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Dotcoms vs notcoms

B. Mahadevan

THE hype created around e-commerce is like wild fire in a thickly-wooded forest. It consumes anything that comes in its way. In India, we seem to be pushing e-commerce at a hectic pace. In the process we risk trading off quality with quantity.

However, recently business magazines, consulting firms and stock analysts have changed their attitude towards dotcoms. Prophesying the downfall of dotcom ventures has become the in thing. On June 23 Lehman Brothers announced that the most successful onli ne book retailer, Amazon, was likely to face a severe cash crunch in about a year. Such reports raise several questions. Is the e-commerce initiative going to be a ``still born'' concept in our country?

What is missing is a clear understanding of what will succeed in e-commerce and what will not. Organisations of varying backgrounds and complexity are beginning to adopt the ``one size fits all'' thinking when it comes to business strategies for e-commer ce introduction. What an e-commerce initiative will deliver to an organisation depends significantly on the nature of the business the organisation is engaged in.

The Amazon story

Let us begin with Amazon. Many of us know that Amazon began operations in an underground make-shift office in 1995. However, what many of us do not know is Amazon as it is today. Amazon sells books, music, toys, DVD/videos, home improvement goods, credit cards, electronics, pet products as well as health and beauty items among other things. It also has three streams of auctions that deal with rare books, collectibles and antiques. As of March this year, Amazon had 10 warehouses spread across the US and Europe totalling 4 million square feet in area. It had 7 customer centres (3 in Europe) and employed 7,600 people. During March 1999-March 2000 Amazon started 13 new businesses.

During the initial stages of its operation, Amazon baffled old companies such as Barnes & Noble with its ability to carry a near zero inventory of books and yet satisfy customer orders out of its catalogue of 1 million titles. However, the Lehman Brother s report showed that figures such as inventory turns and gross margins of Amazon today resembles that of a normal retailer. A Economist report suggested that Amazon's headaches today resemble those of brick-and-mortar retailers.

Physical and digital dotcoms

Amazon's experience leads to several insights. The most important is that Amazon is a physical dotcom. In simple terms, a physical dotcom deals with products that are physical. On the other hand, sellers of software and consulting reports can be called d igital dotcoms. Digital dotcoms sell soft goods that could be converted into bytes and transported through a network and electronically delivered to the customer. For instance, you can download digital music from CDnow, store it in a virtual cupboard in their site, use a MP3 player to listen to the music and pay CDnow on a ``pay-by-usage'' basis.

This differentiation on the nature of products/services a firm is offering will fundamentally govern several issues related to e-commerce and its impact on the business.

Digital products have some special attributes that are not part of physical products. All digital products are basically information goods (bytes of data). The production cost economics of digital products is different. One has to incur a huge cost to pr oduce the first copy of a digital product but the subsequent copies are almost free. For instance, the first copy of the film Titanic would have run to several million dollars but the second copy is just a few US cents (the cost of the CD).

If good infrastructure (adequate bandwidth) is available, digital dotcoms can scale up their operations effortlessly. Moreover, the cost of distribution for digital products is almost nil. This means that if a customer orders for one product or 100, she does not pay anything extra for distribution. The firm would find it easier to reach a large number of customers without proportional investments.

E-commerce strategies for digital products should take into consideration these attributes. Firms can bundle many products together and offer them at a price that is attractive to a large number of customers. Subscription to electronic journals is one su ch example. Educational institutions and corporate houses today subscribe to a database of journals, that may contain the full text of over 1,000 journals and abstracts of over 4,000 journals. The subscription rate for this is typically a very small frac tion of the total cost. Digital dotcoms could aggressively market their products and services by a host of free offerings and organise a huge virtual community ahead of competition.

Physical dotcoms have limits to growth

Physical dotcoms have very limited scope to extract values through e-commerce strategies. It is possible today to allow a customer to use a French translation software only once in his lifetime and collect one paisa as the fee for using it. One can repli cate this functionality over a million customers. Is it possible to do the same in a physical dotcom? Can an online grocery shop sell 10 grams mustard each to hundreds of customers? The experience of online grocery models in the US has clearly demonstrat ed the limitation of physical dotcoms.

What happens when a retailer of physical goods such as books and electronics hosts an impressive homepage with a payment gateway? An online customer pulls the items into the shopping cart, checks out the order, authorises payment and receives a confirmat ory message that the order is executed. Much of the work is done with the brick-and-mortar economy. The logistics and distribution is physical. The order fulfilment process involves traditional distribution networks such as road and rail.

The production process is also governed by physical attributes. Expectedly, growth strategies for physical dotcoms rely heavily on physical dimensions. That explains why Amazon today has 7,600 employees and warehouse space more than that of a brick-and-m ortar stores. Due to significant costs of production and distribution, offering freebies are impossible in physical dotcoms.

In a country such as India, with the poor state of infrastructure, logistics and order fulfilment are the key success factors for business. The tonnes of biscuits that Brittania can sell in Tamil Nadu depend on the distribution infrastructure that it has created in the State. All other issues are secondary to this.

Brick-and-mortar issues are important

Business strategies for growth and competitive advantage will depend on issues related to physical dimensions. The long-term growth and profitability of physical dotcoms are dependent on the brick-and-mortar dimensions of the business. Organisations need to continue focusing on the key problems related to the order fulfilment process in a physical dotcom. Bringing in a new logistics partner may temporarily offer some help.

But there could be other issues in the organisation. This may relate to bad supply-chain management. On the other hand, it could be the result of poor planning infrastructure or low levels of information integrity. In certain other cases it may point to upgrading the skills of employees. In several cases the bottleneck could be the attitude and mindset of the employees. There are no known e-commerce solutions for several of these problems.

Top managers need top understand this crucial aspect of e-commerce before they design their strategies. Firms cannot afford wrong moves in today's competitive world. Ignoring these issues will turn all such dotcoms into notcoms.

The author is an Associate Professor at IIM, Bangalore.