1. Get the Right Mix of Bricks and Clicks
Davis Felella Gill
Barry Carvell
Van Der Bosch Wilson
EMBA TEAM CHICAGO
BA 490X1 E-Business & Commerce Mgmt
Professor Michael Shaw
February 8, 2003
University of Illinois
Executive MBA Program

2. The Manager’s Dilemma ---
Should we integrate our
Internet business with our traditional business OR
should we keep the two separate?

3. The Click-and-Mortar Spectrum
Strategic Joint In-House
Spin-Off Partnership Venture Division
(BarnesandNoble.com) (RiteAid & Drugstore.Com) (KBKIds.com) (OfficeDepot.com)
INTEGRATION
SEPARATION
Established Brand
Shared Information
Purchasing Leverage
Distribution Efficiencies
Greater Focus
More Flexibility
Access to Future Funding

4. Barnes and Noble Their Goal: Why this Goal?
To compete with Amazon.com.
Why this Goal?
Because Amazon was eating their lunch.

5. Barnes & Noble What steps did they take to achieve their goal?
Created a separate division and ultimately spun it off as a stand alone company.
Implemented new management structure that was entrepreneurial.
Benefits included faster decision making, flexibility and access to available capital for internet startups.
Barnes & Noble maintained 40% ownership.

6. BarnesandNoble.com – What Happened?
Lost 90% of equity in 3 years.
CEO resigned after one year.
Sacrificed more than they gained:
Forfeited marketing opportunities by not promoting the web site in their stores.
Barnes & Noble stock recovered from the
e-commerce losses in 2001…and then declined.

7. What did others learn from Barnes and Noble?
The benefits of integration are too great to abandon.
The “Manager’s Dilemma” should be modified to be:
What degree of integration
makes sense
for OUR company?

8. Office Depot Goals: Polar Opposite of Barnes & Noble
Tight integration of physical stores and Internet.
Internet viewed as ‘‘just another channel’’.
Why?
Existing catalog infrastructure, including delivery services.
Existing IT infrastructure which maintained current inventory levels at all locations, among other things.
Low involvement product with high cost procurement with mostly B2B customers

9. Office Depot
How?
Order for delivery next business day or refer to a local store for pickup.
Provide information on in store availability
Detailed product information on website
B2B customer enhancements, such as individual purchasing limit.
Design inter and intra net offering

10. Office Depot
Results:
Increased traffic at physical sites-prompt “for store pick up” to drive incremental sales
Cannibalization of catalog business increases profitability
Now head to head with Staples who has integrated it’s web business after large $$$$ losses
OfficeMax does 180 million in e-business without commercial linkage
Eliminated all “virtual” competitors
Office Depot - $1.5 Billion in e-business sales.

11. Office Depot

12. Office Depot First to announce a Spanish language site.
Currently do 13% of global sales via e-business.
Maintain Viking brands (Direct Mail/Catalog) site.
Multi-division structure:
Stores - International
Business Services - Call Centers
Catalog - Depot.com

13. KB Toys Goals: Why? New infrastructure for e-commerce
Take advantage of strong brand name
Take advantage of BrainPlay’s Internet experience
Why?
Zero Internet experience at KB Toys.
Toy shoppers are highly price sensitive.

14. KB Toys How? $80M invested in joint venture, 80% stake in BrainPlay.
KBkids name leveraged their image while allowing expansion into other products.
Emphasis on easy return policy at its stores.
Boards of directors included representatives from each company.

15. KBkids Results: Today:
Little cannibalization at mall stores which rely on impulse purchases
Physical stores increased buying power.
Today:
Back to KB Toys, management buyout of division from parent company, now privately held.
Purchased eToys in bankruptcy.

16. RiteAid
Goal:
Internet presence fast through strategic partnership with Drugstore.com
Why?
Convinced it was the future way of doing business
Drugstore.com had strong investors available, limiting RiteAids risk.
Drugstore.com had the internet experience.

17. RiteAid How? Purchased a 25% stake in Drugstore.com
Both brands promoted at each destination (coupons, labels, etc.).
Separate identities maintained.
Appearance of integration to customers.
Integrated business functions.

18. Rite Aid
Results:
Drugstore.com now has access to PCS Healthsystems customers, which approves their reimbursement.
Flexibility for customers that often need prescriptions immediately.

19. Rite Aid-Drugstore.com Today
Drugstore.com is a glorified porn site
Stock
Around $80 in 1999 to around $3 today
GNC relationship
Prescription Refills
Stock
around $60 in 1999 to $3.00 today
GNC Relationship

20. Four Business Dimensions (5 actually)
Brand
Management
Operations
Equity
Competition

21. Brand Strong existing brand adds credibility to the Internet site.
Less fear of credit card fraud, important to customers
Extending brand identity to the Internet can inhibit product offerings to maintain commonality.

22. Management Draw on current expertise with integration.
Encourage innovation with separate management.

23. Operations Leverage existing distribution and/or IS capabilities.
Build new state of the art systems at large cost.

24. Equity Retain and gain entire value of internet operation.
Spin off and limit risk.
Spin off and ensure access to capital (less of a factor today?)

25. Competition Are you entering a no-win situation?
Is it possible that your rival is not accountable for a profit for years to come?
What would you have done if you had been a manager at Barnes & Noble?