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The Impact of E-Commerce Strategies on Firm Value: Lessons From and its Early Competitors . Motivation and Goals: . Which strategies generate value in e-commerce environments?

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the impact of e commerce strategies on firm value lessons from amazon com and its early competitors
The Impact of E-Commerce Strategies on Firm Value: Lessons From and its Early Competitors
motivation and goals
Motivation and Goals:

Which strategies generate value in e-commerce environments?

Use event study methodology to estimate the impacts of several strategies on the values of,, CDNOW, and N2K

Follow the firms from their IPO dates until exit or the end of 2001

Focus on six types of strategies:

1.   Promotional alliance formation and advertising

2.   Offline customer service center and distribution center expansion

3.   Pricing

4.   Product line expansion

5.   Service improvement

6.   Foreign expansion

general conclusions
General Conclusions

The strategies and their impacts on value can be explained using a simple framework:

Firms initially believed that pursuing sales was the main way to maximize firm value

– this was their “general strategy”

Firms implemented a variety of initiatives aimed at increasing “web traffic”

Initially, these efforts as a whole increased firm value, and these early positive impacts reinforced the firms’ initial beliefs

Two factors worked against the firms:

1.   The effectiveness of the general strategy diminished over time

2.   Economic theory implies that some ways of increasing sales are less effective than others

empirical results
Empirical Results

1.   Promotional activities have diminishing marginal returns

2.   Offline customer service center and distribution center expansion have diminishing marginal returns

3.   Price reductions reduce value

4.   Product line expansion and service improvement programs increase value, but this effect is due to a relatively small number of successful initiatives

5.   Foreign expansion reduces value

6.   Competitor investments in the firm’s main line of business reduce the firm’s value

the firms
The Firms was founded in July 1995 and went public in May, 1997

In June, 1998 launched its music store is now the most prominent Internet retailer of a variety of products has added several services such as auctions, 1-Click ordering, and zShops, which allows other firms to offer products for sale through has been’s main competitor in online book retailing

CDNOW and N2K were the two top Internet music retailers before being displaced by (subsequently they merged)


The testable hypotheses emerge from a simple theoretical framework with the following assumptions about behavior and success in new environments:

Firms form beliefs about what their general strategy should be before entering the new environment or soon after

Typically survivors experience early success using their general strategy – firms that do not achieve early success exit

Early success reinforces the firms’ beliefs, making them somewhat resistant to change 

two factors work against the firms
Two factors work against the firms:

1.   The effectiveness of the general strategy eventually diminishes as the firm and environment evolve

Judging when the general strategy is no longer useful is difficult, and a firm may need to experience several negative effects before it revises its general strategy

2.   The different ways of implementing the general strategy may differ in their effectiveness, and it may be difficult for the firm to determine which ways are effective

Here, economic theory can provide a guide

In the e-tailing environment, the “general strategy” was increasing sales

promotional activities
Promotional Activities

Benefit: more consumers become aware of the firm’s products and services

Cost: Transaction costs and fees that are determined by the opportunity costs of the ally or advertising outlet

This type of investment involves diminishing returns because marginal benefits eventually fall but marginal costs are independent of the firm’s actions

Hypothesis 1: Investment in promotional alliances and advertising have diminishing marginal returns: investments early in the firm’s life have a more positive impact on the firm’s value than those later on

offline expansion
Offline expansion

Benefit: More customers can be served and shipping times can be reduced

Cost: Determined by opportunity costs of facilities and resources employed in the service effort

This type of investment involves diminishing returns for the same reason as promotional activities: marginal benefits eventually fall and marginal costs are largely independent of the firm’s actions

Hypothesis 2: Investment in offline expansion has diminishing marginal returns

pricing strategy
Pricing Strategy

A firm attempting to increase sales may lower prices

However, price reductions are easily imitated, leading to price wars that lower everyone’s profits and provide no one with a relative advantage

Price reductions may appear to be easily reversed, but this is often not the case because competitors react by lowering their own prices and price reductions are often widely advertised to maximize their effect

Price competition has long been thought to be a potential problem for online retailers because they lack a critical source of product differentiation – location

Hypothesis 3: Price reductions reduce value

product line expansion and service improvement
Product line expansion and service improvement

In new environments, firms do not know how consumers will value products and services the firms can introduce

As a result, we should observe many initiatives that lower firm value

Further, many initiatives will have little or no impact on value

Hypothesis 4: If product line expansion and service improvement programs succeed as a whole, success can be traced to a relatively small number of successful initiatives – many initiatives reduce firm value

Consider programs that involve acquisitions and alliances separately from those that do not, and consider announcements of all types of foreign expansion separately

competitor strategies
Competitor Strategies

Most strategies that increase a firm’s value decrease its competitors’ values

This adverse effect on a firm’s competitors is most likely to be observed when the strategy affects the competitors’ main lines of business

The relative size of the firms also matters: Consider a firm that is one-tenth the size of its competitor – if the firm implements a strategy that increases its value by 10%, then even if the gain is entirely at its competitor’s expense, its competitor suffers only a 1% loss in its value

Hypothesis 5: A firm’s investments in its competitor’s main lines of business have a negative impact on the competitor’s value. This effect is larger if the competitor is smaller.

data on strategies
Data on Strategies

The goal: assemble a comprehensive list of important announcements of strategies using press releases from Business Wire, PR Newswire, and company web sites

I used a variety of selection criteria to select only important press releases

As control variables, include announcements of quarterly financial results, debt and equity issues, and CDNOW’s announcements surrounding its search for a buyer

When multiple announcements occur on adjacent days, I count only one event and put the event date on the most important event’s date

157 events for, 62 for, 68 for CDNOW, 41 for N2K

empirical methodology
Empirical Methodology

The event window includes the two days prior to the announcement and one day after

Some of the event windows overlap, so I use two methods to estimate cumulative abnormal returns:

Method 1: Regress the firm’s daily returns on the market daily return and dummy variables, one for every event window

To compute the CAR for an event, multiply the coefficient on its dummy variable by the length of the event window

Method 2 (the standard approach): Delete periods covered by the event windows from the sample, estimate the market model by regressing Rit on Rmt, and compute the CAR of an event by summing the forecast errors during its event window

results hypothesis 1
Results: Hypothesis 1

Hypothesis 1 is supported:

Early promotional alliances with major portals such as AOL, Netscape, and Yahoo! generated a lot of value

After these early alliances, the high marginal benefits disappeared

Using Method 1 CARs, dividing promotional activities into early and late:

results hypothesis 2
Results: Hypothesis 2

Hypothesis 2 is supported:

Evidence of effects of offline expansion on shipping times shows diminishing returns

Only engages in extensive offline expansion

Using Method 1 CARs, dividing offline expansion into early and late:

results hypothesis 3
Results: Hypothesis 3

Hypothesis 3 is weakly supported:

Signs are negative but effects are statistically insignificant

Price reductions led to price wars

Using Method 1 CARs, announcements of pricing strategies:

results hypothesis 4
Results: Hypothesis 4

Support from a relatively small number of initiatives increased value substantially

Investment in and introduction of a health and beauty store

Acquisition of, a rare books and music retailer

Alliance with Muze for a music database

Alliance with OSM for back office services

Alliance with Borders Group

The music store, the video store, the electronics and toys and games stores, auctions, 1-Click ordering, subject browsing, recommendations center, zShops

results hypothesis 41
Results: Hypothesis 4

Evidence from the others is mixed

For example, none of CDNOW’s service improvements stand out

N2K’s service improvement program reduced value, so it does not address the hypothesis

A few events stand out for

Alliance with Mightywords to allow the purchase of digital articles

Introduction and expansion of its e-bookstore and electronic publishing


Introduction of music downloads

Merger with N2K

results hypothesis 42
Results: Hypothesis 4

Distinguishing between different types of expansion provides some insights

Foreign expansion reduces value

results hypothesis 5
Results: Hypothesis 5

Hypothesis 5 is supported:

Competitor announcements reduced value of the smaller firms but had little impact on

Using Method 1 CARs, effects of competitor announcements: