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 seems at this momentin history to present
`almost unlimited possibilities—as both a conduit and a disrupter
`
`of business. To shed light on the changes we may see as 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 management consultant and author, has
`
`written extensively on the evolution of business models. He
`believes that electronic commercewill accelerate the shift of
`
`power toward the consumer, which will 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 viewthe Internet
`as a classic example of a disruptive technology, one thatwill alter
`
`the basis of competition in retailing. They examine pastretailing
`disruptions, and they find patterns that appearto be recurring,at
`
`least in part, today. Finally, HBR senior editor NicholasG.Carr,
`
`0001
`
`EX1055
`Roku V. Media Chain
`U.S. Patent No. 10,489,560
`
`0001
`
`EX1055
`Roku V. Media Chain
`U.S. Patent No. 10,489,560
`
`
`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 seems at this momentin history to present
`almost unlimited possibilities—as both a conduit and a disrupter
`
`of business. To shed light on the changes we may see as 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 management consultant and author, has
`
`written extensively on the evolution of business models. He
`believes that electronic commercewill accelerate the shift of
`
`power toward the consumer, which will 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 viewthe Internet
`as a classic example of a disruptive technology, one thatwill alter
`
`the basis of competition in retailing. They examine pastretailing
`disruptions, and they find patterns that appearto be recurring,at
`
`least in part, today. Finally, HBR senior editor NicholasG.Carr,
`
`0001
`
`EX1055
`Roku V. Media Chain
`U.S. Patent No. 10,489,560
`
`0001
`
`EX1055
`Roku V. Media Chain
`U.S. Patent No. 10,489,560
`
`
`
`whohas edited a numberofthe articles on electronic commerce
`
`that we’ve published overthe last two years, examines the
`fragmentation of economic activity 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 authorsoffer very different
`
`visions of what’s to come. Outof 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 coauthorof 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.
`
`Thelast time I bought a 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 some features that I wanted(antilock brakes and a
`spacioustrunk,for instance), some that I was neutral about(a
`
`sunroof and powermirrors), 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
`
`waythe car looked and handled, and becauseit was available at
`that moment. I didn’t want to wait a month to get a car witha
`
`marginally better mix of features.
`
`0002
`
`0002
`
`
`
`WhatI went throughis whatall customers go through. Indeed,
`
`customerfrustration is designed into our business system.
`Companiescreate fixed productlines that represent their best
`
`guesses about what buyerswill want, and buyers make do with
`whatthey’re offered. There may be some minortailoring at the
`
`point of purchase—a few optional features or add-ons—but by
`and large the set of choicesis fixed long before customers even
`begin to shop. Whetherthey’re purchasing cars or clothes or
`
`computers, people alwaysgettoo little of what they want and too
`muchof what they don’t.
`
`Of course, the fixed product-line system is no joy for suppliers,
`
`either. Predictions of future demand, no matter how well
`
`grounded,are inevitably inaccurate. That’s whythe pagesof
`newspapersandcatalogs teem with announcementsofsales,
`factory rebates, and dealer incentives, and whyoff-price stores
`
`are always plentifully stocked. Frustrated retailers and
`manufacturers spendtensof billions of dollars in discounts every
`year to help dispose of merchandise that isn’t moving the way
`
`they thoughtit would.
`
`So why does a 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
`
`Nowfor the good news. Thanksto the Internet, an alternative to
`
`the traditional unhappy model of supplier-customerinteraction is
`
`finally becoming possible. In all sorts of markets, customerswill
`soon be able to describe exactly what they want, and suppliers
`
`will be able to deliver the desired productor service without
`compromiseor delay. The innovationthatwill catalyze this shift
`
`0003
`
`0003
`
`
`
`is what I call the choiceboard. Choiceboardsare interactive, on-
`
`line systemsthat allow individual customers to design their own
`products by choosing from a menuof attributes, components,
`
`prices, and delivery options. The customers’ selections send
`signals to the supplier’s manufacturing system thatset 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 recent stage
`
`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’ goodsat suppliers’
`
`prices. Over the past two decades, as customers became more
`sophisticated and gained greater powerover 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 customersarestill product
`takers. Even though suppliers havetailored their offerings to finer
`and finer slices of the customer base, buyersare ultimately forced
`
`to settle for the best approximation of what they want. With the
`choiceboard system, however, customersare product takers no
`
`longer. They’re product makers.
`
`The Coming Dominance of 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 accounts for 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 andservices 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
`broadband access, 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.
`
`But that 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 ofthis decade,I anticipate that choiceboardswill be
`involved in 30% or moreof total U.S. commercialactivity, as our
`
`economy movesfrom a supply-driven to a demand-driven
`system. The big question isn’t, Will choiceboards dominate
`
`commerce?It is, Whowill control the choiceboards?
`
`Changing the Terms of Competition
`
`Because choiceboardscollect precise information about the
`preferences and behaviorof individual buyers, they enable
`
`companies to secure customerloyalty as never before. With each
`transaction, a company becomes more knowledgeable about the
`
`customerand hence better able to anticipate and fulfill that
`
`customer’s needs. That knowledge can be usedtotailor, 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 product lines 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 moversstand to gain enormousadvantages. 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 waveofdigital-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 hungryfor
`accurate and timely information about demand.Dell’s far-
`reaching supply contracts with IBM,for example,will helpit
`endure periodsof restricted componentsupplies far better than
`
`manyof its competitors.
`
`For all those reasons,therise of choiceboards promisesto
`redistribute power within industries. I foresee three typesof
`
`competitors vying for early choiceboard control. First is the
`individual manufacturer or assembler, such as a Dell or a Schwab.
`
`Secondis a consortium of existing manufacturers; an exampleis
`the MetalSite choiceboard launchedby a groupof 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 producethe products. Point.com,for
`instance, uses a choiceboard to help customers research and buy
`
`wireless phones,service plans, and accessories. As it amasses
`
`more and more customer information andrefines its choiceboard,
`
`it will pose an evergreater 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 companiesthat control choiceboards will also control
`
`customerrelationships, they will be the onesthat hold the power
`in an industry and reapthelion’s shareof theprofits.
`
`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 war will
`
`play out, but it seemsclear 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 techniques like collaborative
`filtering, they will use the information to predict customers’
`
`needs and behavioracross virtually all product and service
`
`categories. One-stop shopping will take on a whole new meaning,
`and commercewill take on a whole new look.
`
`0007
`
`0007
`
`
`
`Clayton M. Christensenis a professor of business administration
`
`at Harvard Business School in Boston andthe author of The
`
`Innovator’s Dilemma: When New Technologies Cause Great Firms
`
`to Fail (Harvard Business SchoolPress, 1997).
`
`RichardS. 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 commerceandits implications
`
`dominate the conversation. Fearful of missing an epochal
`opportunity, investors and executives are rushing to place huge
`
`bets on Internetretailing, at what appear to be very high odds.
`
`But despite all the talk and frenzied activity, the future of retailing
`remains decidedly cloudy.
`
`It would be foolish to try to predict which companies’ Internet
`strategies will prove profitable in the end. Yet it seemsclear that
`
`electronic commerce will, on a broad level, change the basis of
`competitive advantage in retailing. The industry has, of course,
`undergonetransformationsin the past. By examining those
`
`transformations andidentifying patterns in the way they
`unfolded, we can discover clues abouthowretailingis 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 economicsof their industry. In
`
`retailing, the first disruption arrived in the form of department
`stores. The second was the mail ordercatalog. 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 way things
`
`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% annual return on the capital
`invested in inventory. Compare that with the business modelof
`
`the average successful discount departmentstore, which earned
`23% gross margins and turnedits inventory overfive times
`
`annually. It achieved a similar return on inventory investment by
`
`changing the balance between margins and turnoverrates.
`Internet retailers’ 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 marginsof 5%.
`
`DepartmentStores as Disruptive Innovators
`
`Retailing wasoriginally 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—evidencesuggests that many of 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—buttheir other qualities
`gave them advantages.In particular, they did a superior job of
`
`getting the right productsinto the right place. They brought
`together an enormous numberofdifferent goods in one location,
`making it mucheasier for shoppers to find what they needed.In
`effect, the departmentstores served asthe portalsof their day:
`
`you knewthatif 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 lowergross 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
`
`preferences as 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 brandof the retailer became a
`surrogate for productreliability.
`
`The reason that departmentstores blossomed whenthey did can
`be traced to a new technology—therailroad. With an
`
`infrastructure ofrails in place, departmentstores could aggregate
`goodsfrom all over the country, andrail trolleys could transport
`customers from their homesat the fringes of townto the
`
`departmentstoresat 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 compensated for the lackof
`personal service with money-backguarantees.
`
`Catalogs were, in essence, an early equivalentof today’s virtual
`
`departmentstores. And just as we are now beginning to 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, nota disruptive one.
`
`Malls did the same thing that departmentstores did, only better.
`They attracted enough customers to enable a collection of focused
`
`retailers such as the Gap, Abercrombie & Fitch, and Williams-
`Sonomato achieve similar margins and inventory turns as
`
`departmentstores, but with deeper productlines within each
`
`category. For the first three decades after shopping malls
`appeared, departmentstores continuedto 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, many strip and
`
`outlet malls are simply aggregations of category-focusedretailers,
`whichthrive in the absence of departmentstores.
`
`A similar transformation tookplace in catalogretailing. As
`customers became accustomed to making purchases through the
`
`mail, hundreds of 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 departmentstores in the early
`1960s. The increased mobility of shoppers enabled discounters
`
`like Kmart to set up shopin less expensivereal estate at the edge
`of town,effectively voiding departmentstores’ competitive
`advantage of prime locationsin 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 beachhead byinitially concentrating on simple
`
`products that couldsell themselves. About 80% of the floor area
`
`0012
`
`0012
`
`
`
`of the leading discountstores during the 1960s and 1970s was
`
`devoted to branded hard goodssuch as hardware, kitchen
`utensils, books, luggage, and packaged personal care products.
`
`Becausethe Keyattributes of such merchandise could be
`communicated easily—by pictures on the package, the brand of
`
`the manufacturer, and a few numbers—the discounters were able
`
`to spend evenless on customerservice than the department
`storesdid.
`
`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 requiredto sustain their business model.
`
`Upending the Discounters
`
`During their early years, the discounters were quite successful. As
`long as they priced their goods 20% below theprices oftheir
`
`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
`
`subsistence levels.
`
`And,in a continuation of the earlier pattern, another new set of
`
`highly focusedretailers attacked the discounters. Specialty
`discounters suchasCircuit 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 they still have the volume to achieve the inventory
`turns required in the discounters’ 23% ~ 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 ableto usetheir
`purchasing clout and logistics-managementcapabilities to
`
`continue to compete in hard goods. But mostof the surviving
`discount departmentstores have followed the earlier path of the
`
`departmentstores: they’ve fled the hard-goods competition by
`
`migrating upmarket. Indeed, discounters such as Bradlees and
`Target have flipped their original merchandise mix: 60% to 80%
`
`of their floor space is now devotedto 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, andit promisesto alter the retailing landscape as
`
`fundamentally as the three earlier disruptions.
`
`Of the four dimensionsof the retailer’s mission—product, place,
`
`price, and time—lInternet retailers can deliver on thefirst three
`remarkably well. The right products? In categories ranging from
`
`books to chemicals, Web stores can offer a selection that no
`
`bricks-and-mortar outlet can match. Theright price? Internet
`retailers enjoy unparalleled margin flexibility. To earn a 125%
`
`return on inventory investment,an Internet retailer such as
`Amazon.com, which can turn its inventory 25 times each year,
`
`needs to earn only 5% gross margins.
`
`Andthe right place? It is here—location—thatthe Internet is most
`revolutionary. The Internet negates the importanceof location.
`Anyone,at any time, can becomea globalretailer by setting up a
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`
`
`Web page.
`
`With such advantages,it’s no wonderelectronic commerceis
`attracting so muchattention. But how should we expectthis
`
`revolution to evolve?
`
`As we’ve seen,there are twoclear patterns in the way the earlier
`
`retailing disruptions unfolded. First, generalist stores and
`
`catalogs dominatedretailing 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 enough sales volume for a
`
`narrower but deeper product mix. Second,the disruptive retailers
`
`weightedtheir initial merchandise mix toward products that
`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 oftheir businesses.
`
`We appear nowto beseeing a repeat of the early stages of both
`
`those patternsin Internetretailing. Let’s look at each one.
`
`Generalist to Specialist
`
`Leading Internetretailers like Amazon.com have rapidly migrated
`
`toward the departmentstore strategy. The logic is clear. The Web
`is a vast and confusing place, andit is currently very difficult to
`know whois selling what. Anybody with a few thousanddollars
`
`can set up a Web-basedbusiness, just as almost anybody with a
`little money in the 1850s could set up a small shop. The best
`Internet search engines today can locate only a fraction of the
`Websites that exist in a category, and they are frustratingly
`
`inaccurate. And with such intense advertising noise aboutus,it is
`
`next to impossible to remember which dot-com nameis
`associated with which productor service. Hence, Amazon seems
`
`to sense the same opportunity that Richard Sears and Marshall
`0015
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`
`
`Field saw. If you needto find a product, you don’t need to search
`
`in the thicket of the Internet. You only need to remember how to
`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 thelargest bricks-and-mortar departmentstores
`
`could stock only the items with the highest turnoverrates within
`each product category. That limitation opened the doorfor the
`
`specialists. Internet departmentstores face no such physical
`limits. They can, in theory, offer the depth of the specialist with
`
`the breadth of the generalist.
`
`It is possible, therefore, that the Internet departmentstoreswill
`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 the availability of greater bandwidth into homes,
`will make it 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 patternsare 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 emergethat rent spaceto a collection of
`specialist retailers whose category brandsare strong—akin to the
`
`way today’s physical shopping malls have evolved.
`
`Upmarket Momentum
`
`Aswith the earlier disruptions, Internetretailing hasinitially
`focused on the simple end of the merchandise spectrum—books,
`
`CDs, publicly traded stocks, personal care products, commodity
`
`0016
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`
`
`
`chemicals, and so on. The question is, Howfastwill the disruptors
`
`move upmarket into more complex products and value-added
`
`services?
`
`As with earlier disruptions, Internet
`retailing has initially focused on
`simple merchandise. The questionis,
`Howfast will e-tailers move upmarket?
`
`Already weseesigns of upmarket migration. The transformation
`of someInternet-basedretailers into “clicks and mortar”retailers
`
`—establishing warehouses and physical stores to give customers
`
`faster access to inventory and to handle returns andservice 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-added servicesto keep their profit
`margins attractive.
`
`The upmarket migrationis likely to happen much morerapidly
`todaythanit 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 expertstaff 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 comes to delivering physical products at the right time. When
`shoppers need products immediately, they'll headfor their cars,
`
`not their computers. There are also certain experiencesthat the
`
`Internet cannotdeliver. Even with a lot of bandwidth,
`
`communicating the feel of clothing and homefurnishings will be
`difficult. And in those customer segments wherethesocial
`experience of shopping is an important elementofvalue, the
`
`homeboundnature of on-line commerceoffers little appeal.
`
`Although such constraints appear daunting, they are unlikely to
`slow the momentumofInternetretailing. Historically, experts
`
`have underestimated the ultimate reach of disruptive
`technologies. Blinded by their perception ofthe initial limitations
`of the new technology, they failed to appreciate the strength of
`the innovators’ motivation to move from the fringes of commerce
`
`to its mainstream.
`
`1. The conceptsof disruptive technologies and ustaining
`technologies werefirst introduced in Joseph L. Bower and Clayton
`
`M.Christensen’s “Disruptive
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