webvan_354107Yesterday, I argued that start-ups have a choice as to what strategy or business model they select to pair with their idea. In so doing, I looked at their choice to pursue a disruptive strategy which I defined as (a) competing against established firms in the market (as oppose to cooperating or licensing to them) and (b) focussing on execution in doing this. The discussion was fairly abstract so in today’s post I want to consider some examples of where disruptive strategy worked and did not work.

It is easiest to start with a case where it didn’t work: Webvan. Webvan was a poster child of the dotcom boom (which already dooms it in our hindsight). It was founded by Louis Borders (or Borders Books fame) and had as its core idea to allow consumers to utilise the Internet to do their grocery shopping. What Webvan chose to do was (a) compete directly with existing supermarket chains and (b) to beat them by bringing groceries right to consumers at a lower price than those chains. The theory was that existing chains were antiquated, expensive and inconvenient for consumers. Ultimately, they thought, somehow groceries have to get from suppliers or distribution centres to consumers so why have a stop in the middle (actually one of the main chains is Stop ‘N Shop so it isn’t like supermarkets don’t understand this). Moreover, this was Borders saying this and surely he was someone who knew the ins and outs of bricks and mortar retailing. This might all sound fanciful now but Webvan received hundreds of millions of dollars in funding from famous VCs and also a prominent IPO. Consumers also loved the service.

The party lasted for two years before bankruptcy. They certainly failed fast! Was the problem a strategic error? One clue is to consider what happened to other companies that explored the very same entrepreneurial opportunity at the very same time, the 1990s. Peapod also saw an opportunity for online grocery orders but its target was something simpler. They did not seek to supplant existing supermarket chains but work essentially within their value chains. Peapod hired shoppers to go down to local supermarkets and purchase groceries ordered by customers online. There was no saving in terms of cutting out steps in the chain from suppliers to customers and so Peapod had to charge a premium for their service. This necessarily limited their scale but also mean they had to target a specific sort of time-poor but well-off customer who might pay for the service. Peapod received much less funding than Webvan but it still exists today being bought in 2000-2001 by Royal Ahold — the owners of Stop ‘N Shop. So Peapod hardly pursued a disruptive strategy. To be sure, they focussed on execution but they did not compete with established firms. This experience is enough to suggest a strategic error at the heart of Webvan — it just wasn’t possible to scale quickly enough to disrupt the supermarket industry at that time.

So what of success? Let’s keep with the retailing theme and consider Amazon.com. We know the story of Amazon.com but let me re-frame it through our strategic lens. Bezos had as his goal using the Internet to service retailing in general. In other words, he saw broadly the same issues as Louis Borders but rather than provide a delivery service for a wide number of product categories, instead, he chose an Internet delivery service from a wide number of products in just one category — books. That simplified the logistical problem but at the same time also provided consumers with much more than convenience or price but instead variety. In other words, Amazon focussed on execution by targeting consumers who would like to locate a wider variety of books than could be stored in a traditional retail bookstore. Bezos sought to disrupt traditional bookstores (for starters) and his vision of the future was that Internet-based retailing would end up like traditional retailing with a few players who could operate cost-effectively at scale. Amazon may not drive out all-comers but, in the future, it would be a long-term player. And in that future its product categories would also be wider. So Amazon was competing and executing just as Webvan did.

The difference is that Amazon operated in a way that allowed it conduct an experiment as to whether a disruptive strategy would work. First, by offering millions of books for sale he could see if there really was a market for product variety as opposed to a concentrated number of popular books. Second, he could see whether traditional booksellers could respond quickly to draw consumers away. Of course, those booksellers suffered from the classic innovator’s dilemma and either did not want to cannibalise their bricks and mortar businesses or dismissed the whole idea of Internet book-selling as it destroyed consumer’s “love of browsing.” (Yes, they did say that last part!) As it turned out, he scored big on both counts and then was in a position to refine the model, deliver low prices and then run the experiment again in retail category after retail category with some working better (i.e., music) than others (i.e., clothes).

In all this, it is hard to definitely say whether Webvan did not consider its strategy carefully or just rolled the dice and loss. Remember the financial market backed them and not Peapod and sometimes it is just hard to know which is the right business model. After all, in choosing a business model you are trying to learn something about the market you are participating in. If we could just theorise or use introspection or history to guide that, it wouldn’t be an experiment. If there is a simple message here it is, at least define what you hope to learn by choosing a disruptive strategy. If you can’t do that, then perhaps you have more strategic work to do.

5 Responses to When does a disruptive strategy work?

  1. Amazon also leveraged existing delivery infrastructure.

  2. […] 3:32 on June 26, 2014 by Mark Thoma On the Social Responsibility of Wonks – Paul Krugman When does a disruptive strategy work? – Digitopoly Limits to arbitrage are real – […]

  3. CdrJameson says:

    All the large UK supermarkets responded to the Webvan idea by developing their own internalised, delivery service along the Peapod lines (staff basically wander around the shop filling baskets) that only costs a small delivery charge more than buying things yourself. Often this is cheaper than the fuel you’d consume to drive yourself to the shop and back. I don’t think they see this as ‘disrupting’ their existing business, more leveraging their existing distribution infrastructure.

    The one company that set up independently (Ocado) partnered with a large supermarket (Waitrose) to get started and now parters with another (Morrisons). They’ve been trying to strike out independently for years on their own for years but don’t seem to have managed it.

    Webvan’s often held up as a terrible idea, but seems to have just underestimated the scale of setting up the whole chain themselves. There’s nothing inherently wrong with delivering groceries ordered over the Internet.

  4. Webvan and Peapod offer an interesting example. As a New Yorker, I have been witnessing the growth of FreshDirect, which competes directly with brick and mortar retailers to deliver groceries. It competes more on quality and charges premium prices, more in the Whole Foods part of the sector. It appears to be expanding its footprint in the northeast, probably gearing up for competition with Amazon Fresh. Speaking just as a consumer, FreshDirect seems to have ridden the wave of interest in organic/natural foods, as well as offering recipe-driven shopping and pre-organized meals. Perhaps disruption was possible, or at least is now, but taking a different approach than simply competing on price.

  5. […] P.D.: Al hilo de lo que es disrupción y qué hacer contra ella o sobre ella, Digitopoly ha publicado una serie de artículos francamente recomensables: cuándo no subirse al carro de la disrupción y cuando funciona una estrategia de disrupción. […]

Leave a Reply

%d bloggers like this: