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 / First Quarter 2001 / Issue 22(originally published by Booz & Company)


The Last Mile to Somewhere

Once considered the domain of tacticians, operations now resides at the forefront of business strategy. Consider the saga of Web-based delivery services.

The E-Business Operations Team contributed to this article.

In the not-too-distant past, many executives considered operations strategy an oxymoron. Strategy covered lofty concepts like competitive dynamics and brand positioning, while operations implied tactical stuff like supply-chain management and customer service centers — mere afterthoughts for a visionary leader. New Economy executives were particularly prone to this perspective, outsourcing operating activities in order to focus single-mindedly on capturing "eyeballs."

But not anymore.

The New Economy has entered a new phase — a shift from value creation for customers as the sole focus, to value capture by companies and shareholders. Operations strategy now resides at the forefront of business strategy for dot-com startups and traditional companies alike.

Eyeballs alone can no longer sustain once high-flying dot-coms; market pressures now demand continued growth as well as improved profitability to revive their market valuations. Take a look at what happened to e-tailers during the 1999 holiday season: They faced shortages of popular goods, overstock of undesirable merchandise, and an inability to get the right items to the right customers on time. Their experience underscores the importance of capacity planning to a company's very identity. After all, Brand Management 101 defines a brand as a promise delivered. So truly managing a brand requires more than developing clever commercials and spending millions on Super Bowl advertisements. This past holiday, a traditional operations metric — on-time delivery performance — decided the fate of e-tailers.

There has also been an increasing focus on operations strategy among traditional companies trying to adapt to the Internet economy. Consider B2B exchanges. More than 100 have been announced to date, representing billions of dollars in investment, making these exchanges perhaps the most critical Internet-related investment on the agenda of bricks-and-mortar CEOs. The focus of these high-technology investments? Traditional operations processes, such as purchasing, supply-chain management, and collaborative design. With Internet technology, these traditional processes can deliver hundreds of billions in bottom-line improvement.

In short, every major company faces a growing need to evolve operating strategies to harvest the enormous value potential sown by the Internet. Only the foolhardy will ignore the strategic implications of operations.

The evolving story of the last-mile delivery industry — e-tailers offering same-day home delivery — offers an excellent example of the transition from value creation to value capture, and the critical role played by operations strategy. Last August, in a widely quoted report, we analyzed the operating models underlying a host of such startups and concluded, "We believe the last mile may lead to the gallows rather than to the promised land" (see "The Last Mile to Nowhere: Flaws and Fallacies in Internet Home-Delivery Schemes," s+b, Third Quarter 2000). Digging into the fundamental economics faced by companies such as Kozmo, Urbanfetch, and Webvan, we found same-day delivery e-tailers hobbled, perhaps critically, by four fundamental challenges: limited online sales potential; high cost of delivery; a speed/variety trade-off; and existing, entrenched competition. The market apparently agreed. Between August and November, Inc. sold out to Webvan Group Inc., Inc. canceled its plans for an initial public offering, and Inc., after discussing a merger with Kozmo, closed its original consumer-focused business.

Are we gloating over our prescience? Not at all. We believe these moves reflect a new focus on operations strategies that we hope will lead to a workable business model, a last mile to somewhere.

The Last Mile Revisited
Our report drew upon hard numbers to cast a dark shadow over the existing same-day delivery schemes. Not surprisingly, it triggered extensive reader feedback - not all of which was positive. Ronald Facchinetti, founder of a European last-mile startup, challenged our analysis:

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