Amazon and the limits of growth: The Red Queen effect confirmed

Headlines like this dominated the online and offline media last week: The recent takeover of Whole Foods for almost $ 14 billion by Amazon sent shock waves to observers and high street retailers.
Should we be surprised by the news? Personally I am not surprised at all; Diversification and continuous expansion is a strategy that Amazon consistently pursuits since the beginning of its times.

Is that right? In 2004 I published a research paper in the Management Decision titled: "Strategies for surviving the Internet meltdown: The case of two Internet incumbents" * Although this article won the title of the best paper award of the journal for that year it never became so popular with only 24 citations so far.
In this study I reviewed the strategic decisions made by Amazon and one more of the survivors of the dot.com disaster (E-Trade) at the beginning of the 21st Century, looking for clues why these Internet pioneers did not follow the fate of the thousands of dot.coms that went bankrupt after the 90's dot.com hype.
My study was focused on the major and minor strategic decisions made in the period 1997 - 2001. I classified these decisions according to the well- known Growth Matrix of Ansoff; this matrix identifies as most of us know, four types of growth strategies: Market Penetration, Market Development, Product Development and Diversification.
During the period in question Diversification was the main strategic approach for growth pursued by Amazon: Although Diversification is the most risky of the four options this strategy worked and not only helped Amazon survive the Internet debacle but also transformed Amazon from an online bookstore to an online (and increasingly traditional) retail giant that it is today. We must not forget that Whole Foods is not the first traditional retail venture of Amazon, they operate already a number of physical bookstores; interestingly books is the first product category that help Amazon to be launched as e-shop back in 1995.

As I mentioned, to me the expansion of Amazon to traditional retailing did not come as a surprise. In my 2004 article I came to the following conclusion when discussing the findings:

"An alternative strategic option for both Ž firms (i.e. Amazon and E-Trade) could be to concentrate on the present business domains and pursue further grow by expanding their physical activities rather than the virtual ones, at the cost of traditional players; such a strategy is likely to trigger reactions of traditional, physical Ž firms."

This conclusion was based on the findings that in the case of Amazon (and to a lesser degree of E-Trade) their strategy was looking to be inspired by the Red Queen Effect. My impression was that when Amazon will sell online whatever is possible to sell it might turn to the traditional retailing  in order to maintain its survival and growth.

The interesting thing about the emerging high-street presence of Amazon (and for sure more e-businesses will follow it) is that it can have many negative effects for established retailers but it could have also some positive ones: Is the expansion of e-tailers to the High Street a way to revitalize city centers suffering from shop closures and increasing difficulty to attract buyers in shopping centers?

Interesting issue to follow-up. One thing is sure, the distance between online and off-line becomes once more a bit smaller.

*Efthymios Constantinides, (2004) "Strategies for surviving the Internet meltdown: The case of two Internet incumbents", Management Decision, Vol. 42 Issue: 1, pp.89-107, https://doi.org/10.1108/00251740410510190

New warning to Web Designers: 200 milliseconds is enough to make it or brake it

In 2006 a group of Canadian researchers (Lindgaard, Fernandes, Dudek, and Brown) published an article in the Business & Information Technology Journal called Attention web designers: You have 50 milliseconds to make a good first impression*. In this study the researchers tested whether a very short exposure (50 milliseconds or 1/20 of a second ) is enough to create a quality perception about a web site that is consistent with the quality perception about the site if people examine the same web site for a longer time. They found indeed that 50 milliseconds are enough for internet users to form a positive or negative impression about a web site.

I thought this is a good example to use in order make clear to my students of the Master Advanced Topics in Digital Marketing today how important is the web site design for the quality perception of people about web sites and how short time is needed in order to form an opinion about a site’s aesthetic quality.

I started my lecture today with a short experiment where all present students took part: I presented them 2 web sites (that in my view could be examples of good and bad design) on the screen. They were exposed to a screenshot of each web site twice, the first time for 200 milliseconds (it was not possible to make a 50 milliseconds exposure in this setting) and the second time for 10 seconds which is close to the average time that Internet users look to new sites when browsing the web searching for something online before deciding to stay in the site or move on.

Forty-seven students took part in the experiment and although it is not a really scientific one the results confirm the findings of the Lindgaard et.al. study from 10 years ago: The consistency of quality perception between the very short and the long exposure is impressive. In the case of the “nice” web site 78% of the participants said that they liked in after the short exposure (200 milliseconds) versus 93% who liked the site after a more thorough examination during the 10 second exposure. In the case of the “not nice” web site the results were even more impressive: 100% did not like the site in the short exposure and 98% also did not like it after the second long exposure.

Can this mean that bad designed web sites have a stronger negative effect on us than the good designed web sites if we are exposed to them online? This is possible but what is sure is that the statement of the Canadian colleagues in their article 10 years ago is still valid. 

There can be maybe more conclusions from our not scientific test but maybe it will be a good idea to replicate the Canadian study to get a good impression of the effect of web design on quality perceptions today when Internet users are much more experienced and sophisticated than 10 years ago.

In the picture you can see the results of the test, Web site A is the "nice" and Web site B is the "not nice" one.

*Lindgaard, G., G. Fernandes, C. Dudek, and J. Brown. 2006. Attention web designers: You have 50 milliseconds to make a good first impression. Business & Information Technology 25 (2): 115–126.

Customer motives as online co-creation partners: a research paper

The discussion about innovation engaging the customer as co-creator (often described by terms like co-innovation, crowdsourcing, peer production customer, crowd-based outsourcing etc) is not new to many of us. One of the new and interesting aspects of co-creation is engaging customers in co-creation process using online tools (and social media in particular) as interaction platforms. There are several issues to be addressed here, one of them is finding the best persons / customers and get them on board. Motivations of customers to engaged in such processes are of vital importance. This was the topic of our latest research paper (co-authored by Carlota Lorenzo-Romero and Leonine Brünink) titled "Customer Motives and Benefits for Participating in Online Co-Creation Activities". The article that was accepted and will be published soon in the International Journal of Internet Marketing and advertising  attempts to give an answer to this issue. Based on a survey conducted among 239 young Internet users in Holland and Germany the factors described in the Uses and Gratifications Theory (and tested earlier by Nambisan, S., & Baron, R. A. (2009) for "traditional co-creation). We tested whether the benefits described int the Uses and Gratifications Theory (i.e. Personal Integrative Benefits, Hedonic Benefits, Social Integrative Benefits and Learning Benefits) are motivators for online co-creation and this seems to be the case. We  found out that about 28% of the participants have taken part in co-creation activities with businesses online, something in line with findings of our previous research.  We also identified two profiles of online co-innovators and found that males and Dutch are in general more motivated than females and Germans to participate in such activities. The differences based on ethnicity might have to do with the fact (and this is a personal observation) that in the Netherlands there are more opportunities for online co-creation activities than in Germany. With some caution for generalizations due to the sampling method we think that this study provides some
For those interested the abstract of the paper below:

Abstract

The widespread adoption of Web 2.0 applications, commonly known as Social Media, has brought about a new generation of empowered customers. Empowered customers are well-informed, knowledgeable and certain about their specific product and service needs; they are often willing to share their experiences, product knowledge and innovative ideas with producers, providing input for new product designs and enhancements. Such customer attitudes often labelled as co-creation, are forcing many companies to step away from the traditional firm-centric view of innovation and take a more customer-centric view by actively integrating customers’ ideas and knowledge in their new product and service development processes. Co-creation presents businesses with an interesting challenge: how to identify and recruit the innovative customers who willing to cooperate and share their knowledge as the basis for successful online co-creation activities.

This study identifies the various motivators for customers to participate in online co-creation. Based on the uses and gratification approach a pilot questionnaire is employed and its practical applicability is tested. The results indicate that customer participation in co-creation projects is motivated by four distinct types of benefits and  that co-creators differ in their motivational level. Finally, recommendations on how to adapt the questionnaire for future research and suggestions for further research issues are provided. 

References

Nambisan, S., & Baron, R. A. (2009). Virtual customer environments: Testing a model of voluntary participation in value co-creation activities, Journal of Product Innovation Management, 26(4), 388–406.

Constantinides E., Brünink L., Lorenzo-Romero C., 2014, Customers Motives and Benefits for Participating in Online Co-Creation Activities, International Journal of Internet Marketing and Advertising (forthcoming).

Social media: the silver bullet of marketing strategy?

It is a fact that most businesses are by now convinced about the potential of the social media as marketing tools and the need to integrate them into their marketing strategy. Many do this already: Look for example to the Social Media Monitor (report5): In the Netherlands the adoption of social media marketing strategies by the top 100 businesses* was 92% in 2012  up from 14% in 2008. 70% of these companies have a Social Media Manager while this position din not exist 4 years ago. In any similar report you read you see the same picture emerging: the social media is hot!

These positive news however should not detract those who are seriously working on this topic either as academics or practitioners from the real issues:

-          Do marketers really know how to exploit the full potential of the social media as marketing tools? And do they use them the right way?
-          Is social media marketing the comprehensive answer to the challenges of the marketing field today? Some of these challenges: empowerment and techno-savvy consumer, depletion of effectiveness of the traditional marketing tools, market globalization and increasing technological progress bringing new techniques and technologies to the market every day. Some of these techniques and technologies are: mobile computing, Internet of Things, wearable technologies, RFID, cloud computing and Neuromarketing.

My answer based on my personal observations to both these questions is simply “No”. I think that businesses have gone some way on the social media strategy arena but they have to go much further. Next to this I do not believe that social media marketing is the single answer to the challenges facing today’s marketers: there are many more issues to be addressed.

What these challenges and issues are and what are my personal views on the future of marketing strategy? This will be the subject of my talk in the E-Travel Summit on 30 October in Almere.

 *Based on their advertising budget

2008: 12% of EU turnover online

Forecasts made some years ago about the growth of E-Commerce (by Forrester if I remember well) were estimating that in 2010 10% of the business would be realized online. It seems that such predictions were rather pessimistic: according to a Eurostat press release published on Jan 19, 2010 E-Commerce in the EU accounted in 2008 already for 12% of enterprises' turnover. According to the same report 93% of the European enterprises have access to the Internet (champions were Finland (100%), Denmark, Austria and Slovakia (all 98%) and Germany (97%) and 82% have also access to fixed broadband connection with the highest percentages in Finland (94%), Spain and Malta (both 93%) and France (92%). As to the E-Commerce turnover by destination the largest percentage in the EU is done within the country (73% average); 19% is realized with other EU countries and 8% outside the EU. I expect in 2010 that EU E-Commerce will exceed 15% of the total turnover in the union.


Conclusions: E-Commerce has become mainstream business activity in the EU but more effort must be done to reach international markets. In the global Internet marketplace the potential is enormous. The summary of the report is available in
 http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-19012010-BP/EN/4-19012010-BP-EN.PDF

An airline's digital transformation

As an old KLM employee myself I am always interested in developments in the airline industry and this company. While KLM was by no means not one of the pioneers of E-Commerce in the airline world they have shown a remarkable progress in this field during the recent years. An interesting article about the digital transformation of this company that expects now to earn 40% of its revenues online published by Accenture recently. The term of co-sourcing is introduced and explained also in this article; interesting for those allergic to rampant outsourcing.

Online Marketing in four simple steps Part I

Introduction

One of the most common issues keeping many strategists and marketing executives busy is how to optimize their Internet presence and make the most out of the web as a communication and distribution channel. These concerns are logical considering that the Internet has become the nr.1 information source for consumers and businesses, the nr. 2 retailing channel in many countries and according to different estimations by 2010 the Internet retailing will be between 10% and 13% of the total retailing volume in the US. Understanding the mechanisms of online marketing and finding a proper way to teach this subject is also a problem that many academics and other educators have. For some people belonging to the above categories a way out could be the 4S Web Marketing Mix model I describe in a paper published in 2002. Next to scientific citations I come occasionally across references to this paper in different blogs , online forums or even web sites of business consultants. This paper has been consistently among the 25 most downloaded articles of the journal from its publication until today, reaching even the first position in the list. I have the feeling that the paper is mostly download by colleagues/teachers but very often by practitioners as well. The inclusion of the model in the popular 123manage site for management models must be one reason for that.

The 4S Web Marketing Mix model is meant to guide businesses in designing and building their online presence. It can be used also as a way to evaluate an existing online presentation with the objective to improve it. In the following 4 posts I will explain briefly the principles of this model and I will explain the additional knowledge build up since the publication of this paper by means of research conducted by my colleagues and myself.

As a first step I would like to say a few things about this model in general. The idea behind it is that in order to build and maintain a successful online presence it is necessary to address four different issues – that for the sake of simplicity I illustrate with four terms starting with the letter S - in a integral and comprehensive manner:

SCOPE : The Strategy

SITE: The customer Online (or Web-) Experience, the “operational” issues.

SYNERGY: The integration of the online presence into the organization and its network: the “organizational” issues

SYSTEM: The technologies necessary to realize the above

The model looks therefore like this:

Next week's post: The Scope

Power to the (online) consumer Part 2

Quick summary Part 1: The Internet has become an indispensable part of our life

Next to becoming the prime source of information for most of us the Internet influences in other ways our position as consumers. You will hardly find anyone around who does not have a personal story to tell about getting a better deal the last time he or she bought flying tickets, vacations, books, furniture, computers, new or second hand car, clothes, electrical appliances, kitchen equipment and anything else you can imagine, just by taking the time to do some search with Google before buying the product.
The whole situation is often labeled as “customer empowerment”, a situation attracting a good deal of the attention of both academics and practitioners. A symptom of changing attitudes: business people are not anymore surprised when you tell them that the era of the corporate market domination is over and that the existential, online consumer is on his way to become the dominant party of the marketing equation.

Customer empowerment has its roots to a number of evolutionary causes but it is primarily related to the Internet that made available and easily accessible large amounts of information that has led to a unique transparency of the marketplace, in combination with the ease of transacting with any supplier, in any part of the world as long as he offers a better deal. Recent developments around the social media (blogs, forums/bulletin boards, communities and social networks) have further contributed to customer empowerment by offering to consumers the option to further refine their product information and better assess the value of different offers by directly getting in touch with other users or experts and asking their opinion or experiences. The customer empowerment is also visible in the fact that the Internet has given consumers the opportunity to act as part of the supply chain, eliminating traditional intermediaries from the process. A simple example: The photo film and film processing industry are in the edge of extinction because of the digital technology replacing the film role and the Internet replacing the photo shop. Similar developments have affected a whole series of industries: airlines and Travel, banking, media, newspapers, telecom, employment services, printing and even the traditional high-street retailer.

The effects of customer empowerment on customer behavior but also on business processes and market structures are remarkable and far-reaching yet for many businesses it is not exactly clear what the consequences can be. A few tips in my next posting.

Next week: Part 3

Power to the (online) consumer Part 1

The Internet is hot again; having fully recovered from the boom and bust of the 90s the virtual economy has entered a new era of robust growth in all fronts; with over 1 billion users worldwide it is in several countries already the nr 2 retail channel while online advertising is the fastest growing advertising category. The broadband connections are expanding quickly (there were 285 million subscribers in 2006, expected to reach 560 mill. by 2011) and new technologies like Wiki and Ajax support a whole new family of interactive applications (known as Web 2.0 or social media) giving web users countless new options and capabilities.
The growing importance and influence of the Internet is clearly visible to consumers and businesses. As a teacher I experience a steady increase of requests for supervision of student assignments with subjects related to corporate online presence, mobile commerce and e-marketing during the last two years. On the other hand more and more literature and textbooks about E-Marketing are published every year (the last four months alone I was asked to review two concepts for textbooks about E-Commerce by different publishers).
The Internet has been fully integrated in our life as part of our decision making process. There is hardly anyone around using any other medium than the web when searching for information ranging from news, weather reports, medical information and train departure times to flying tariffs, movie theater schedules, telephone numbers, personal information or information about any person, product, brand or company everywhere in the world. According to a recent study 70% of the high income consumers use already the Internet as their nr 1 information source in the US.
Next week: Part 2

Peer-to-Peer (P2P) banking: After mergers and acquisitions one more headache for Bankers ? PART 2

Short Summary of last week posting (Part 1): A new generation of Peer-to-Peer (or Citizen-) Banking web sites appear to attract enough attention of the public. Should traditional bankers worry?

Part 2

Is it possible that the incumbent banks will share the fait of the travel agencies, music industry, telephone operators and the newspaper classified adds who experienced a sudden and substantial loss of business to online competitors before they even understand what’s going on? The scenario is not unlikely at all; the past experiences has shown that many of the revolutionary Internet ideas tend to expand as a virtual pandemic after reaching a users’ critical mass. Take the examples of SecondLife, Google, Wikipedia, MySpace, Digg, Flickr, Skype and YouTube to name some of the familiar names. These are brands that have attracted millions of followers in very short time and without any promotion. I dare to predict that the same will happen with the Peer-to-Peer (P2P) banking sites, provided that they reach the critical mass of users that will put them in the radar of giants like Google, eBay, Yahoo or Microsoft (and why not of Amazone or WallMart) who constantly look for interesting ways to expand their online business. Experience from recent high-profile acquisitions of Internet businesses points to the fact that the industry giants have no problem spending billions of dollars in order to further strengthen their online position and expand their market reach. Having said that it is not so difficult to imagine what will happen if Google or Yahoo add zapa.com, Boober.nl or any other similar online Peer-to-Peer bank to their assortment: from small and local these names will become overnight big and global and most probably fierce direct competitors of the traditional banking by offering to hundreds of millions web users an interesting virtual banking alternative. The worst case scenario for the traditional bankers is that most probably the citizen banks will expand their assortment to more categories of financial services and products. Do banking CEOs and strategists need to worry? After all banking is not like every other industry since reliance (based on personal contact and interaction) is a core banking value that the Internet cannot provide. Moreover banking is an economic activity meticulously regulated and followed by governments and financial authorities. Can these and other possible problems stand in the way of citizen banks? Again looking to the Internet history I would argue that online concepts embraced by users develop their own momentum and can expand beyond the reach and control of industries, governments or any kind of watchdogs.The important question to my opinion is whether the banking world has noticed these developments and has given any thought to this threat, provided that they consider this as a threat at all. One would expect that guided by past experience banking executives and strategists should seriously consider making the first step, ahead of the Internet giants. The online P2P banks are still cheap and therefore easy to acquire, while the risks are relatively low.Will the banking world try to preempt? Looking again to the past this sounds very unlikely. Experience shows that incumbents are very slow to react to the fast and often uncontrollable developments in the cyberspace. If this is the case here, it is interesting to wait for the next chapter of the Online Citizen Banking story

Peer-to-Peer (P2P) banking: After mergers and acquisitions one more headache for Bankers ? PART 1

Talking about Internet Marketing to a banking audience a few months ago, I mentioned at some point that if I was a banker today my worst nightmare would be the moment that Internet giants like Google, eBay, MySpace or Yahoo decide to enter the banking business as online banks. The participants thought that I was obviously joking since no one tried to challenge this idea or to follow-up to the discussion.

A few weeks ago this episode came back to my mind reading the news here in Holland: the online bank Boober.nl opened its virtual doors for business, as a loan auction. Boober.nl will act as an intermediary, charging a commission of 0,5% per transaction for intermediation and creditworthiness control, between people who want to either lend or borrow money but want a better deal than the deals traditional banks are offering. The idea of Peer-to-Peer banking is simple: Wannabe citizen bankers can offer their money against an interest rate that is higher than the interest of saving accounts or other similar types of investment to borrowers against interest rates that are lower than the interest of banking loans and bank credit. The whole setting is not much different than the millions transactions in second hand articles taking place between people, facilitated by the thousand online auctions eBay style or exchange portals.
Searching the web I came across more such online banks like Prosper.com in the USA that recently closed their first year in business with 140.000 members and loans of $ US 27 mil. and the British Zopa.com with more than 110.000 members already. The message seems to appeal to a large audience segments: the first day of operations the massive interest for Boober.nl put the server out of the air and according to the data published in the site up to now loans of about Euro 850.000 (over $ US 1 mil) have been booked.
The total amounts of loans are still low but this kind of developments should cause some uneasy feelings to banking boardrooms. The fact that online Citizen Banking has not made headlines yet is not important. Looking back to the history of the Internet we have plenty of examples of incumbents who woke up one morning to find out that a chunk of their business had left them for ever (the click-and-mortar travel and vacation sector and the traditional bookstores were among the first to experience this) migrating to unknown online companies with strange names.

Next week : Part 2