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 / Summer 2011 / Issue 63(originally published by Booz & Company)


Focus and Scale on the Internet

In November 2010, Amazon announced another large acquisition: Quidsi, the parent company of and Again, both sites sold products that Amazon already offered online. But Quidsi was succeeding by building capabilities focused tightly on the needs of its core customer base: busy new parents. It now hopes to grow by following the evolving needs of this clear demographic segment.

Focus on Local Capabilities

The latest trend on the Internet takes to the extreme a focus on capabilities rather than scale. Instead of seeking to serve the mass market from a virtual node on the Internet, independent of geography, companies are starting to leverage the Internet at a local level, turning the scale-based model on its head — and perhaps putting the final nail in the coffin of the original Internet model.

Consider one of the latest phenoms, Groupon, which captured headlines in December 2010 by rejecting a $6 billion offer from Google. Groupon started in Chicago in November 2008 and quickly expanded to Boston, New York City, and Toronto. In 2010, it expanded to nearly 500 new markets in North America and Europe, a staggering pace of nearly 10 cities per week.

A fairly simple concept has fueled this phenomenal growth. In each of its 500 markets, Groupon offers a “daily deal” that taps the marketing dollars of local businesses (a market in which Google has struggled). Consumers in the local market see promotional discounts from local merchants ranging from 50 to 90 percent off. Unless a predefined number of Groupon customers make a purchase, the deal does not “tip”; no one gets the bargain and the merchant pays nothing to Groupon. But the need to tip the deal encourages buyers to solicit their network of friends and family members to join the deal directly or through various social media such as Facebook. By early 2011, the company had offered more than 100,000 deals in partnership with 58,000 local businesses.

Groupon certainly gains scale economies by serving so many locations, and the model has strong network effects. It boasts more than 50 million subscribers, which obviously attracts merchants interested in offering deals. But most deals are local and, accordingly, the relevant number for most merchants is not the 50 million subscribers but instead the number of local subscribers.

To ensure successful execution, Groupon uses the Internet and its global scale to attract customers through mass-market advertising. But it also has to ensure its deals will appeal to its local customer base by vetting the local merchants in each city. Groupon has developed deep capabilities for identifying targeted merchants within priority cities, and it turns down the vast majority of the proffered merchant deals. With a promise of at least one deal a day in each city served, the company must have an effective and efficient set of routinized processes for working at the local level.

Some lesser-known examples of the emerging local focus are beginning to attract the attention of venture capitalists. Like Amazon before it, J. Hilburn — a Dallas-based startup — seeks to disintermediate an inefficient supply chain used by traditional local players. Founded in 2007, J. Hilburn offers custom-tailored clothing made from high-quality fabric, but at a price within the reach of most business professionals. The company makes use of the Internet to eliminate both the need to hold inventory and the risk of unsold products by procuring to order along a focused supply chain. In 2010, the company sold 60,000 custom-tailored shirts made from Italian fabric at its factory outside Macau, China, at prices ranging from $80 to $150 each.

To offer custom-made shirts, the company needs a local capability, provided by a network of “style advisors” who go to a client’s home or office to take tailoring measurements. As is the case in other direct-sales businesses, the style advisors receive a commission on their own sales as well as on the sales of other advisors they recruit to their network. J. Hilburn currently employs more than 500 style advisors, typically women with school-age children seeking extra income. Although potential customers can visit the company’s website to initiate the purchase process, a search for the name of a style advisor is limited to a maximum of 30 miles from a given zip code. Despite the importance of its virtual model, building the local network remains key to J. Hilburn’s ability to fully leverage its Internet-enabled supply chain.

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