Opportunities for Action in Consumer Markets. Fast Is Good, but Smart Is Better

Transcription

1 Opportunities for Action in Consumer Markets Fast Is Good, but Smart Is Better

2 Fast Is Good, but Smart Is Better Last spring, the first dot-com failures were reported, and most of them were of so-called business-toconsumer sites. That wave of failures was often attributed to poor execution. Since then, the number of unhealthy companies has jumped dramatically, from 5 per month in April and May 2000 to 25 per month throughout the summer. As the number of dot-com failures approaches statistical significance, the virus looks as if it is starting to spread from business-to-consumer to business-tobusiness sites, as M-Xchange, FleetScape.com, and Equipp.com show signs of trouble. In addition, a very different set of diagnoses is beginning to emerge about the root causes of the declining health of both types of companies. Over a period of three months, The Boston Consulting Group compiled a database of the failed dot-coms cited in the online and off-line press. A core of approximately 70 players emerged a sufficiently large sample to begin to reveal the major problems behind the failures. The 70 companies we examined had been forced to do one or more of the following: file for bankruptcy (CraftShop.com and epatients.com) take down their Web sites (BBQ.com and Foofoo.com) dramatically change their business plans (HomePoint.com and Bid.com) sell their assets (egroups.com and Free-PC.com)

3 stop paying employees (PlanetAll.com and Quepasa.com) We found that, with the exception of incumbentbacked ventures, the primary cause of failure was not bad execution but bad thinking. For companies seeking to find their way in the New Economy, particularly incumbents and investors eyeing the new IPOs, it s important to understand what really went wrong. What Went Wrong? In our search for common underlying causes of the failures, we discovered a land grab mentality at work. Many companies rushed to capture as much market share as possible, leaving tougher management decisions for later. Most of the problems experienced by dot-com companies are rooted in fundamental mistakes, not just poor fulfillment and unwise spending. The majority of companies held the misguided belief that speed and scalability should take primacy over the principles of strategy. As a result, many businesses were funded and developed despite their poor revenue and profit models, indiscernible competitive advantage, and lack of true consumer benefits. More than 60 percent of the companies we investigated had poor financial models that eventually succumbed to the fatal combination of thin gross margins and excessive customer-acquisition costs (see the exhibit A Poor Business Model Is the Main Reason for Dot-Com Failures ). Toy retailers such as ToyTime.com were in commodity sectors where they were too easily imitated and could not achieve sufficient margins. Other companies, such as

4 A Poor Business Model Is the Main Reason for Dot-Com Failures Reasons for Failure in 70 Companies Studied Poor revenue, cost, investment, and profit models Fall 1999 to Fall No competitive advantage 31 No consumer benefit 15 People, organization, implementation, and execution problems 12 Channel conflict 7 Ineffective fulfillment process 5 SOURCE: BCG analysis. drkoop.com, relied on elusive supplementary revenues (such as advertising and click-through commissions). Rarely did those materialize. Another model that could not achieve adequate margins focused on acquiring customers by paying them cash locking in costs but not revenues. Almost half of the companies that failed lacked a sustainable competitive advantage a business requirement applicable equally to online and off-line environments. Online retailers selling items such as women s luxury goods lost out to the more established offline players because there was no real advantage for consumers to buy such products online. Many retailers couldn t even compete within their own categories online. Beautyscene.com, for example, struggled to differentiate itself within the beauty-product market,

5 which is essentially a commodity business with low entry barriers. Finally, single-category players were at a disadvantage compared with companies such as Amazon.com, which could spread customer acquisition costs over many categories. The third major reason for failure, which we saw in more than 20 percent of the businesses, was a lack of consumer benefits that would appeal to more than a tiny market segment. As a result, there were doomed attempts to appeal to narrow interest groups such as breakfast-flake enthusiasts or barbecue aficionados or to sell products that simply were not suited to the Internet. The detailed product information offered by Audiocafe.com made the site popular with audiophiles, but that success was difficult to convert into sales because consumers still wanted to see and hear the high-end audio systems before making a purchase. Companies also overestimated consumers interest in sophisticated technologies. A number of sites developed innovative features that were largely unappreciated or even rejected because they made the sites too hard to download. Unsuccessful dot-coms were also more likely to be pure plays because they are highly dependent on financial markets, whereas incumbents can continue to fund their false starts through rough patches. Among failed incumbents, two themes emerged. Some neglected to capitalize on their existing advantages. CompUSA, for example, launched Cozone.com entirely independently of its powerful off-line brand. Others, such as Levi s, failed to tackle the challenges brought about by channel conflict. Eventually, the company withdrew its online offering. Channel conflict was by far the biggest issue for incumbents, and for the most part it was ignored or wished away in many of the cases investigated.

6 Learning from Failure Although the Internet has revolutionized commerce as we know it, a few basic business principles and requirements remain. Here are the main lessons to be learned from the dot-com failures: Play to your strengths. Competitive advantage is absolutely necessary: the online space isn t big enough for everyone, and success is not random. Companies make money in the long run when they have achieved a distinctive and quantifiable competitive advantage. Build a sturdy business model. E-businesses cannot rely on advertising, click-through, and other supplemental revenues a potential warning to many of the business-to-business offerings coming online. They must develop robust revenue, cost, and profit models. Create a superior consumer proposition. Products and services need a compelling consumer proposition. One that exists in the off-line world cannot necessarily be translated online. Further, being as good as the off-line world is not good enough: the offering has to be superior. Develop a defensible market position. Scalability and first-mover advantage cannot be pursued at the expense of defensibility. The business must have a clear competitive advantage in order to achieve profitability. Capitalize on the advantage of incumbency, but mind the store. Incumbents have inherent advantages: they control the legacy assets that the start-ups have to build or otherwise gain access to. However, incumbents must capitalize on their advantages while ac-

7 tively resolving any potential channel conflict. That includes educating the organization on the benefits of meeting consumers needs across multiple channels. We believe that despite all the hype about the Internet as the ultimate channel for the delivery of goods and services, managers are going to have to do some hard thinking about how it fits into their overall channel strategy. In some cases it will make sense to adapt, but not entirely submit, to the promise of the Internet. In others it will make sense to grab the Internet and completely rethink the business. But in both cases the same rules will apply. Deidre Sorensen George Stalk, Jr. Deidre Sorensen is a consultant and George Stalk, Jr., a senior vice president in the Toronto office of The Boston Consulting Group. You may contact the authors by at: [email protected] [email protected] We invite you to post comments and questions to the authors online at Or just visit the site to see what other readers have to say about this topic. The authors will respond within three days. We hope to generate a lively discussion and welcome your participation. The Boston Consulting Group, Inc All rights reserved.

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