3 Critical Issues in Internet Retailing

Special Report: The Future of The Web

In the early, hyped-up days of e-commerce, Internet retailers tried to focus customer and investor attention on the bells and whistles of their product offering or Web pages, and hoped that no one noticed the poor performance of backroom operations — or they deluded themselves into believing that good execution was unimportant. But that approach resulted in late shipments and bloated fulfillment costs, which led to the demise of erstwhile leaders such as Pets.com, Webvan and Value America. In contrast, successes like Amazon.com invested heavily in building operations capabilities rather than outsourcing anything that didn’t appear sexy enough for the “new economy.”

“There’s a lot of co-processing going on. You look at kids now … they’re at their computers, they’ve got six windows open, they’re chatting, they’re watching. And I think that has some really interesting ramifications [for online content]. … One is: How much of your brain is watching any one thing? And what does that mean for content?”

—LAURIE DEAN BAIRD, DIRECTOR OF TECHNOLOGY PARTNERSHIPS, PLATFORM R&D, TURNER BROADCASTING SYSTEM INC.

Internet retailing now has completed the cycle from overhyped promises to overreactive retrenchment and has settled into a steady but heady growth pattern. Online retail sales in the United States exceeded $85 billion in 2005, and in 2006 they appeared to be on track to grow at around 24%.1 This would mark the fifth straight year at that rate, which is more than three times the growth rate of total retail sales.

With e-commerce sales now accounting for large shares of seven retail categories — over 40% in computer hardware and software and around 17% of music and video sales2 — consumers have become increasingly pragmatic in their purchasing decisions. This sustained increase in Internet sales has been accompanied by an increased focus on operations execution.

The growth in online retail sales can be explained not only by the emergence of “pure-play” Internet retailers but also, to a large extent, by the entrance of multi-channel players — traditional brick-and-mortar retailers leveraging their brands and hopefully their physical infrastructures to compete on the Web. “Big-box” retailers such as Office Depot and Staples each generated more than $3 billion in Web sales in 2005.

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References

1. U.S. Census Bureau, “Quarterly Retail E-Commerce Sales 1st Quarter 2006” (Washington, D.C.: Government Printing Office, May 18, 2006); and U.S. Census Bureau, “Quarterly Retail E-Commerce Sales 3rd Quarter 2006” (Washington, D.C.: Government Printing Office, November 17, 2006).

2. U.S. Census Bureau, “Statistical Abstract of the United States: 2007” (Washington, D.C.: Government Printing Office, 2006): 656.

3. M. Wagner, “The Well-Traveled Package: Returns: The Many Roads to There and Back,” October 2004, www.InternetRetailer.com.

4. D.A. Mollenkopf, E. Rabinovich, T.M. Laseter and K.K. Boyer, “Managing Internet Product Returns: A Focus on Effective Service Operations,” Decision Sciences 38, no. 2, in press.

5. T.M. Laseter and E. Rabinovich, “Wagging the Long Tail: Evidence from Online Returns,” working paper, Darden Graduate School of Business, University of Virginia, Charlottesville, Virginia, 2006.

6. E. Brynjolfsson, Y. Hu and M.D. Smith, “From Niches to Riches: Anatomy of the Long Tail,” MIT Sloan Management Review 47, no. 4 (summer 2006): 67–71.

7. T.M. Laseter, P.W. Houston, J.L. Wright and J.Y. Park, “Amazon Your Industry: Extracting Value from the Value Chain,” strategy+business 18 (2000): 94–105.

8. K.K. Boyer, M.T. Frohlich and G.T.M. Hult, “Extending the Supply Chain: How Cutting-Edge Companies Bridge the Critical Last Mile Into Customers’ Homes” (New York: AMACOM, 2004).

9. E. Rabinovich, “Why Do Internet Sellers Incorporate Logistics Service Providers in Their Supply Chains? The Role of Transaction Costs and Network Strength,” California Management Review, in press.

10. M. Rungtusanatham, E. Rabinovich and T.M. Laseter, “Internet Retailer Margins and Physical Distribution Service: Customer Expectations, Customer Experiences and Supplier Performance” (presentation at the 2006 Decision Sciences Institute Annual Meeting, San Antonio, Texas, November 18–21, 2006).

11. J.P. Bailey and E. Rabinovich, “Internet Book Retailing and Supply Chain Management: An Analytic Study of Inventory Location Speculation and Postponement,” Transportation Research Part E: Logistics and Transportation Review 41, no. 3 (2005): 159–177.

12. A. Raman, N. DeHoratius and Z. Ton, “Execution: The Missing Link in Retail Operations,” California Management Review 43, no. 3 (spring 2001): 136–152.

13. T.M. Laseter, E. Rabinovich and A. Huang, “The Hidden Costs of Clicks,” strategy+business 42 (2006): 26–30.