Case: Webvan

Webvan was founded in 1996, the heyday of the dot-com boom,by Louis Borders, . Webvan’s original investors included a lot of big references at the time who at venture money to hit the web, f.i. Goldman Sachs and Yahoo!, who encouraged it to rapidly build its own infrastructure. (With the first mover advantage strategy, like Amazon.Com, in the back of their head, it would be a success for sure.) The idea was to deliver groceries at home in a number of cities, the first in web retail for home groceries.  Some journalists and analysts blamed this serious error of judgment on the fact that none of Webvan’s senior executives (or major investors) had any management experience in the supermarket industry, including its CEO George Shaheen who had resigned as head of Andersen Consulting , a management consulting firm, (now Accenture) to join the venture.

Webvan tried to embrace a total customer satisfaction model involving a 30 minute window delivery without considering that many working customers would like their groceries delivered at home and at night. HomeGrocer, a similar company, started operating the year before Webvan. It went public in March 2000 and, like Webvan, was losing large amounts of money. On 26 June 2000, Webvan bought out HomeGrocer.

If we look a the porter analyses of the Webvan Business (anno 1999 – early 2000!):

  • Threat of substitutions – Consumers have a lot of alternate choices to complete their grocery and non-prescription drug shopping needs.  This indicates that Webvan does not have free reign over the prices and delivery options that they provide.  If the company does not maintain its competitive edge, the consumers have other options for shopping.
  • Threat of rivalry – Since the online grocers segment is small there is not a great deal of rivalry.  None of the competition is strongly positioned to be a great threat to Webvan’s strategy, operation, or pricing and promotional methods, and they have bought the first online grocery store!
  • Threat of new entrants – Since the Internet usage is increasing and the population is continuing to grow, there is great potential for online shopping services.  The barriers to entry and exit are small if a company wants to create an online presence.  This indicates that there is a large threat of possible new entrants.  Brick-and mortar organizations have very low risk in creating an e-commerce location for their goods.
  • Buyers’ bargaining power – The bargaining power of the buyers do exist.  Buyers demand comparable prices to the brick-and-mortar grocers as well as satisfactory customer and delivery services.  If the prices and customer service requirements are not met, buyers will not visit the site.
  • Sellers’ bargaining power – The sellers do not have a great deal of bargaining power.  Manufacturers will not gain an advantage by trying to force the company to change their practices.  There are many food products that could replace the orders for the manufacturers.  It is more advantageous for them to hold onto their “shelf space” with Webvan so that their product is available.

With this Porter analyses done, Webvan had a favorable position to go online and start selling. They knew that their was a market for home selling (look at catalogues being send around during those days…)

BUT….While Webvan was popular, the money spent on infrastructure far exceeded sales growth, and the company eventually ran out of money. They had major investments running, had over 2000 employees to meet up to the standards they had set for themselves. The business model they had set up was just not sustainable.

Sources:

justfood.Com – http://www.just-food.com/news/webvan-pulls-the-plug-on-internet-operations_id77374.aspx
Wikipedia – http://en.wikipedia.org/wiki/Webvan
venturenavigator.Com – http://www.venturenavigator.co.uk/content/153
youtube – http://www.youtube.com/watch?v=18k4tdr3qO4&feature=related

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