Note: This article is part of a series taken from Denise Harrison’s article March to a Different Drummer originally published in Compass Points in August 2002. Although this article was written in 2002, this discussion is timeless.
“Get big fast or go home!” was the mantra of venture capitalists. Webvan spent $830 million to expand into 26 cities at once only to file for bankruptcy after its overly ambitious strategy failed. E*Toys had a market capitalization greater than that of ToysRUs its first day of trading. Greed, irrational exuberance, call it what you may, but common sense was not part of the tune. Good business strategy is based on market knowledge and strategic focus – focus on what you do best and in areas where your competitors are weak.
In recent years many companies saw the Internet expansion as a key trend to enhance growth. Pundits argued that the new economy was immune to business cycles. Webvan embodied growth mantra – to what end?
“Webvan Group, Inc. said it shut down its online grocery-delivery service and will file for Chapter 11, marking one of the most spectacular and expensive failures of the Internet era. Webvan poured $830 million into high technology warehouse facilities and a 26-city expansion plan that most observers have since said was too ambitious.”
The Wall Street Journal, July 10, 2001
This is only one example of how companies assumed the Internet was the “land of opportunity,” pouring millions of dollars into plans that were ill conceived and based on invalid business models.
During this dot.com boom, Intelligent Information Systems (IIS), Durham, NC, a software-consulting firm, evaluated a variety of potential growth strategies. IIS was clearly differentiated by its high quality standards and its commitment to total customer satisfaction. To many companies, “quality” and “total customer satisfaction”, are just buzzwords, but to the team at IIS these phrases are driving principles. While many technology firms in the Research Triangle Park were taking advantage of the lucrative public offerings, the senior management team at IIS knew that a public offering would cause the company to lose its focus on customer satisfaction and zero defects. After a public offering, associates would be imagining what they could do with their newfound wealth, watching the stock price daily, hourly, assessing minute-to-minute their net worth. This myopic self-interest would cause the company to lose its competitive advantage.
They had a difficult decision to make during a critical time frame, but 20/20 hindsight shows that the II management team chose the optimal direction and course for their firm by focusing on the key areas that set the company apart from the competition.
eBay is another company that turned down easy cash as it focused on its long-term success. It focused on its customers, the sellers of products on eBay’s online auction site. As traffic grew on the site, advertisers asked eBay to participate in lucrative advertising contracts. Short term, these contracts would have significantly enhanced eBay’s revenue and profitability. However, when the sellers on eBay’s site complained about competition from the advertisers, eBay reduced the advertising on the site. eBay focused on the customers who had made it successful to date. If these customers had not remained loyal and had jumped ship to try other auction sites, competitors would have been more successful at competing against eBay.
As eBay expanded, large companies looked to it as a distribution channel, sometimes to unload excess inventory, sometimes simply to have another sales channel. To protect its original customer group, eBay does not offer volume deals or special deals to these large companies. Everyone must play by the same rules. While some of eBay’s original participants feel threatened by the new, larger companies selling through the site, many think that the added participation will drive more traffic to the site, enlarging the overall customer base for all participants’ products.
We will continue this series and discuss Historical Examples in a future post.
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Denise Harrison is a senior consultant for the Center for Simplified Strategic Planning, Inc. She can be reached at firstname.lastname@example.org.
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