Academic journal article SAM Advanced Management Journal

Dot-Com Companies: Are They All Hype?

Academic journal article SAM Advanced Management Journal

Dot-Com Companies: Are They All Hype?

Article excerpt

Introduction

Infrastructure advances drove the first three eras of disruptive change in retailing: railroads enabled department stores; rural free delivery enabled mail-order catalogs; and the automobile enabled the rise of discount department stores. The development of the Internet has enabled online retailing, leading to the fourth wave of disruption in the industry.

The phenomenal growth of the Internet since the mid-1990s has given rise to a revolution in global, business, now known as electronic commerce or e-commerce. E-commerce has been traditionally used by businesses for business-to-business transactions. The prevalence of Web browsing in American life has opened a retail market on a grand scale. Many companies are clamoring to get online. Internet sales in 2002 are predicted to reach $14 billion, according to the Consumer Electronic Manufacturing Association. Yet, more recently, a shake-up in e-commerce gives us an opportunity to evaluate companies in this electronic revolution.

Pure-Play vs. Click-and-Mortar Companies

Some companies start with a presence only on the Internet. These companies are classified as Internet pure-plays. Many companies that have traditional operations with a physical storefront have also expanded on to the Internet. In other words, these brick-and-mortar companies have become click-and-mortars. In fact, 80% of the businesses on the Internet are click-and-mortar companies and only 20% are Internet pure-plays, according to the latest dotcom.com survey. Click-and-mortar companies have the following advantages: well-established brand names, pre-existing customer bases, and well-oiled supply chains, and inventory systems. While pure-plays struggle to establish these advantages, click-and-mortars can concentrate on streamlining their Internet presence. Table 1 shows the industries and their relative percentage share of Internet presence.

For comparison, Table 2 lists a sample of Internet pure-plays versus their brick-and-mortar counterparts for various industries.

E-Commerce and Product Segmentation

In recent years more and more people are browsing the Internet. Today, 40% of American households own a computer with Internet connection. The percentage of browsers who become buyers is also increasing, as shown by Table 3.

By any standard, the outlook for e-commerce seems bright. As shown in Table 4, Newsweek further forecasts a rise from $185 billion of online sales in 2000 to $3,635 billion in 2005, which is an increase of over 1,800% in five years.

To evaluate the long-term prospects for dot-com companies, one can begin by applying basic economic or management theory of market segmentation. Products marketed on the Web can be categorized in terms of consumers' ability to judge the quality of the products. Figure 1 illustrates the product continuum given this attribute.

On one extreme of the continuum are pure search goods exemplified by commodity products such as oil, wheat, and metal. Electronic commerce in these markets has existed for decades, and the quality of these products is easy to judge by their description. As a result, consumers in these markets care little about the identity of the seller but a lot about the correct characterization of the product and its price.

The next category of this continuum is the segment for quasi-commodity products. Videos, CDs, books, and toys fall into this class of products. Compared to commodity products, product differentiation begins to play a role. For example, when a reader considers buying a romantic novel, she must first find a title she prefers among the different novels available. After selecting the title, she would care primarily about its price and the reliability of the vendor. This market segment has experienced most of the growth in e-commerce.

Product quality becomes increasing more difficult to assess on the Web for the next category of the product continuum, "look & feel" or experience goods. …

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