Webvan

·        Summary: Webvan’s business model of online grocery retailing differentiated it from the competition in several key areas.  Efficiency of operations allowed a fully utilized Webvan distribution center to serve as many customers and draw 20% more revenue than 20 offline grocery stores while using half the labor, with twice the selection. Investors were impressed with this type of performance, however the company was projected to sustain losses well into the foreseeable future. Demand was not as high as was needed to achieve maximum revenue. Therefore, distribution centers were not operated at capacity, and thus the economies of efficient operations were not realized.

§         Where is Webvan in the Internet Technology Life Cycle?  Are the company's actions consistent with its position in the Life Cycle?

-        Webvan is in the growth or transitional stage. 

-        Activities should be building capabilities, building network, investing in infrastructure, winning customers, building the brand name and teaming-up and running. 

-        Webvan’s actions were consistent with its position in the Technology Life Cycle.

§         Will their business model work?

To analyze whether or not Webvan’s business model will be successful, the case reader should examine the problem from three different points of view – viability, sustainability and profitability.  A business model analysis, VIDE analysis and Complementary Assets analysis can be performed to answer this question.

§         Is Webvan's revenue model too limited?  What additional revenue sources could be explored to make up for lower-than-estimated average grocery orders?

-        If Webvan was meeting its projected numbers, limited revenue streams wouldn’t be so much of a problem.

-        Even though Webvan did not wish to sell customer names or advertising, additional revenue sources could come from marketing services, such as product testing, surveying customers or selling aggregate purchasing data (and therefore not infringing upon the privacy rights of individuals).  Since its distribution facilities were not heavily utilized, insourcing opportunities were a potential source of additional revenue and could also facilitate strategic partnerships and alliances.

The last part of the business model analysis goes to answer whether this model is sustainable.  The VIDE analysis presented below delves further into that question.

VIDE Analysis

Criteria	Question	Answer
Customer Value	Does the capability make an unusually high contribution to the value that the customers perceive?	Yes for some people. ·            Spend less time shopping ·            Save time running errands (if expand to photo processing, dry cleaning, etc.) ·            Home delivery ·            Lower prices (potentially) ·            Access to exotic foods (can stock slower moving items)
Imitability	How quickly and to what extent can other firms duplicate or substitute the capability?	Infrastructure can be duplicated, but not easily. ·            Many others offering same concept ·            Very high learning curve in logistics ·            High capital cost to build automated distribution center ·            Customer trust and/or investment
Competitor Differentiation	Is the type or level of capability unique to the firm?	No. Groceries are groceries and online ordering and delivery mechanisms can be replicated. BUT, there is differentiation on number of SKUs and niche markets (e.g. ethnic foods)
Extendability	Can it be used in more than one product area?	Yes. ·            Dry cleaning ·            Photo processing ·            Other items (electronics, accessories, etc.)

 

§         What kinds of capital does Webvan have?  How is it converted into customer value?

-        Human capital provides the customer with a well-trained staff of customer service professionals and delivery people. 

-        Organizational capital translates into efficient operations, which provides the customer with speed, selection and (relatively) low cost.  The management team behind webvan also brought online retailing expertise and the ability to raise significant funding which allowed the company to scale up to serve the targeted communities quickly.

§         What are the characteristics of the online grocery industry?  In what ways is Webvan differentiated?  How will the competitive environment of the online grocery industry change in the next five years?  What major changes have occurred since the writing of this case?

-        The industry is “distribution-centric” and relied upon stealing share and large scale roll-out of services.  A large customer base and a high level of repeat usage were also needed for success.

-        In the next five years, the competitive environment may see:

*        consolidation

*        decreased margins due to competition

*        entry of off-line competitors into online space

*        increased innovation as an attempt to widen or stabilize margins once they start eroding

*        increasing commoditization (decreasing differentiation)

§         How can Webvan influence the competitive environment to ensure their success?

While Webvan must concentrate on its internal functions and its expansion, it cannot ignore the competitive environment.  It is critical that they play a pro-active role in managing their position because the incumbents and the competitors are larger and more established than Webvan.

 

Relationships with suppliers: 

• Form alliances at a national and local level

·            Large players like Proctor and Gamble to lower prices

·            Smaller niche players like the local fish market to provide exclusive items

• Provide very targeted advertising to lower their advertising costs and return customer information to help them with understanding the customer

 

Relationship with customers:

• Expand product selection to fulfill more customer needs (like Amazon.com)
• Offer other services to add to the customer value and convenience
• Establish switching costs

·            Offer lowest prices

·            E-coupons

·            Loyalty programs

·            Reduce the purchasing time and effort needed so others cannot match

 

Relationship with competitors:

• Build customer base quickly through rapid expansion so that the possibility of breaking even becomes difficult for a new entrant
• Reduce internal costs to win in the event of price war (like Wal-mart does to Kmart)

 

Relationship to other industries:

• Ally with delivery companies (FedEx, UPS, etc.)

·            Learn from their innovations

·            Gain coverage in other areas to deliver non-perishables – increased scale further drives down costs

Conclusion: Webvan must be pro-active to ensure its future success.  These steps not only concern its internal operations, but also the external environment in which it operates. 

Major change since the writing of the case: Peapod losing venture capital, personnel, stock price, etc.