Knowledge@Wharton: On Building Corporate Value

Overview

Offers a new way of looking at the perplexing circumstances surrounding business today.
Knowledge@Wharton on Building Corporate Value examines the financial and strategic approaches for bringing companies back from the bleeding edge. Through a combination of research, Wharton Executive Education programs and events, and company cases and interviews with industry leaders, this book delivers epiphanies for managers who have lost their way in the e-craze. The authors provide a ...

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Overview

Offers a new way of looking at the perplexing circumstances surrounding business today.
Knowledge@Wharton on Building Corporate Value examines the financial and strategic approaches for bringing companies back from the bleeding edge. Through a combination of research, Wharton Executive Education programs and events, and company cases and interviews with industry leaders, this book delivers epiphanies for managers who have lost their way in the e-craze. The authors provide a framework for applying more robust and rigorous approaches to financing, outsourcing, R&D, company infrastructure, and customer relationship management.

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Editorial Reviews

Soundview Executive Book Summaries
From the beginning of the so-called "dot-com bubble," there were those who thought the Internet to be a revolutionary force for immediate change in the world, and those who thought the whole thing was simply speculative mania intended to con the gullible. They were both wrong. Indeed, the truth resides somewhere between those two extreme modes of thought - the Internet can be a powerful tool if companies and consumers learn how to use it creatively and imaginatively. It can open up possibilities for value creation and enhancement heretofore unimagined, providing companies with sustainable competitive advantage.

Part theoretical framework, part hard reality, Knowledge@Wharton On Building Corporate Value is based on articles and research drawn from the Wharton School's online resource, Knowledge@Wharton.

For companies eager to approach their Internet ventures like real businesses (i.e. with revenues and the hope of profits), the authors write that it is important to analyze both conceptual strategies, as well as real-world business models, in order to gain the best, most powerful competitive edge. Both are critical to success, they explain, particularly in the aftermath of the enormous losses in capital investment brought about by the bursting of the dot-com bubble.

According to the authors, those who poured billions into entrepreneurial ventures in the mid- to late-90s recognized the three broad conceptual effects inherent to Internet technology:

  • Communication effect. The Internet has made it easy to search for and find vast amounts of information, in addition to making it much less expensive to store and transfer it. Note, it is less expensive, not free - a point overlooked by dot-com investors and entrepreneurs in their relentless drive to attract traffic to their businesses. For example, many companies that once gave away their content for nothing, generating revenues through advertising, discovered ads couldn't generate sufficient funds to maintain their businesses.
  • Brokerage effect. Some analysts compare the Web to a giant market marked by openness, informality and interactivity. The authors write that this effect makes it possible for Internet users to access global markets at minimal cost, flattening the playing field enough for small companies to take on large conglomerates for the same customers. A good example of this effect is eBay, the online auction site whose mission is "to help practically anyone trade practically anything on earth." It boasts 40 million registered users, 126 million auction listings, and gross merchandise sales of $11 billion annually.
  • Integration effect. The Internet realigns players in industry value chains as some players are disintermediated in the wake of the new technology. When the value chain changes, the authors write that it provides opportunities to create value. In addition, the Web's ability to connect buyers and sellers directly to one another knocks middlemen out of the value chain by eliminating the need for their participation in transactions. The Web can also create new intermediaries, or infomediaries, that mine customer transaction data to make "mass customization" possible.


A business model is made up of a company's goals, strategies, processes, technologies and structure - the things that enable an organization to capture and deliver value to customers. The authors explain that a business model must have four important elements: scalability, complementary resources and capabilities, relation-specific assets, and knowledge-sharing routines.

Information assets, which dominate e-business, the authors write, are generally costly to produce initially, but typically are easy and inexpensive to reproduce. Exploiting this on the Web requires companies to develop scalable business models. Technological advantages are often short-lived, however, and the authors point out that those advantages require companies that want to lead in the digital arena to acquire complementary resources, capabilities and assets to keep competitors at bay.

No firm can hope to dominate the Internet, the authors explain, but networks of allied firms can provide competitive advantage for those involved in such alliances, particularly if they are adept at managing collaborative relationships and relationship-specific assets. In such collaborations, they write, effectiveness depends largely on the knowledge-sharing routines collaborators develop between one another. These routines help partners enhance their collective competitive advantage over rivals and their partners.

Once a company has a strong business model in place, the authors write, it needs to gain and sustain competitive advantage through leveraging three elements:

  • Position in opportunity space. If firms want to gain competitive advantage over rivals, the authors write that they must position themselves appropriately in their markets. After the Cold War, for example, defense contractors had to find ways to put their technologies to commercial use to stay afloat in a market that didn't need tools of defense.
  • Leveraging capabilities. According to the authors, companies must learn to develop capabilities - the combination of skills, resources and knowledge firms bring to the table when they compete - that are unique. These capabilities should be difficult to duplicate, yet widely applicable across several products and services.
  • Neutralizing competition. As important as it is for companies to position themselves correctly and develop unique capabilities, the authors write that they should also adopt strategies that anticipate competitive reactions. Copyright © 2003 Soundview Executive Book Summaries

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Product Details

  • ISBN-13: 9780471008309
  • Publisher: Wiley
  • Publication date: 11/1/2002
  • Edition number: 1
  • Pages: 227
  • Product dimensions: 0.69 (w) x 6.00 (h) x 9.00 (d)

Meet the Author

KNOWLEDGE@WHARTON (http://knowledge.wharton.upenn.edu) is a biweekly online resource that offers the latest business and finance insights and research, including analysis of current trends, interviews with industry leaders, perspectives from the Wharton faculty, and information from Wharton seminars and programs. With a subscriber base of 180,000 registered users in more than 189 countries, Knowledge@Wharton is recognized worldwide as a leading source of unique and timely information on the global business marketplace.

MUKUL PANDYA is the Executive Editor of Knowledge@Wharton.

HARBIR SINGH is Chair of the Management Department at the Wharton School and has published articles in the California Management Review and the Strategic Management Journal.

ROBERT E. MITTELSTAEDT is Vice Dean and Director of the Aresty Institute of Executive Education at the Wharton School. He is also a published author.

ERIC CLEMONS is a distinguished professor at the Wharton School and a published author.

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Read an Excerpt

Knowledge@Wharton

On Building Corporate Value
By Mukul Pandya Harbir Singh Robert E. Mittelstaedt Jr. Eric Clemons

John Wiley & Sons

ISBN: 0-471-00830-3


Chapter One

A Hare, a Tortoise, and the Business of Buying Groceries Online

Inspiration came to Louis H. Borders back in 1997. The cofounder of the Borders bookstore chain was reportedly opening a package of Japanese spices and specialty foods that he had ordered from a catalog when he realized that Internet-based commerce would never take off until someone figured out a way to deliver products to people's homes simply and inexpensively. Determined to do just that, Borders came up with the concept for Webvan, an Internet venture whose ambitious goal was to revolutionize the low-margin, intensely competitive grocery business.

Armed with more than $122 million in initial funding from blue-chip companies such as CBS and Knight-Ridder and backing from top-notch Silicon Valley venture capital firms such as Benchmark Capital, Sequoia Capital, and Softbank, Borders and his associates declared Webvan open for business in the San Francisco Bay area on June 2, 1999. "Webvan Group today set a new standard for Internet retailing," the company declared in its press release. Borders, then the CEO-who was later replaced by George Shaheen, the former boss of Andersen Consulting (now Accenture) -enthusiastically said, "Webvan fundamentally transforms and simplifies the way customers shop for their groceries."

As everyone now knows, for all its hubris Webvan turned out to be one of the Internet's most spectacular failures. After burning its way through more than $1.2 billion in two years after its high-profile launch, the company declared bankruptcy in July 2000. Most of its 2,000 employees were let go with minimal notice. Since then, the company has been liquidating its assets. Borders, through one of his companies, has petitioned the bankruptcy court to let him buy Webvan's software technology platform for $2.5 million and the assumption of $500,000 in debt.

Does Webvan's Icarian flameout mean that the shoppers will never buy fruits and vegetables unless they can touch and smell them in a real-world store and that the online grocery business has no future? For part of the answer, look across the Atlantic Ocean to Britain's biggest retailer, Tesco, which traditionally operated a chain of supermarkets but has lately entered non-food businesses, such as personal finance. The company's online arm, Tesco.com, was on track to garner $420 million in revenues in 2001, and analysts estimate its profits from the grocery business to be around $22 million. Tesco.com is said to have nearly one million registered users, 840,000 orders a year, and is expanding into categories such as baby products and wine. Tesco.com claims that it has become "the largest and most successful Internet-based grocery home shopping service in the world."

On the surface, Webvan and Tesco had the same goal: both companies wanted to harness the power of the Web to deliver groceries to shoppers. That, however, is where the similarity ended. Anyone who compares Webvan's approach to the online grocery business with Tesco's will see that each company pursued a strategy that was not just different from the other's but poles apart. For example, while Webvan made huge bets on the Internet's ability to change shoppers' behaviors, Tesco made tiny ones. Webvan wanted to overthrow the grocery industry's infrastructure and replace it with its own, while Tesco used the industry's infrastructure to keep costs low. Webvan spent enormous sums of cash trying to build a brand and a customer base while Tesco used its existing brand and customers to drive its online business. (Of course, it is also true that Tesco began with some crucial advantages vis-à-vis Webvan. Webvan had to build name and scale de novo, while Tesco could leverage both. In addition, Webvan made its investments in the United States, where grocery shopping offers low margins to sellers, while Tesco began in Britain, where margins are significantly higher than they are in the United States.)

Jerry Wind, a Wharton professor of marketing who explores the actions of both companies in a book titled Convergence Marketing, notes that Webvan started with the notion that it would have to do everything from scratch and that a new type of firm would be required to do it. "But the company did not take into account the logistics issues that were involved," he says. "As such, Webvan had to create a whole logistics company. In contrast, Tesco followed a simple strategy. From the beginning, it saw Tesco.com as one more channel through which to reach its existing customers as well as some new ones. It tried to provide a multi-channel experience to the customers that it had already attracted." That strategy allowed Tesco.com's online grocery business to thrive.

It might be worthwhile examining the strategies of Webvan and Tesco in greater detail to show how those differences led to different results.

Webvan: Speed Kills

From the beginning, an ambitious winner-take-all attitude marked Webvan's approach to selling groceries online. In the late spring of 1999, just as Webvan was getting ready to launch its Web site, Borders told The Wall Street Journal that Webvan planned to sell $300 million worth of groceries a year from a single warehouse in Oakland, California. "If it thrives, and even if it does not, Mr. Borders plans to open another enormous grocery warehouse in Atlanta a few months later. Down the road are plans for at least 20 more such facilities throughout the United States in practically every city big enough to support a major-league sports team," The Wall Street Journal wrote.

Borders raised an initial $120 million in venture capital and spent a significant part of it building the state-of-the-art warehouse, "a 330,000-square-foot behemoth adorned with five miles of conveyor belts and $3 million of electrical wiring," according to The Wall Street Journal. Although other online grocers such as Peapod were in trouble, Webvan had high hopes that it would be able to succeed where others had failed because it had invested heavily in high-tech infrastructure. Webvan executives believed that this investment would translate into much higher productivity and that this strategy would enable the company not only to beat out other online grocers but also traditional brick-and-mortar supermarkets.

Unlike shoppers in traditional grocery stores who moved around aisles with carts, Webvan workers would stand at automated carousels equipped with nearly 9,000 products. Thanks to its unique technology, Webvan executives predicted, its workers would be 10 times as productive as traditional shoppers-and this scenario would translate into faster profitability. Borders claimed that the Oakland warehouse would be profitable in six to 12 months while other warehouses might break even in as little as 60 days. "I do not see any reason why an Internet company should take five to 10 years to be profitable," Borders argued.

If higher worker productivity was one key element of Webvan's strategy, another was its assumption that time-starved shoppers would respond overwhelmingly to the convenience of being able to order products on Webvan's Web site 24 hours a day and have them home-delivered within a 30-minute window of their choosing. This goal, the company said, would be accomplished by having a fleet of customized delivery vans to handle distribution. So efficient would this process be, Webvan believed, that customers would be able to shop at Webvan at the same or lower prices as they did at traditional grocery stores. "Prices are up to 5 percent less on average than typical supermarkets, and delivery is free for orders of $50 or more," the company said.

Based on these twin assumptions of super-efficient worker productivity and customer-friendly delivery, Webvan embarked upon aggressive growth after its Web site was launched. By July 1999, the company announced that it had hired the Bechtel Group, an engineering firm in San Francisco, to build 26 highly automated warehouses for $1 billion. Each warehouse was to be modeled on the facility in Oakland. Webvan clearly wanted to grow-and fast. (A note of caution is in order: The desire for massive investments in scale per se is not necessarily a recipe for failure. In fact, in the drug wholesaling business, companies made massive investments to support efficient warehousing operations and customer-friendly distribution, and the only survivors in that industry are companies that ramped up their scale rapidly. Webvan, however, chose this approach in the grocery business, where profit margins are minuscule, and the willingness of customers to adopt online grocery shopping in large enough volumes to support the investments in scale was uncertain.)

Two factors contributed to Webvan's aggressive drive for growth. The first was the threat of emerging competition. Peapod, with sales of some $40 million, had a head start over Webvan in the online grocery market, but it was bleeding cash. A greater challenge seemed to stem from HomeGrocer, a Seattle-based online grocery firm. At around the same time that Webvan launched its operations, Amazon.com announced that it had bought a stake in HomeGrocer. The Amazon-HomeGrocer combination could have affected Webvan's prospects significantly. For Webvan, the way to head off that threat seemed to lie in making a run for dominance.

Webvan executives believed that the threat of competition made the company's drive for market dominance necessary. The second factor-easy availability of capital-made that drive possible.

In 1999, capital was flowing in tidal waves towards technology and Internet companies, especially those backed by leading Silicon Valley venture capitalists such as Benchmark Capital and Sequoia Capital-both of which were solidly in Webvan's corner. That year, venture-capital investments reached an all-time high of $48.3 billion, an increase of more than 150 percent over 1998's total, according to the NVCA and Venture Economics. More than 90 percent of that capital went to high-tech and Web-based companies. Before a company could qualify to grab a piece of that action, however, it had to convince potential investors that it was willing to live by the Internet economy's unwritten rule of growing at breakneck speed.

Even if someone at Webvan had wanted to first try out its online grocery model in one city, improve upon it, and then expand to other cities, the financial climate of those times would have had little patience with that approach. Many people involved with Internet startups believed that they had a narrow window of opportunity and that they had to act fast before it slammed shut. In an interview with The New York Times, David Beirne, a venture capitalist with Benchmark Partners and an early backer of Webvan, described the situation as a catch-22. "We had a unique opportunity to raise a lot of capital and build a business faster than Sam Walton rolled out Wal-Mart," he said. "But in order to raise the money, we had to promise investors rapid growth."

If rapid growth was what Webvan's investors wanted, that is what they got. The company began rolling out massive warehouses at a cost of more than $30 million per warehouse in areas such as Suwanee, Georgia (serving the Atlanta market) and Carol Stream, Illinois (serving the Chicago area). Smaller distribution centers were set up in areas such as Los Angeles and San Diego, among others. On November 5, 1999, with hardly a few months of online product sales under its belt, Webvan went public in a stock offering co-underwritten by some of Wall Street's most blue-blooded investment banks: Goldman Sachs, Merrill Lynch, BancBoston Robertson Stephens, Bear Stearns & Co., and Salomon Smith Barney. Webvan sold 25 million shares priced at $15 each, but so heady was the buzz surrounding its IPO that the stock soared to a short-lived high of $34 on its first day of trading, giving Webvan a market capitalization of $7.6 billion.

Over the next year and a half, Borders and other Webvan executives strove mightily to remain true to their vision for the company. Among its most ambitious moves was to recruit George Shaheen, the CEO of Andersen Consulting, as Webvan's CEO, with Borders taking the chairman's post. As the months passed, however, it became clear that Webvan was unable to get away from one simple fact: Webvan was spending more money on acquiring customers and products and that it could make by selling them. Some analysts estimate that Webvan lost more than $130 per order, including depreciation, marketing, and other overhead.

In an attempt to gain economies of scale, which might have led to profitability, Webvan in September 2000 merged with its erstwhile rival HomeGrocer, but that, too, could not postpone the decline. In documents filed with the Securities and Exchange Commission (SEC), Webvan reported that in the fiscal year ending December 31, 2000, the company had lost $453 million on sales of $178 million. By April 2001, Shaheen had left Webvan, and the company was scaling back dramatically. This change included dropping plans for the construction of new warehouses as well as slashing marketing expenses. Lowering marketing costs immediately hurt sales. Even more significantly, though, these actions added to the perception that Webvan was in trouble and that it was unable to stanch its financial hemorrhage.

Goldman Sachs, meanwhile, was making intense efforts to find a buyer or new investors for Webvan. When these efforts failed, Webvan had little choice but to announce on July 9, 2001 that it was closing its operations and would declare bankruptcy.

How Flawed Assumptions Misled Webvan

In retrospect, what did Webvan do wrong? The company's assumptions led directly to its blunders. To recount, Webvan assumed the following:

1. That a very large number of people would prefer to buy groceries online and have them delivered at home, rather than buying them at a physical supermarket. This belief led them to reckon that Webvan's sales would explode and that people would place a high value on not having to go to a physical supermarket.

2. That so much inefficiency existed in the grocery industry's infrastructure that Webvan would garner a bigger margin if it rebuilt the whole infrastructure by doing all its own warehousing and logistics and moving further up the value chain by cutting out the wholesalers

3. That if a Web site gave shoppers more choice and a wider selection of products, that people would be willing to pay at least the same price (if not a premium) for the privilege of shopping online as they did in a physical store

As time was to show, each of these assumptions was wrong. Webvan's biggest mistake was assuming that people did not want to shop in a supermarket.

Continues...


Excerpted from Knowledge@Wharton by Mukul Pandya Harbir Singh Robert E. Mittelstaedt Jr. Eric Clemons Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

Introduction: You Cannot Violate the Laws of Economics.

PART I: FRAMEWORK.

1. A Hare, a Tortoise, and the Business of Buying Groceries Online.

2. Creating Internet Strategies for Competitive Advantage.

3. Customer Behavior and Internet Strategies.

4. Managing Risks in Internet Strategy.

PART II: EXPERIENCE.

5. How an Internet-Based Strategy Affects Financial Services.

6. Internet Strategy and the New Media.

7. Post Mortem: Lessons from the Online Stamp Market.

8. Online Exchanges: Do They Have a Future?

Conclusion: Sustaining Competitive Advantage Amid Uncertainty.

Appendix: Selected Readings.

Endnotes.

Index.

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