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ARCHNES MASTER of SCIENCE in MANAGEMENT STUDIES at the Aachi-Iosnstfiill MASSACHUSETTS INSTITUTE of TECHNOLOGY

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ARCHNES MASTER of SCIENCE in MANAGEMENT STUDIES at the Aachi-Iosnstfiill MASSACHUSETTS INSTITUTE of TECHNOLOGY Exploring Online Retailing Strategies: Case Studies of Leading Firms in the U.S. and China By Jian Chen B.S. Applied Chemistry Wuhan University, 2006 SUBMITTED TO THE MIT SLOAN SCHOOL OF MANAGEMENT IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF ARCHNES MASTER OF SCIENCE IN MANAGEMENT STUDIES AT THE AAcHI-IOSNSTfiill MASSACHUSETTS INSTITUTE OF TECHNOLOGY JUNE 2012 @ 2012 Jian Chen. All Rights Reserved. The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part in any medium now known or hereafter created. Signature of Author: MIT Sloan School of Management May 11, 2012 Certified By: U Michael A. Cusumano SMR Distinguished Professor of Management Thesis Supervisor Accepted By: Michael A. Cusumano I ISMR Distinguished Professor of Management Faculty Director, M.S. in Management Studies Program MIT Sloan School of Management 1 [Page intentionally left blank] 2 Exploring Online Retailing Strategies: case studies of US and China leading Online Retailers By Jian Chen Submitted to the MIT Sloan School of Management on May 11, 2012 in partial fulfillment of the requirements for the degree of Master of Science in Management Studies ABSTRACT Online retailing has been a significant part of people's daily life. Research shows that 85% of internet users have purchased online. In China, with the increased penetration rate of internet and adoption of online payment, the online retailing is accounting for a larger percentage of overall retailing volume year by year. However, the lower barrier to entry of online retailing compared to traditional retailing makes the competition more intense than ever. In addition, several leading online retailing companies in the US experienced unprecedented obstacles when attempting to expand in China. This leaves an open question- what is the right strategy in online retailing? The objective of this thesis is to identify to best online retailing strategies in China by examining the online business environment of US and China and distilling current strategies of successful online retailing companies in both countries. The research has been based on case studies of leading online retailing companies. Four lenses, including operational excellence, customer intimacy, product leadership and platform leadership, have been used to explore the unique positions these companies have chosen, and the different set of activities they employed to achieve the positions. Thesis Supervisor: Michael A. Cusumano Title: SMR Distinguished Professor of Management 3 [Page intentionally left blank] Acknowledgements First and foremost, I would like to thank Professor Michael A. Cusumano, my thesis advisor, for his guidance, advice, and suggestions. I also took his class, The Business of Software and Digital Platforms, in which I benefited from the valuable theory, frameworks, and brainstorming with classmates. My thanks also go to Chanh and Julia at the MSMS office, who organized the thesis boot camp to massage us to plan and write our theses early. I would also like to thank Robert Irwin from the MIT Writing Center, whose insights on time management and writing process were valuable. He also spent much time reviewing and editing my draft. The thesis is dedicated to my family, who gave me unconditional love and support. My daughter, Yingke, was born at home in China while I wrote the thesis. My mother, Meigui, and my wife, Juanjuan, took care of everything at home very well, which enabled me to focus on my studies here. I very much appreciate their hard work and sacrifice, without which I could not have reached my goals at Sloan. 5 [Page intentionally left blank] 6 Table of Contents Chapter 1 Introduction ....................................................................................................... 9 1.1 Overview of E-commerce ............................................................................................. 9 1.2 Overview of Online Retailing ................................................................................... 11 1.3 Thesis Objective and Structure ................................................................................... 13 1.3.2 Analysis Framework ............................................................................................... 14 1.3.3 Thesis Structure...........................................................................................................15 Chapter 2 Market Analysis of Online Retailing Industry in the US.................................... 17 2.1 Market Size and Other Key Factors of Online Retailing Industry in the US.............. 17 2 .2 M ajor P layers ................................................................................................................. 18 2.3 Competitive Analysis ................................................................................................. 20 2.4 Future Trends of the Industry ...................................................................................... 25 Chapter 3 Analysis of the Online Retailing Business in China........................................... 27 3.1 Market Size and Other Key Indicators of Online Retailing Business in China ...... 27 3.2 Major Players in B2C E-commerce Business in China............................................. 28 3.3 Competitive Analysis ................................................................................................. 30 3.4 Future Trends of Online Retailing Business in China................................................ 33 Chapter 4 Strategies of Leading US Online Retailing Companies....................................... 35 4 .1 O v erv iew ........................................................................................................................ 3 5 4.2 Case Study of Amazon.com ...................................................................................... 37 4.3 Case Study of Zappos.com ...................................................................................... 51 4.3.2 The Retailing Strategies of Zappos.com ................................................................. 54 Chapter 5 Case Studies of Leading Chinese Online Retailing Companies.......................... 63 5 .1 O v erv iew ........................................................................................................................ 63 5.2 Case Study of Dangdang.com .................................................................................... 64 5.2 Case Study of Vancl.com ........................................................................................... 77 Chapter 6 Conclusion: Distilling Strategies of US and Chinese Online Retailers................89 6.1 The Unique Market Positions of Companies Studied ............................................... 89 6.2 Best Practices in Different Value Disciplines ............................................................ 90 6.3 Conclusions .................................................................................................................... 93 References................................................................................................................................95 8 Chapter 1 Introduction 1.1 Overview of E-commerce E-commerce has a great influence in the global economy. It has created a new way for people to buy and sell products, and improved efficiency and effectiveness. As a subset of E-commerce, online retailing is playing an important role in people's everyday life. Companies like Amazon and eBay are in the Fortune 500, and they have changed the retail industry profoundly. In order to understand online retailing and the strategies of online retailing companies, it is necessary for us to review the definition of E-commerce and its history and development. E-commerce can be defined as the transaction of tangible and intangible products and services via the Internet. It includes online retailing, company procurement, online auctions and online payment, to name a few such transactions (Carayannis and Alexander, 2007, p214). Just 20 years ago, E-commerce did not exist. The Internet was introduced in 1960s, but Amazon.com, one of the earliest and best-known E-commerce companies, started only in 1995. The reasons for this time lag were threefold. Initially, the internet was only intended for research and education, and commercial use was prohibited. During the early 1990s, the restrictions were removed and the internet went on to a new era. In addition, the introduction and wide spread of the World Wide Web, which created a new way to effectively find and organize the content created, fundamentally lowered the bar to utilizing the internet for commercial purposes. The World Wide Web was invented by Tim Berners-Lee in 1989, and it was quickly adopted because the inventor let people use it for free. Finally, the web browsers with graphical interface enabled people without specific technical training to "surf' the Internet. Web browsers such as Mosaic, Netscape and Microsoft's Internet Explorer were introduced between 1993 and 1995, and provided an interface by which many more people could 9 access the Internet. As a result, E-commerce started in 1995 because of the technological advance and removal of restrictions. By 2000, E-commerce had become even more popular. The introduction of security protocols and Digital Subscriber Lines (DSL) provided a more secure and faster Internet connection for users, making E-commerce more reliable and
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