The Challenge of Internet Disintermediation
Cut out the middleman and sell directly to the end user: sounds like a good idea. And in some situations, it is. Successful disintermediation means more profits and more industry recognition. But why do some companies fall flat in their attempts to sell to end-users online while others succeed? Many established businesses, starry-eyed at the possibilities of the Internet, failed to heed the hard-learned lessons of other businesses which struggled to cut their re-sellers from their supply chain.
Before disintermediating, a company must consider three factors:
the strength of their brand
the customer value they and their re-sellers add
their ability to exploit direct channels without disrupting established ones
When it comes to e-commerce, Nike and Levi-Strauss are excellent examples of companies with similar goals and staggeringly different results. During the Internet boom, e-commerce was seen as the great enabler of disintermediation, and both companies hoped to create a direct-to-customer e-commerce channel. But while Nike’s Internet channel continues to grow, the good people at Levi-Strauss long ago gave up on their Internet attempts to disintermediate their traditional channels.
Brand Strength
Brand strength is the first factor a company must examine. It is important to note that brand strength, not brand recognition, is the key. Consumers must not only know a company, but also must trust that company and be willing to seek it out before the company can depend upon the Internet for direct sales. Both Nike and Levi-Strauss pass muster in this department. Customers are confident doing business with them, and both brands have dedicated followings that are willing to seek out and frequent their web sites. They stand in contrast to companies and industries where brand names are less familiar, or where they engender less loyalty.
Consider publishing houses: what stops them from selling directly to readers? At first glance, bookstores appear ripe for disintermediation: the main value they provide the customer is information on titles, and that could be easily replicated online with the Amazon model. So why aren’t national publishers like Random House building e-commerce sites? The answer in part is that the publishers realize they lack brand strength. Most consumers know books by title or by author, or by buying environment and experience, but certainly not by publisher. A publishing house’s brand would do little to distinguish the company to customers, putting it at a major disadvantage to the established booksellers like Barnes & Noble, Borders, and Amazon.
Adding Customer Value
The differences between Nike and Levi-Strauss become more clear when we look at the value they add for customers. Nike entices customers by offering new product value on their web site. One of e-commerce’s best examples of innovation is Nike’s customized product line. Customers can go to the web site, pick a basic shoe, create their own color patterns, even add their initials or team name.
Levi-Strauss, on the other hand, never attempted to add significant product value in their e-commerce efforts. In their defense, there are perhaps fewer opportunities to create new products through the Internet in the blue jeans market, but this lack of potential should have made Levi-Strauss wary of direct-to-customer e-commerce from the start. Without any innovative value, the Internet can only offer convenience, and in the case of blue jeans, e-commerce simply isn’t all that attractive.
The value that re-sellers add should also be considered before a company tries to cut them out. Consider the differences between sports shops – Nike’s main sales channel – and department stores, where most of Levi-Strauss’s products are sold. Nike has a competitive product offering in almost every athletic category. Go to a sports store, and whether you’re looking for shoes, sweatbands, or soccer balls, there will be a Nike product on the shelf. Because they offer such a wide range of products, Nike can approximate sports stores’ selections on their web site; the value a sports store adds to Nike products is minimal.
Contrast that with Levi-Strauss’s position in department stores. Even if we limit our view to the apparel section, Levi-Strauss products make up only a fraction of the total offering. Additionally, while the company is competitive in the blue jeans market, Levi-Strauss is not thought of as a product leader in other clothing segments. In this case, the department stores add significant value by offering customers additional products that Levi-Strauss cannot. Without innovative value, or some broader basis for leadership, it is very difficult for a company to create its own online sales channel.
Keeping Supply Chain Partners Happy
The third factor to consider prior to pursuing disintermediation, is a company’s ability to develop a direct-to-customer channel without angering their supply chain partners. Even very successful “brick and click” companies like Barnes & Noble derive only a small fraction of their revenues from online sales; the bottom line is that supply chain partners will always be needed, and are alienated at a company’s peril. Levi-Strauss misstepped badly in this area, while Nike’s success in part rests on their having gone out of their way to maintain strong supply chain relationships.
Late in 1998, Levi-Strauss launched an e-commerce site to disintermediate their partners. In an attempt to drive as much revenue as possible to their own site, the company took an adversarial approach to their re-sellers’ e-commerce efforts, banning them from selling Levi-Strauss products online. In doing so, Levi-Strauss made the mistake of closing certain established channels for the benefit of another, yet unproven one. After being roundly criticized by analysts for creating an artificial advantage for their web site and for alienating their long-time partners, Levi-Strauss reversed its strategy in 1999. Today, Levi-Strauss products are sold online by Macy’s and JC Penney’s, while levi.com is used only for promotional purposes.
Although Nike, with 60% market share, seems well positioned to bully their partners, they have always recognized the importance of their offline partnerships. Initially, Nike only sold a handful of products online, making it easier for their partners to cope with the transition. Even now, with their e-commerce channel at full strength, Nike makes sure to treat their partners well. Not only have they resisted building artificial advantages for their e-commerce channel, they have actually given their partners the ability to better compete with the site. For instance, catalog company and long-time Nike distributor Eastbay can sell customized Nike sneakers through its own web site. Nike also developed relationships with Foot Locker, allowing the national shoe chain to sell certain shoes exclusively. By giving their re-sellers like Eastbay a new value to offer customers, or by creating advantages for stores like Foot Locker, Nike has done an outstanding job of keeping their supply chain partners happy.
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It is clear thatdespite temptations to the contrary, the Internet is not a panacea for companies seeking to disintermediate their supply chain partners and sell directly to their customers. Although the Internet creates some very different dynamics, Nike’s success and Levi-Strauss’s struggles show that the rules-of-thumb governing successful disintermediation in the bricks-and-mortar world, apply equally to Internet strategies and are ignored at great risk.