From Bricks to Clicks

1. From Bricks to Clicks Professor Joshua Livnat, Ph.D., CPA 311 Tisch Hall New York University 40 W. 4th St. NY NY 10012 Tel. (212) 998-0022 Fax (212) 995-4230 jlivnat@stern.nyu.edu Web page: www.stern.nyu.edu/~jlivnat I wish to acknowledge access to Media Metrix traffic data and Factset Information Services databases.

2. Overview • The adoption of Brick and Mortar companies to the new economy. • Entry strategies into the digital economy.

3. Two Questions • 1. What type of business is more likely to succeed on the Web? • A five-step evaluation process. • 2. How do Brick and Mortar companies adapt to the Web? • Which companies should plunge into the Web immediately? • How should they proceed? • Which companies should delay entry into the Web?

4. Which Brick & Mortar Companies Are Most Likely to Gain From The Web? • Companies with: • Substantial reductions in transaction costs. • Online stock trading. • Tickets on the Net. • Operations in areas where network externalities are possible. • Market making such as E-Bay. • Available content • Media companies.

5. Web Venture Potential Costs • Initial investments: • Web site construction. • Integration with current systems. • Marketing. • Content, if relevant. • Price transparency. • Cannibalization of existing products or services. • Internal conflicts.

6. Costs of Waiting • Losing the first mover advantage. • Crucial if the first mover can benefit from network externalities and/or high switching costs. • Detrimental if first mover enjoys brand-name recognition. • Will be more difficult to capture market share. • More dangerous in areas where the industry is concentrated and other firms can “crowd the market”. • The battle for development of next generation products.

7. Benefits of Waiting • Another firm spends the necessary resources to develop the technology and the market familiarity: • Somebody else’s trial and error. • “Educating the consumer”. • Development of best practices. • Ability to better utilize existing resources.

8. Amazon Vs. Barnes & Noble • Amazon is the first mover. Started selling books in July 1995, music in June 1998, and other items subsequently. • Amazon transferred initial technology to other markets (CD’s, DVD/video, electronics, auctions, toys, software,…). • Amazon patented some best business practices – “One click shopping”. • Amazon enjoys better opportunities from E-Commerce affiliation programs. • Amazon recorded revenues of $95 million and gross profit of $72 million from affiliates in 1999.

9. Barnes & Noble’s Strategy • B&N can leverage its existing brand name in creating its online brand name. • B&N can have lower fulfillment costs – large inventory and distribution center to support current operations. • B&N can use its existing IT infrastructure and databases to develop content for its Web site. • B&N can use existing relationships with publishers to secure preferential treatment.

10. Operating Data

11. Barnes & Noble Strategy • Savings due to delayed entry: • Amazon spent over $760 million on its operations and fixed assets during 1997-Q3/00, whereas B&N spent only about $400 million during that period.. • Price wars hurt offline and online profits (Amazon discounted books to get customers). • Internal conflicts with existing operations can be reduced: • Installed online terminals in existing stores. • Joined forces with Bertelsmann (which invested $200 million in the online operation).

12. Amazon and Barnes & Noble • It is unclear that Barnes & Noble has lost substantial long-term advantages to Amazon: • Amazon has little or no network externalities. • Switching costs are low. • Amazon proved the concept, but invested large resources in setting up distribution centers and physical inventories. • Barnes & Noble has yet to capitalize on its existing brand.

15. Form of Entry Into The Digital Economy • One of several major approaches: • Internal development. • Forming a separate subsidiary. • Forming a separate business. • Acquisition of another company. • Joint venture with another company. • Investment in another company.

16. Entering New Businesses:Roberts and Berry (SMR, 1985) • Two factor model: • Familiarity with technology. • Familiarity with market. • Three levels of familiarity: • Base, New familiar, New unfamiliar. • Entry strategies: • Internal development. • Acquisition. • Licensing. • Joint venture. • Venture capital or venture nurturing. • Educational acquisition.

17. Successful Entrance Strategies • For “base” and “new familiar” markets and technologies, use internal development, acquisition, or licensing. • Company has sufficient knowledge to manage the entry successfully. • For “new unfamiliar” category, use joint ventures, venture capital, or educational acquisitions. • Use other entities’ superior market or technology knowledge.

18. Brick and Mortar’s Move to the Web • A mixture of “base” and “new familiar” market. • Tapping existing and new online customers. • A “new familiar” or “new unfamiliar” technology. • New system development efforts. • New culture. • New business practices.

19. Entry Strategies • The most conservative approach is to invest in other firms. • Rite-aid holding a stake in Drugstore.com. • A medium-risk approach is a joint venture with an online company with a proven track record. • Toys-R-Us with Amazon. • A high-risk approach is internal development as a separate company (Barnes and Nobel), or a subsidiary (Staples.com).

20. Conclusions • It is not clear that the best strategy for a Brick and Mortar company is to develop immediate online presence. • When developing online operations, a Brick and Mortar company should consider less risky approaches. • Not every Brick and Mortar company should have online operations.