1 From Bricks to Clicks Professor Joshua Livnat, Ph.D., CPA 311 Tisch Hall New York University 40 W. 4th St. NY NY Tel. (212) Fax (212) Web page: 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.

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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.