing to place huge
`
`bets on Internet retailing, at what appear to be very high odds.
`
`Butdespite all the talk and frenzied activity, the future of retailing
`remains decidedly cloudy.
`
`It would befoolish to try to predict which companies’ Internet
`strategies will prove profitable in the end. Yet it seemsclear that
`
`electronic commercewill, on a broadlevel, change the basis of
`competitive advantagein retailing. The industry has, of course,
`undergonetransformations in the past. By examining those
`
`transformations and identifying patterns in the way they
`unfolded, we can discover clues about howretailing is likely to
`
`evolve in the Internetera.
`
`The essential mission of retailing has always had four elements:
`getting the right productin the right place at the right price at the
`right time. The wayretailers fulfill that mission has changed as a
`result of a series of what wecall disruptive technologies.! A
`disruptive technology enables innovative companiesto create
`
`0008
`
`0008
`
`
`
`new business models that alter the economicsoftheir industry. In
`
`retailing, the first disruption arrived in the form of department
`stores. The second wasthe mail order catalog. The third was the
`
`rise of discount departmentstores. Internet retailing marks the
`fourth disruption. A diverse group of Internet companies—
`
`retailers such as Amazon.com and Autobytel.com,distributors
`
`such as Chemdex,travel agencies such as Travelocity.com, and
`auction sites such as eBay—are poised to change the waythings
`are bought andsold in their markets. These newcomers pose
`powerful threats to competitors with more conventional business
`
`models.
`
`While disruptions change the economicsof an industry, they
`don’t necessarily change companies’ profitability. In retailing,
`profitability is largely determined by two factors: the margins
`stores can earn and the frequency with which they can turn their
`
`inventory over. The average successful departmentstore, for
`
`example, earned gross margins of approximately 40% and turned
`its inventory over about three times per year. In other words,it
`made 40% three times, for a 120% annualreturn onthe capital
`invested in inventory. Compare that with the business model of
`
`the average successful discount departmentstore, which earned
`23% gross margins and turnedits inventoryoverfive times
`annually. It achieved a similar return on inventory investment by
`
`changing the balance between margins and turnoverrates.
`Internetretailers’ profit margins haven’t yet converged into a
`
`standard range. But if businesses such as Amazon.com continue
`to turn inventory at presentrates of 25 times annually, they could
`achieve traditional returns with margins of 5%.
`
`DepartmentStores as Disruptive Innovators
`
`Retailing was originally dominated by local merchants who
`provided value to their customers by keeping large inventories,
`
`extending credit, and offering personalized advice. The
`merchants’ high-inventory, service-intensive business model
`resulted in slow turnover—evidence suggests that manyof these
`
`0009
`
`0009
`
`
`
`retailers struggled to turn their inventories over twice a year—and
`involved high costs. As a consequence,theseretailers were forced
`to charge high prices to earn the margins necessary to stay in
`
`business.
`
`The industry changed dramatically in the late nineteenth and
`
`early twentieth centuries as a result of thefirst retailing
`
`disruption: the launch of departmentstores by men like Marshall
`Field and R.H. Macy. These stores tended to underperform the
`
`existing retailers in many aspects of customer service—a classic
`characteristic of an industry disruption—but their other qualities
`
`gave them advantages.In particular, they did a superior job of
`
`getting the right products into the right place. They brought
`together an enormous numberofdifferent goodsin onelocation,
`making it mucheasier for shoppers to find what they needed. In
`effect, the departmentstores served as the portals of their day:
`
`you knewthat if you walked into a good departmentstore, you
`
`werelikely to find what you wanted. The aggregation of
`customers and products enabled departmentstores to outperform
`local stores in pricing. By accelerating inventory turnoverrates,
`they could earn the same returns on much lower gross margins.
`
`Marshall Field’s, Sears, and other big
`departmentstores served as the
`portals of their day.
`
`The departmentstores also found a way to mitigate their
`disadvantage in customerservice. Becausetheir clerks could not
`
`be as knowledgeable about individual customers’ needs and
`
`preferencesas local specialty shop owners, departmentstores
`initially tended to focus their merchandise mix on simple,
`
`familiar products. Then, as customers grew accustomedto the
`
`0010
`
`0010
`
`
`
`new format, the departmentstores introduced more complex
`
`productsat higher price points. The brand ofthe retailer became a
`surrogate for productreliability.
`
`The reason that departmentstores blossomed whenthey did can
`be traced to a new technology—therailroad. With an
`
`infrastructure of rails in place, departmentstores could aggregate
`
`goodsfrom all over the country, andrail trolleys could transport
`customers from their homes atthe fringes of town to the
`
`departmentstores at the center. Site location became a source of
`competitive advantage and was managedscientifically. Chains
`
`hired squadsof “traffic counters” to tabulate the numberof
`
`potential customers walking past busy street corners. (The busiest
`corner in America in 1914 was State and Madison in Chicago,
`
`which 142,000 people passed between 7:00 am and midnight.)
`
`At the same time that departmentstores were springing up in
`
`cities throughoutthe country, anothervery different disruption
`
`wasalso taking place—catalogretailing. Originally targeted at
`rural customers whocould noteasily visit departmentstores,
`mail-order catalogs were madepossible by the introduction of
`rural free mail delivery. Sears touted its catalog as “the cheapest
`
`supply house on earth,” and it compensatedfor the lack of
`personal service with money-backguarantees.
`
`Catalogs were, in essence, an early equivalentof today’s virtual
`departmentstores. And just as we are now beginningto see
`virtual retailers branch out into real stores—the so-called clicks-
`
`and-mortar strategy—so Sears expanded beyondits catalog to
`create a chain of physical outlets.
`
`Trumped by Malls and Discounters
`
`Anothertechnological advance—the automobile—set in motion
`
`the nextretailing revolution. First, the automobile made
`shopping malls possible. Although malls proved a real threat to
`
`departmentstores, they didn’t alter the fundamental business
`
`0011
`
`0011
`
`
`
`model. They were a sustaining innovation, not a disruptive one.
`Malls did the same thing that departmentstoresdid, only better.
`Theyattracted enough customersto enable a collection of focused
`
`retailers such as the Gap, Abercrombie & Fitch, and Williams-
`Sonomato achieve similar margins and inventoryturns as
`
`departmentstores, but with deeper product lines within each
`category. Forthe first three decadesafter shopping malls
`appeared, department stores continued to play crucial roles as
`
`anchors, using their strong brands to draw shoppers. But by
`making shoppers comfortable with malls, the departmentstores
`
`sowedthe seedsof their own obsolescence. Today, manystrip and
`
`outlet malls are simply aggregations of category-focused retailers,
`whichthrive in the absence of departmentstores.
`
`A similar transformation tookplace in catalog retailing. As
`customers became accustomed to making purchases through the
`
`mail, hundredsof specialty catalogs appeared. They chipped
`
`awayat the sales of the generalist catalogs, like those of Sears’ and
`Ward’s. In 1985, Ward closed downits catalog operations. Eight
`yearslater, Sears followed suit.
`
`The automobile also made a second waveof innovation possible:
`
`the establishmentof the discount departmentstoresin the early
`1960s. The increased mobility of shoppers enabled discounters
`
`like Kmart to set up shop in less expensivereal estate at the edge
`of town,effectively voiding departmentstores’ competitive
`advantage of prime locations in city centers. Unlike malls,
`
`discountstores were a disruptive innovation. They made money
`through a completely different business model—a low-cost, high-
`
`turnover model that enabled successful discounters to achieve
`
`five inventory turns a year with gross margins of between 20%
`and 25%.
`
`Repeating departmentstores’ early strategy, the discounters
`seized their beachheadbyinitially concentrating on simple
`
`products that could sell themselves. About 80% of the floor area
`
`0012
`
`0012
`
`
`
`of the leading discountstores during the 1960s and 1970s was
`
`devoted to branded hard goods such as hardware, kitchen
`utensils, books, luggage, and packaged personal care products.
`
`Becausethe Key attributes of such merchandise could be
`communicated easily—by pictures on the package, the brand of
`
`the manufacturer, and a few numbers—thediscounters were able
`
`to spend even less on customerservice than the department
`stores did.
`
`Asthe discounters invaded the low ground, the departmentstores
`systematically closed downtheir hard-goods departments and
`
`moved upmarket. They becameretailers of soft goods such as
`
`clothing, home furnishings, and cosmetics—products whose key
`attributes are more complex and harder to communicate. Because
`
`soft goods were moredifficult to sell in the low-service, discount
`format, departmentstores were able to maintain the higher
`
`margins required to sustain their business model.
`
`Upending the Discounters
`
`During their early years, the discounters were quite successful. As
`long as they priced their goods 20% belowthe prices of their
`
`common enemy, the departmentstores, they could make money.
`But whenthe discounters had driven the departmentstores from
`
`the lowertiers of the market, they were competing only against
`equally low-cost discounters. That competition drove pricing and
`profits in the branded hard-goodstiers of the market to
`
`subsistencelevels.
`
`And, in a continuation of the earlier pattern, another new setof
`
`highly focused retailers attacked the discounters. Specialty
`discounters suchas Circuit City, Staples, Home Depot, Toys R Us,
`Barnes & Noble, CVS, and Tower Records carved up the hard-
`
`goods market. Like the malls, these category killers represent a
`sustaining innovation rather than a disruptive one. They offer
`
`0013
`
`0013
`
`
`
`broader, deeper selections of products within their narrower
`
`categories, but theystill have the volumeto achieve the inventory
`turns required in the discounters’ 23% x 5 profit model.
`
`Faced with ever fiercer competition, many of the weaker discount
`departmentstores such as Korvettes, Venture, Woolco, Zayre,
`
`Grand Central, and Caldor have bowedoutof the business. A few
`
`discounters, WalMart, most notably, have been able to use their
`purchasing clout andlogistics-managementcapabilities to
`
`continue to competein hard goods. But most of the surviving
`discount departmentstores have followed the earlier path of the
`
`departmentstores: they’ve fled the hard-goods competition by
`
`migrating upmarket. Indeed, discounters suchas Bradlees and
`Target have flipped their original merchandise mix: 60% to 80%
`of their floor space is now devoted to soft goods. Competing
`against full-price departmentstores is mucheasier than
`
`competing against the cutthroat category specialists.
`
`Repeating Patterns?
`
`A fourth retailing disruption, instigated by the Internet, is now
`underway, and it promises to alter the retailing landscape as
`
`fundamentally as the three earlier disruptions.
`
`Of the four dimensionsofthe retailer’s mission—product, place,
`
`price, and time—Internetretailers can deliver on thefirst three
`remarkably well. The right products? In categories ranging from
`
`booksto chemicals, Web stores can offer a selection that no
`
`bricks-and-mortar outlet can match. The right price? Internet
`retailers enjoy unparalleled margin flexibility. To earn a 125%
`
`return on inventory investment, an Internetretailer such as
`Amazon.com, which can turn its inventory 25 times eachyear,
`
`needs to earn only 5% gross margins.
`
`Andthe right place? It is here—location—thatthe Internet is most
`revolutionary. The Internet negates the importance of location.
`
`Anyone, at any time, can becomea globalretailer by setting up a
`
`0014
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`0014
`
`
`
`Webpage.
`
`With such advantages, it’s no wonder electronic commerceis
`attracting so muchattention. But how should weexpectthis
`
`revolution to evolve?
`
`As we’ve seen, there are twoclear patterns in the way the earlier
`
`retailing disruptions unfolded. First, generalist stores and
`
`catalogs dominated retailing at the outset of the disruptions, but
`they were eventually supplanted by specialized retailers. The
`
`specialists emerged once the marketfor the new form ofretailing
`had grownlarge enoughto generate enoughsales volumefor a
`
`narrowerbut deeper product mix. Second,the disruptiveretailers
`
`weighted their initial merchandise mix toward productsthat
`could sell themselves—simple, branded products whose key
`
`attributes could be comprehendedvisually and numerically. They
`then shifted their merchandise mix toward higher-margin, more
`
`complex products to maintain their profits in the face of intense
`
`competition at the low end of their businesses.
`
`We appear now to be seeing a repeat of the early stages of both
`
`those patterns in Internetretailing. Let’s look at each one.
`
`Generalist to Specialist
`
`Leading Internetretailers like Amazon.com have rapidly migrated
`
`toward the departmentstorestrategy. The logic is clear. The Web
`is a vast and confusing place, andit is currently verydifficult to
`
`know whois selling what. Anybody with a few thousanddollars
`
`can set up a Web-based business, just as almost anybody with a
`little money in the 1850s could set up a small shop. The best
`
`Internet search enginestoday canlocate only a fraction of the
`Websites that exist in a category, andthey are frustratingly
`
`inaccurate. And with such intense advertising noise aboutus,it is
`
`next to impossible to remember which dot-com nameis
`associated with which product or service. Hence, Amazon seems
`
`to sense the same opportunity that Richard Sears and Marshall
`
`0015
`
`0015
`
`
`
`Field saw. If you need to find a product, you don’t need to search
`
`in the thicket of the Internet. You only need to rememberhowto
`type “Amazon.com”—orbetteryet, click on its bobokmark—and
`
`you'll be guided to whatever you need.
`
`It’s less clear, though, whetherthis pattern will unfold as it did in
`
`the past. Even the largest bricks-and-mortar departmentstores
`
`could stock only the items with the highest turnoverrates within
`each productcategory. That limitation opened the door for the
`
`specialists. Internet departmentstores face no such physical
`limits. They can,in theory, offer the depth of the specialist with
`
`the breadthof the generalist.
`
`It is possible, therefore, that the Internet departmentstores will
`not yield market share to specialized retailers as the volume of
`purchasesin individual categories grows. But there is a
`counterforce. The inevitable emergenceof better search engines,
`
`together with theavailability of greater bandwidth into homes,
`
`will makeit increasingly easy for consumersto find specialized e-
`tailers. We would like to be able to predict the future of Internet
`departmentstores and category-focusedretailers based on the
`patterns of the past, but the future simply cannot be knownatthis
`
`point. The technological and economicfactors that drove the
`historical patterns are different in this wave. Our bet, however,is
`that the pattern will play out: the managerial benefits of focus and
`the ultimate ease of travel across Websites will give a slight edge,
`eventually, to focused players. The oddswill tilt toward specialists
`
`even more if cybermalls emerge that rent space to a collection of
`specialist retailers whose category brandsare strong—akin to the
`
`way today’s physical shopping malls have evolved.
`
`Upmarket Momentum
`
`Aswith theearlier disruptions, Internetretailing has initially
`focused on the simple end of the merchandise spectrum—books,
`
`CDs, publicly traded stocks, personal care products, commodity
`
`0016
`
`0016
`
`
`
`chemicals, and so on. The question is, How fast will the disruptors
`
`move upmarket into more complex products and value-added
`
`services?
`
`As withearlier disruptions, Internet
`retailing has initially focused on
`simple merchandise. The questionis,
`Howfast will e-tailers move upmarket?
`
`Already wesee signs of upmarket migration. The transformation
`of some Internet-based retailers into “clicks and mortar”retailers
`
`—establishing warehousesand physical stores to give customers
`faster access to inventory and to handle returns and service issues
`conveniently and personally—is not an admission that the
`
`Internet-retailing model doesn’t work. Rather, just as we saw with
`Sears years ago, it is a perfectly predictable step. As competition
`in the simplest tiers heats up, good managers migrate toward
`higher price points and value-addedservices to Keep their profit
`marginsattractive.
`
`The upmarket migration is likely to happen much morerapidly
`today thanit did in the earlier disruptive waves. Traditional
`
`retailers have always had to make a trade-off between the richness
`
`of information they could exchange with customers and the
`numberof customers they could reach. Although local merchants
`
`could exchangerich information about products, the economics
`of providing such expertise meantthat they could cater to only a
`
`narrow set of customers. To reach a mass market, department
`stores could not afford to employ expert staff to sell a broad range
`of complex products. They were forced to provideless rich
`
`information. The Internet seems capable of breaking this trade-
`
`off. It can enable retailers to communicate rich information about
`
`0017
`
`0017
`
`
`
`a broad set of complex productsto a very large set of customers.”
`That capability should help e-tailers move upmarket more
`quickly than their predecessorsdid.
`
`Of course, some productsare less suited to electronic sale than
`others. While Internet retailers excel at getting the right product
`
`in the right place at the right price, they’re at a disadvantage when
`
`it comesto delivering physical products at the right time. When
`shoppers need products immediately, they’ll head for their cars,
`
`not their computers. There are also certain experiencesthat the
`
`Internet cannot deliver. Even with a lot of bandwidth,
`
`communicating the feel of clothing and homefurnishingswill be
`
`difficult. And in those customer segments where the social
`experience of shopping is an important elementof value, the
`
`homeboundnature of on-line commerceofferslittle appeal.
`
`Although suchconstraints appear daunting, they are unlikely to
`
`slow the momentum ofInternetretailing. Historically, experts
`
`have underestimated the ultimate reach of disruptive
`technologies. Blinded by their perceptionof the initial limitations
`of the new technology, they failed to appreciate the strength of
`the innovators’ motivation to move from thefringes of commerce
`
`to its mainstream.
`
`1. The concepts of disruptive technologies and ustaining
`
`technologies werefirst introduced in Joseph L. Bower and Cla
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