Q1. Based on your own experience of traditional bookselling and your exploration of online bookselling, compare willingness-to-pay for books supplied by these two business models. In the US, the traditional bookselling had a market of about 26 million dollars in the year 1996 and had grown to about 33 million dollars in the year 2001. It is growing at the rate of about 4. 8 % per annum. An average American citizen buys about 10 books a year in 1996. Book buying usually increases during the weekends and during the fourth quarter of the year. Usually individuals between the ages of 35 to 75, buy books.
In the US, more than 50, 000 new titles are published every year. However, people read both old and new releases. When considering traditional bookstalls, it is important to take into consideration the publishers, wholesalers and the retailers. One of the most popular publishers in the US is Simon & Schuster (which hold a 11 % share of the market). In recent years, many of the small publishers have been taken over by the larger ones as they were facing loses and it was increasingly becoming difficult to maintain relationships with writers and retailers.
In the traditional system of book vending, the publishers for bulk purchasers offer huge amounts of discounts to retailers and wholesalers. Retailers are offered a discount of about 55 %, whereas wholesalers are offered a margin slightly above that. However, there has been a lot of controversy in this regard, due to apparent favoritism. Hence, many of tee publishers are now made to sign agreements with the retailers and the wholesalers, regarding the amount of discounts that could be offered. In the traditional system, the retailers and the wholesalers can return books to the publisher and they would get a full refund of the money.
However, it may be difficult to return the soft copies such as CD’s to get a credit on the amount. The practice of returning the books to the publisher has developed as early as the depression period, in which retailers were guaranteed return of the unsold copies so that only the popular books could be kept on the shelves. The number of return of books is rising gradually, as people want to read the new books and the best sellers. In the year 1986, returns of the books were in the range of 15 to 25 % and in 1996 it rose to 30 %. These books have to be recycled or sold through alternative ways with discounts.
Baker and Taylor were one of the major wholesalers in the US and Ingram Books was another major wholesaler. These wholesalers provided the retailers with discounts and volume-based purchases. They acted as middlemen between the publisher and the retailer. Although, the costs of services were slightly higher, they performed many functions for the convenience of the retailer and the publisher including speedy delivery, after sales services, free-services, cutting the gaps between the manufacturer and retailer, accepting feedback, etc.
Retailers on the other hand have increasingly beginning to gain an important share in the market since the 1970’s. The two largest chain stores in the US included Dalton and Waldenbooks. There were several developments at the retail end of the book stores which really improved production of books and several other aspects including author profiles, wholesales, etc. Supermarkets, malls and libraries began to be developed so that retailing could pick up. One of the largest book chains stores in the US has been Barnes and Noble.
It employees about 20, 000 staff and had made sales of about 2. 45 million dollars in the year 1996. Barnes and Nobles remained as two separate store chains and were actually combined by Leonard Riggio in the year 1971. The company has several stores in New York, Manhattan and Boston. Barnes and Noble acquired Dalton chain of stores in 1985 for about 300 million dollars. Barnes and Noble have also started with other businesses in the field of books. They also have mail order book services and book clubs. Barnes and Noble also set up shop in Canada, but it has major operations in the US.
The procurement of books for the malls and superstores of Barnes and Nobles has been centralized. Jeff Bezos had founded Amazon. com in the year 1995 and it reached sales of about 16 million dollars in the year 1996. About 7600 employees were present in the organization in that year. Amazon. com can reach much more people compared to Barnes and Noble, but it can sell only online, unlike Barnes and Noble. Online booking selling seems to have one disadvantage over store book selling. The customers in the stores are able to feel the book and read excerpts of the book.
In such a circumstance, they would be more interested in buying the book and would find the book its money’s worth. With time, the internet is beginning to change, and many of the manufacturers are beginning to show case the product and actually permit the customer to sample it using the internet. With the bookshelf model, it does seem that it would be costly to get the investment to setup the place, build shelves and get the logistics. In comparison, an online store does not require much of investment and infrastructure.
The customer can access the online bookstore from almost any part of the world and can select the book. The user would need only a computer, an Internet connection, and a membership username and within a short period of time the product would be delivered to the house. Willingness to pay is the maximum money the customer would be willing to pay for a product and it would demonstrate that the customer is concerned about the quality of the product; costs spend on the production and the good name of the product. This characteristic varies from one individual to another and from one company to another.
Several characteristics play a major role including the quality, brand name, reputation, equity, etc. Studies have shown that when the price of a product was lowered, below the willingness to pay, the customer is more likely to obtain the product. The customer would obtain the product satisfactorily, if the price equals the willingness to pay. The customer would not be happy if the price of the product is higher than the willingness to pay. Barnes and Noble has a good reputation and has it stores located in various parts of the US. The customers have a high willingness to pay for their products.
On the other hand, the willingness to pay is lower for Amazon. com as the reputation and quality anticipated is not as high compared to Barnes and Noble. Although people are paying more money for Barnes and Noble products, they feel they are obtaining more value for their money compared to Amazon. com. Barnes and Noble is an older product and has a better reputation than Amazon. com. People are more likely to trust Barnes and Noble. In the US, Barnes and noble is a household name with several local stores. On the other hand, Amazon. com is an online store. Q2.
Assess Barnes & Noble’s response to the substitution threat from Amazon. How did Amazon respond and to what effect? When Amazon was launched in the year 1995, it was termed as the ‘Earth’s biggest river-Earth’s biggest bookstore’. In the year 1995, the company ran it sales up to 0. 5 million dollars, 16 million dollars in 1997 and 82 million dollars in the year 1997. Amazon. com was eating into the sustainability of Barnes and Noble. Substitution threat is a situation in which one player would be using an opportunity created by the vacuum left by the shortcomings or the deficiency of the other player.
The extent to which the opportunity exists depends on the characteristics of either player. Amazon was using the deficiencies of Barnes and Noble to a great extent. They were exploiting the limitations to store shopping and using the benefits of online business. They were many ways in which Amazon were using the substitution threat such recombining, straddling, fighting, harvesting, etc. However, Barnes and Noble began to attack Amazon’s online strategy in January 1997. The company went online and offered the customers huge discounts for online hardcover and paperback versions (up to 30 %).
At the same time it also filed a litigation against Amazon. com for having the slogan “Earth’s biggest bookstore’, when it was actually not. It wanted to launch an all-round offensive against Amazon. Barnes and Noble felt that Amazon was not a bookseller but a book broker. Using the substitution threat again, Barnes and Noble wanted to dominate the online book market. Barnes and Noble wanted to become the leader in online bookselling by displacing Amazon within a period of two years. They felt that online business offered much greater opportunities, as people could not find a bookstore with a variety.
People from even other countries could do online shopping and improve the sales of the company. The investment over infrastructure and setting up a shop was much higher compared to a bookstore compared to online shopping. People, who did not have the time to search for a bookstore, could now do it setting in the comfort of their homes. This seemed to be one of the greatest advantages of online shopping. Through online shopping, the books could be advertised and marketed and this could really boost sales. Barnes and Noble operated a sorting facility in Jamesburg, and slowly this facility began to expand.
They developed a very efficient strategy in comparison to Amazon, and claimed to bring the book to the customer much faster than what Amazon actually did. However, the operations of both, Barnes and Noble and Amazon were similar. Barnes and Noble also created better web features compared to Amazon. They also separated out the online operations from the bookstore in order to evade tax. At the back end of the operations, Barnes and Noble also tried to establish relations with the publishers and the wholesalers.
One advantage the company had observed was that the operations were much lesser compared to a standard bookstore as infrastructure costs were saved. Barnes and Noble soon began to offer to the online customers, books at the wholesale or warehouse rates. The company also offered several services. Many people felt that the services offered by Barnes and Noble were much similar to that offered by Amazon. The software tool of Barnes and Noble was much superior to that of Amazon. The company permitted the customers to store personal data and also buy the books very easily.
They also signed up with several Internet organizations such as AOL and the New York Times to provide extra services. AOL provided software and news services. Once Barnes and Noble actually entered into the online market, Amazon began to feel the heat and suggested breakthrough measures for the customers in order to increase their sales. They offered higher discounts to the customers (up to 40 %) and added more than a million titles to the online book collections. They also offered personalized services so that the customer could use the software and select books according to their personal preferences.
They also developed ties with several software giants such as Yahoo, Excite and AOL. com. The company developed a very strong advisement and publicity strategy so that the public could select its products compared to that of Barnes and Noble. The services provided by Barnes and Noble were much similar to that of Amazon but some of these services were different in nature. Barnes and Noble were also trying to imitate the business of Amazon by using a successful business model. By collaborating with some of the website with which Barnes and Noble also had combined.
As Barnes and Noble offered personalized services, it could be combined to the Harvesting model of substitution. Barnes and Noble also tried develop a website much richer than that of Amazon. Barnes and Noble also began to involve the operations of the book supply system so as to improve the online strategy. The software technology utilized by Barnes and Noble was also much superior to that of Amazon. During the initial period Barnes and Noble failed to draw in huge customers. I do feel that the marketing strategy played by Barnes and Noble to launch its product was not very effective.
It was able to achieve its objectives only to some extent. Amazon had its name already established in the online book market. They were seeking to make relationships with the customers and improve their business further. Although Amazon had already established itself in the market, Barnes and Noble were eating up its share. Q3. Considering both Barnes & Nobel and Amazon, how sustainable will their respective business models be in the future? Who will be the online leader? Give reasons. Sustainability of a business is threatened by imitation, substitution, holdup and slack.
The added value of the business is threatened by imitation and substitution. The added values cannot be used to obtain the benefits if holdup and slack threats are present. In fact holdup may divert the benefits to the suppliers and the customers. Several factors are present in the market, which would help to determine the ability to attract. These five factors that may be present include: – threat from several new comers, rivalry between the competitors, ability of the buyers to bargain or demand more, strength of the suppliers in the market, and the substitution threat (such as changes in technology).
Porter, an American Aeronautical engineer to determine the competitive strength of a business and to evaluate its market position, framed these factors or forces. The Porters five-force analysis is frequently utilized with other management tools such as SWOT analysis and PEST analysis to determine the strategy a company should be following. Companies can also develop business decisions and plan investment according to the Porters analysis (Chapman, 2005). The new entrant in the field on online bookselling was Amazon. com. It began to be functional in the year 1996.
It had sales of about 150 million dollars in the year 1997. It had also developed huge amount of losses in the year 1996 and 1997. Bezos had actually developed Amazon. com keeping in mind the potential of the Internet. Jeff Bezos was also found of the bookselling business, and seeking the huge potential of the Internet. He founded the Amazon. com Inc, and had a stake of about 41 %. He was much fascinated with online trading in other fields and soon began to employ it for book selling. He developed the slogan “Earth’s biggest river-Earth’s biggest bookstore” to describe his bookstore.
Amazon developed a virtual storehouse, which was catering to its online operations. This was located in Seattle. The company on purpose did not offer huge amount of graphics to the users on its website as it felt that the speed of downloading would be reduced. The competitors of Amazon. com in the field of online bookselling were Barnes and Noble. This was basically following the slogan “Earth’s biggest bookstore”, which it strongly opposed and brought about a lawsuit. The first thing that Barnes and noble did was to have litigation against Amazon. com for using this slogan.
Barnes and Noble claimed that Amazon was a mere agent that was passing on the books to the public. The company began to offer huge amounts of discounts that bought books from them online. About 20 % discount was offered for the paperback versions and 30 % for the hardbound versions. The company initially planned to become the top online bookseller within a period of two years. Barnes and Noble developed its own sorting out facility for Internet orders at Jamesburg. They started to compete with Amazon. com in beating them out in promptly serving the customers with the orders.
They were able to delivery the orders faster to the customers, but their charges were similar to that of Amazon. com. The graphics of the website that belonged to Barnes and Noble was much more esthetically pleasing compared to Amazon. com. The site began to provide with personalized services. The company claimed that it did not have to pay much for initiating online operations. Barnes and Noble worked in collaboration with AOL. com. This company was providing several online services to its customers. It had provided great software support to Barnes and Noble.
It also collaborated with The New York Times in providing a book review. The buyers are the people who actually purchase the books from the booksellers. They would be looking at several benefits they would be having from the company which include the costs of the books, marketing, advertisement, brand name, services provided, reputation, delivery time, discounts provided, range of after sales services, etc. The education level, nationality and intelligence of the buyers play a major role in determining the book company they would be selecting.
Even Bill Gates was one of Amazon’s customers, and it felt that the website offered a huge collection within a very short period of time. The online services offered by Amazon were very user friendly. The company also provided several online services to the buyers such as information of the books, interview with the writers, etc. Barnes and Noble went to provide a discount for the buyers. The felt that the customers ha a huge benefit over Internet shopping. They could save time and also access the Internet as per their time of convenience.
Even international customers were benefited through the online business model. Amazon was able to offer greater amount of discounts to the customer and also seemed to have a larger online collection compared to Barnes and Noble. The fourth factor is the suppliers that provide the books to the online booksellers. Ingram and Doubleday supply Amazon and Barnes and Noble has its own warehouse for supplies. The booksellers should be able to obtain the logistics within a very short period and should be able to supply the customer immediately.
In an online shopping model, it is very important to answer to the demands of the customer immediately. The fifth factor is the substitution threat. According to this threat one player would be filling up the deficiency created by another. In this case, Amazon had left a very small gap, and Barnes and Noble were effective in filling this gap. It provided the customers with discounts, and faster delivery times. Besides, it was able to provide the customers with a more appealing website and personalized services.
With relation to the online leader, I do feel that Amazon. om is more likely to be an online leader in book sales. Amazon. com was the first to start with the concept of online book selling. It was able to setup global or international customers much earlier than Barnes and Noble. Although, they cannot be termed has having a bookstore, they are turning out to be good agents, providing highly specialized services to the customers. The online collection and options that Amazon. com is providing is much larger as that compared to Barnes and Noble. It is also providing greater amount of discounts compared to Barnes and Noble.
Amazon. com is exclusively an online vendor but Barnes and Noble is a bookstore vendor, which has recently extended its services online. As Amazon provides its customers with other online services (shopping of other products), it could provide several other benefits to its customers. The customers could also buy other products from its website. Hence, on the whole, Amazon. com is more likely to provide a greater range of services compared to Barnes and Noble. As Amazon does not have any offline trading, it is more flexible to incorporate changes than Barnes and Noble.
Hence, they are more likely to adapt to changes in the market. Amazon would also be spending less money on infrastructure and hence is in a better position to offer discounts to the customers and at the same time make profits. References: Amazon. Com (2007), Books, [Online], Available: http://www. amazon. com/books-used-books-textbooks/b/ref=gw_br_bo/103-4496859-8857400? %5Fencoding=UTF8&node=283155&pf_rd_m=ATVPDKIKX0DER&pf_rd_s=left-nav-1&pf_rd_r=0SFBPSRKW2VRZ7SPFCN4&pf_rd_t=101&pf_rd_p=307751001&pf_rd_i=507846, [Retrieved: September 10, 2007].
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