1. BA 572 - J. Galván1 BRICK TO CLICK Traditional companies and e-commerce

2. BA 572 - J. Galván2 OVERVIEW The adoption of Brick and Mortar companies to the new economy. Entry strategies into the digital economy.

3. BA 572 - J. Galván3 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. BA 572 - J. Galván4 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. BA 572 - J. Galván5 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. BA 572 - J. Galván6 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. BA 572 - J. Galván7 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. BA 572 - J. Galván8 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. BA 572 - J. Galván9 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. BA 572 - J. Galván10 OPERATING DATA

11. BA 572 - J. Galván11 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. BA 572 - J. Galván12 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. BA 572 - J. Galván15 COMPARING PERFORMANCE

16. BA 572 - J. Galván16 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.

17. BA 572 - J. Galván17 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.

18. BA 572 - J. Galván18 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.

19. BA 572 - J. Galván19 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.

20. BA 572 - J. Galván20 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).

21. BA 572 - J. Galván21 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.

22. BA 572 - J. Galván22 ANYWAY…