The Family Business InterviewAs we approach a new century, the ground beneath businesses everywhere is shaking. A primary shaker, according to international e-business expert Michael de Kare-Silver, is the “electronic shopping revolution” on the Internet. The revolution, he says, is already having a major impact on retail and manufacturing companies. In his new book, “e-shock” (Amacom Books, New York, 1999), de Kare-Silver predicts that retail businesses with their slim profit margins will be the hardest hit, as more and more people become comfortable shopping on the Net. A reduction of just 15 percent in store traffic, he argues, will doom countless retailers.
De Kare-Silver expects the revolution to accelerate and reach a critical mass as soon as 2005. Since so many small and mid-sized family businesses will be affected, Howard Muson, editor of Family Business, went to London to explore the implications of the e-commerce revolution with de Kare-Silver, who heads the Internet strategy group of Computer Sciences Corp.
For many businesses, de Kare-Silver emphasized, the Internet represents not just a threat but an opportunity. But how to know whether your products or services will be helped or hurt? de Kare-Silver has devised an electronic-shopping (ES) test to help you figure your strategy in dealing with the revolution. Over tea and sandwiches at the Savoy Hotel, he talked about his test, how companies will have to change in response to the e-commerce challenge, and where to go for help in becoming Internet savvy.
— The Editors
Family Business: Family companies aren’t generally into revolutions. Many are wedded to tradition and customary ways of doing things. Often, aging founders hang around too long and lose the will to innovate. How do you get people to think about a totally new way of doing business?
Michael de Kare-Silver: Give them the wakeup call! Whether a person is 20 or 80 years old, I can’t believe that he or she hasn’t heard about the Internet. How can they not be aware of what’s going on? How many successful business people, in their quietest moments over a glass of whisky or on a cold night in front of the fire, haven’t wondered: “What is all this about?”
If they recognize there’s something out there, they take the next step, which is to find out more about it. Then, if they have the motivation, they will realize that the Net presents an opportunity to fuel new sales growth and renew the business.
FB: In the U.S., and I assume in the U.K., a large majority of retail companies are family owned and operated. Have you observed anything about the ability of this type of firm to respond to the e-commerce challenge?
de Kare-Silver: If the question is whether a smaller business can respond to the challenge, my answer is: no question it can. I have no reason to believe that a company that has been successful up till now, that has carved out competitive advantages vis-‡-vis smaller and larger competitors, cannot continue to do so.
It is easier to do now, in fact, because the technology costs of doing business on the Internet aren’t as intimidating as many people thought. Costs have come down substantially since I wrote the book. Number one, there are now lots of smaller, low-cost, niche technology providers. Number two, they are often young startups themselves and quite entrepreneurial. Some are willing to either delay fees, or put fees on a success basis, or take equity in lieu of fees.
FB: Yet you mention that the Forrester Research group in Boston has concluded that the cost of maintaining an effective business Web site is about $3 million a year. They must have been talking only about big companies with elaborate sites and huge advertising budgets.
de Kare-Silver: Yes, that’s big money. But as I said, the number of new smaller providers are lowering costs. Experts are now saying that you can set up a Web site, build up a database, and sell your products in a secure fashion in a reasonably low-cost way. The debate has moved on a little bit. Now the question is whether you will be able to sign-post your customers that you are out there. That is where you get into the big bucks. Because cyberspace is a vast, confusing place, you have to invest in marketing to let people know you are there.
FB: You predict that the Internet revolution will reach a critical mass in the year 2005, and if companies don’t respond it could force many-particularly retail-firms out of business. That’s only five years away. What makes you think it’ll happen so soon?
de Kare-Silver: Three factors are at work: what’s happening on the supply side, what’s happening on the demand side, and the developing infrastructure.
On the supply side, corporations all over the world-especially in the U.S.-are investing billions to create the e-business environment of the future. Everyone from Microsoft to the big computer hardware companies, to the telephone companies and the content media like Time Warner are spending a fortune anticipating this new environment.
On the demand side, consumers want convenience. Both end-to-end consumers and intermediate business customers want it to be as easy as possible to buy what they need, as fast as possible, and at low cost. There is enormous demand for quick, low-cost responses.
The third thing is the telecommunications infrastructure, which is being built at a rapid pace to send rich video and data through telephone and cable TV wires. About the middle of the next decade, I expect that the supply, the demand, and the infrastructure will reach a critical mass.
FB: Why is infrastructure so important? Just because we’ll be able send and receive much more data fast doesn’t mean more products will be sold, does it?
de Kare-Silver: Once the infrastructure is built, it will mean shopping over it will be a pleasurable experience. Things will work reliably, and word-of-mouth will spread the message: “Hey, the technology is cheap, it’s user-friendly, and all you have to do is plug in and play. Why not do it?”
FB: You say retailers will be the hardest hit. Do you see casualties already?
de Kare-Silver: We’re beginning to see a few. For example, in Britain one of the first casualties was our Automobile Association, which announced last year it was closing all 130 of its High Street [Main Street] shops. The company’s executive team said that “people are preferring simply to buy their travel insurance by phone, fax, or the Internet…and our shops are becoming economically unviable.”
FB: What other evidence do you see of the threat to retail businesses?
de Kare-Silver: Researchers are finding that consumer behavior is starting to change. For example, in a study done by Greenfield, a research firm in the U.S., 39 percent of the people interviewed said that they plan to make fewer trips to the store because they’re beginning to buy some stuff over the Internet or in other ways.
There was some dramatic evidence of the trend after the holidays last year when headlines were proclaiming it had been an “e-Christmas.” They were commenting on the rapid upsurge of shopping over the Internet. One of the biggest battles was between Toys “R” Us and the Internet upstart eToys. There was no doubt that eToys had taken some market share away from Toys “R” Us. You’d expect the same thing to happen again this year, to a greater degree.
FB: How would you advise retailers to respond to the threat?
de Kare-Silver: I’ve laid out some strategies in the book. The first step is to take the electronic-shopping (ES) test to determine whether your products and services lend themselves to being sold electronically (see below). The test is simple, and if you find that your products don’t easily lend themselves to this channel, you might conclude: “Well, actually, I don’t need to worry about this. What I simply need to do is continue to reinforce my current distribution channels.”
On the other hand, if you find that your products and services do lend themselves easily to being sold electronically, that should be a wakeup call that says: “Hey, we’re going to have to do something here.”
FB: What sorts of products or services do not lend themselves to direct sales on the Internet and are unlikely to be successful?
de Kare-Silver: The ES Test has three stages to it. The first stage looks at the product’s characteristics. The second stage looks at how familiar the product is to the customer. The third stage looks at what types of customers you are targeting.
If your product is physically involving-if its sale depends on how consumers respond to its feel, taste, or smell-it is less likely to succeed electronically. Products like fresh food may not sell well over the Internet, for example, although a number of companies, such as Webvan and Peapod.com, have set up systems for doing so. But if your product depends on sight, sound, or some intellectual assessment-like buying a computer or a book-the customer doesn’t need to touch it or smell it and can buy it just as easily over the Internet.
FB: How does the customer’s familiarity with the product and the nature of the target market affect the decision to go on the Internet?
de Kare-Silver: Take a Chanel perfume. You may say it’s a smell product and there’s no way people would want to buy it electronically. Well, a woman who has bought Chanel No. 5 before, or a man who regularly buys it for his wife’s birthday, doesn’t have to go to a store to smell it. They can be completely confident buying that product on the Net.
But take the Chanel example one step further. Is that husband the sort of guy who is quite comfortable buying electronically? Well, if he lives on 79th Street on Manhattan’s East Side, maybe he is. But if he lives in a small, out-of-the-way town he may not yet be comfortable buying on the Net; he may not even have a computer at home. So if your customer doesn’t want to buy the stuff on the Internet, what’s the point of setting up a Web site for direct sales? You may conclude, “My customer is the type who wants to come in and have a chat with me and my wife, catch up with what’s going on in town, and have his or her purchase personally wrapped.”
FB: You divide shoppers into six types according to how likely they are to buy electronically (see below). Explain the range of types.
de Kare-Silver: At one extreme you have what I call “frenzied copers.” These are time-pressed individuals who are busy with careers, raising kids, and the like. They prize anything that saves them time and therefore would be particularly interested in making use of electronic shopping.
At the other extreme are what I call “habit diehards.” They are the sort of people who in every change situation want reassurance before they will try anything new. They will be “the last to go” when it comes to shopping on the Internet.
Another group consists of people who like to go shopping, people whom I call “social shoppers.” Even though they may be quite busy, time-pressed, and computer literate, they just like the interaction, the fun, the social side of going shopping. This group is less likely to buy on the Internet.
FB: How can retailers go about finding out what group their customers fit into?
de Kare-Silver: Actually, if you are a successful businessperson, I’ll bet you know the answer intuitively. Just go through your customer list and try scoring each name according to the six types. You could devise a little questionnaire and mail it to customers, asking them about how they prefer to shop. Or you can hire a market research company for $10,000 to $15,000 to get some answers for you.
FB: You seem to feel retailers in general have been slow to wake up to the challenge of the Internet. Is that because of some flaw in the retail culture?
de Kare-Silver: No, I wouldn’t say it’s the culture. Some of the most sophisticated retail businesses in the U.S. and the U.K. have been among the first to employ advances in information technology.
But many retailers see the Internet as a potential threat to their business. They view it as an alternative, rather than a complementary, channel of distribution. They ask: “Why would I want to encourage my customers to buy electronically when that may cannibalize my business?”
So they play it cautiously. They follow rather than lead and are not overly proactive. As time goes by, I think they will move on. Many retailers are beginning to appraise the Web as an opportunity rather than a threat.
FB: Yet, as you point out, big retailers like Wal-Mart and Sainsbury, the U.K. supermarket chain, continue opening new stores. Some have 15- or 20-year plans for expanding the number of “bricks-and-mortar” outlets. This suggests a lot of smart executives don’t believe electronic shopping is going to cut into store revenues significantly.
de Kare-Silver: It’s extraordinary. I think the big retail chains are just beginning to wake up to the fact that the traditional model of growth and sales development may need a reappraisal. It’s because they have not yet seen any material decline in sales in their stores.
I expect in the next couple of years the big chains will start to reappraise their store plans. They’ll begin to think of a more multichannel portfolio for doing business, rather than depending on bricks-and-mortar only.
FB: Aside from computer and software sellers such as Dell or Cisco Systems, are any companies that are doing direct sales on the Internet making money? Amazon.com, for example, is touted as the model for the successful Internet business, but it hasn’t yet made a profit.
de Kare-Silver: It’s a myth that an Internet company can’t make money, because a lot of them actually are. A research company in the U.S. called Active Media did a study which concluded that 46 percent of Internet companies are profitable.
There are even quite a number of smaller companies out there that aren’t high-profile, but are doing quite nicely, thank you. In the U.K., there are lots of newspaper stories about quaint little companies that have built a Web site and are making money without any marketing. It may be a little company in a village somewhere making jumpers out of local sheep wool, or an iron monger with some obscure products-they’re doing $10,000, $20,000, $50,000 of business a month without even trying. One business that I’m personally connected with in the U.K. is Stanley Gibbons, which sells stamps, autographs of famous people, and other collectibles. They have set up a Web site and are getting business from it without spending a penny on marketing yet.
FB: With all the Web sites out there, how do you let people know how to get to yours? How do you elbow your way through the crowd in cyberspace?
de Kare-Silver: The first step is to just tell your customers where to find you. You can do that face to face, over the phone, send them a letter or fax or a brochure. Step two is to make a list of target customers you’d like to have and how you can reach them. After you do that, you can try to identify three or four specific Web sites where you can reach those people by posting ads.
So, for example, Procter & Gamble advertises their Pampers disposable diapers on a few sites for women. It generates a considerable number of referrals. You can also think of other types of complementary activities. Amazon.com, for instance, has signed up what it calls “associates,” who advertise its site. If an ad on an associate’s site results in a sale, the associate gets a percentage.
FB: Let’s talk about manufacturers. Do you think there are opportunities for manufacturers on the Internet?
de Kare-Silver: There are as many opportunities for manufacturers as for retailers. But manufacturers have a big decision to make. If a manufacturer goes down the Internet path and tries to sell directly to consumers, is that going to threaten its existing retail distributors? Because if it chooses to do that-and doesn’t manage the distributors carefully-they may be de-listed and lose major outlets for their products.
A manufacturer that has a strong retail distribution in place has to decide: “If we are going to move electronically, how are we going manage that physical distribution so we don’t lose business? Can we build the electronic side in a complementary fashion, not in a way that seems to be threatening?”
FB: Selling their products on the Internet would involve a tremendous transformation for a manufacturer, wouldn’t it? They’d have to develop a distribution network and skills in marketing they probably never had.
de Kare-Silver: Yes, but a qualified yes. There’s a lot you’d have to do to set up a distribution channel, but, again, you can outsource some of it, or all of it, if you want to.
FB: This all underlines the importance of thinking through the various strategic options for your business. You lay out a range of options, between going into Internet sales exclusively and not doing anything and just waiting to see how this channel develops.
de Kare-Silver: Option 1 is to simply say I will set up a site but not sell anything. I am not going to threaten any existing retail channel. I will provide a rich information source about my products for people who are browsing the Net. I can tell them where they can get product samples. I can tell them where my shops are so they can come in and buy. Another option is to export over the Net. I can be a bricks-and-mortar retailer in the United States, but an Internet provider in other countries.
FB: You also speak of a “hub-and-spoke” option.
de Kare-Silver: This is where you have a few big sites and facilities, or showrooms, where customers can view and purchase products. In those areas where you don’t have shops, you reach out to them electronically. Goods ordered online can then be shipped along “spokes” to outlying areas where you don’t have stores.
FB: Any other options?
de Kare-Silver: Well, the other option is to turn the e-commerce challenge on its head. If you are a retailer and not yet comfortable with the Web, you might decide that your response will be to create the best store in the world, one that people will come to not just to purchase goods but for the experience.
For example, Borders bookshops across the U.K. offer what I call a retail-plus-leisure environment. They employ people called events managers whose job is to plan events that attract people to the store. It may be a book signing, or a children’s story, or a special video. The store of the future will extend the experience of customers beyond purchase of the product or service.
Ironically, that is just what Amazon.com is trying to do on the Internet. Their strategy has been to create an experience they call (you may or may not like the language) “customer ecstasy.” They’re trying to make sure that buying books from them is easy and reliable. When you order a book, you get an e-mail telling you when it will arrive. Then you get an e-mail saying it has been wrapped and is on its way.
If you talk to people at Amazon, they will tell you their success doesn’t actually have anything to do with the Internet. They believe they’re successful because they have very, very good customer service. They have a strong model for customer fulfillment.
FB: In contrast, you believe a lot of bricks-and-mortar retailers have fallen down in the quality of their customer service.
de Kare-Silver: I wouldn’t pick on retailers. A lot of companies pay lip service to customer service. Everyone says “customer service, customer service.” But even today there are only a handful of companies in every industry sector that achieve truly excellent service.
So another way of responding to the Internet challenge is to think about how you can use this catalyst-this step change-to really improve what you do. If you make your product and service truly excellent, people are going to want to come to you to buy, even if you are not the right channel for them.
FB: And if you’re going to sell on the Internet, you have to do it right. You can’t do it in a half-hearted way; you have to provide good service.
de Kare-Silver: Absolutely. I said earlier that it’s fine to start in a small way and test the waters. But if you start selling on your site, you have to execute to the best of your ability. Even if you have only 100 products in your Internet catalog, make sure those products are in stock. Make sure you have an e-mail facility on your site. Make sure your link with FedEx works. Make sure somebody is monitoring the orders and that they are getting fulfilled. All this is not difficult to do actually.
FB: You mentioned earlier that there are a number of small outsource providers who can assist companies that want to do business on the Web. For example?
de Kare-Silver: Well, one of the more prominent ones is USWeb/CKS, which is based in the U.S. and Europe now. It’s been around only a few years, but it’s “fleet of foot” and totally dedicated to the Internet. If I wanted an established company that isn’t too big and not too small, I would pick them.
FB: What can they do for you?
de Kare-Silver: Everything. They can build your Web page and host your Web server environment. They can take your list of products and build a database catalog. They can put the catalog on the Net, with or without pictures. They can put you in touch with specialized agencies that do Web marketing for you, such as doubleclick.com. They can build connections with FedEx or UPS. There’s nothing they can’t do for you.
FB: Any other advice for smaller family businesses starting out on the Web?
de Kare-Silver: For any organization that may be cash-constrained, try the low-cost route at first and see what happens. Even for the Amazon.coms of this world, it doesn’t pay to try to be everything to everybody. Start small, keep the investment low, test and try, learn. Get some of the new Internet magazines where small, local firms offering Web design and outsource services advertise. If your site begins to work, build. As it grows, you will see how it can work best for your business and gain confidence.
How hard will your products be hit?With Michael de Kare-Silver’s electronic shopping (ES) Test, you can assess whether your products lend themselves to sales on the Internet by adding up your scores on three factors:
Product characteristics: Products that the customer wants to physically handle, smell, or taste in person do not generally lend themselves to Internet sales. If customers only need to see or hear the product, or obtain information on its qualities before buying, they may just as soon buy it on the Internet as in your store.
To score yourself on this factor, assess the degree that your products are “physical” or “virtual” on the 10-point scale below. The more physical a product’s appeal, the lower its ES score. The more virtual its appeal, the higher the ES score.
Familiarity and confidence: If customers know the product, have bought it before, and are confident about its quality and reliability, they might just as soon purchase it online as in your store. Thus products with a strong brand name can be expected to sell well over the Internet because they already enjoy consumers’ trust.
The degree to which people are familiar with the product, and trust it, is also assessed on a 10-point scale. Award more points to products that enjoy high customer confidence, fewer points to those that are less well known and trusted.
Consumer attributes: Whether a product sells well on the Internet will depend a great deal on the motivation for shopping of the people who tend to buy it, as well as their willingness and comfort in buying online. If, for example, your customers seek mostly convenience, and are comfortable buying online, you may find they are showing up less often in your store.
The willingness of your target customers to buy electronically is the most critical factor in the ES Test, according to de Kare-Silver, and therefore gets 30 points in the overall scoring.
By adding up your scores on the three scales, you arrive at an overall assessment of your products’ ES potential. According to de Kare-Silver, total scores over 20 have significant potential for sales over the Internet-or are vulnerable to competition on the Net from other sellers.
— Howard Muson
Who’s most likely to shop the Net?You can use Michael de Kare-Silver’s typology of shoppers to assess how likely your mix of customers will be to buy on the Net:
Social shoppers: They like to get out of the house and meet people, they take pleasure in store shopping. They’re less likely to buy online.
Experimenters: They’re happy to try new things and have been among the first to use and purchase over the Net.
Convenience shoppers: People who find shopping a chore or are very busy with careers and families (“frenzied copers”) are highly inclined to shop electronically.
Habit-bound diehards: Forget it-they’ll be among the last to join the electronic revolution.
Value-bound mercenaries: They’ll go anywhere to get the best quality, price, and service. If they can get it electronically, they will be quick adapters to this channel.
Ethical shoppers: A minority that is highly conscious of ethical considerations whenever they shop. They’ll buy in stores or online-doesn’t matter-so long as the product is sold in an honest and “politically correct” manner.
The top 10 in Internet sales
- Personal computer hardware
- Travel
- Entertainment
- Books and music
- Gifts and flowers
- Apparel and footwear
- Food and beverages
- Jewelry
- Sporting goods
- Consumer electronics
Source: BusinessWeek/Forrester Research