In this article we presented dozens of examples that illustrate the success of the new economy and EC. Yet, failures of EC initiatives are fairly common. Furthermore, during 2000–2002, large numbers of dot-com companies failed. In this section we will look at some examples of failures and their causes. We will also look into some success factors that can be used to prevent failure.
Pre-Internet Failures
Failures of e-commerce systems should not seem surprising, since we have known about failures of EDI systems for more than10 years. A typical example involved the attempt of the U. S. Food and Drug Administration (FDA) to install an online collaboration systems to reduce drug-review time. It was basically an electronic submission system and then an intranet-based internal distribution and review system. The system failed for various reasons. We present them in list form below; many of these reasons are typical of the reasons for EC failures in general, so we have highlighted the key words, for your future reference.
- No standards were established for submitted documents.
- There was resistance to change to the new system, and the FDA did not force reviewers to work electronically.
- The system was merely an electronic version of existing documents. No business process reengineering (BPR) was undertaken in planning (or improving) the new system.
- The FDA lacked technical expertise in interorganizational information systems and in collaborative commerce.
- No training or even information was provided to the FDA’s end users.
- There were learning curve difficulties, and no time was allowed to learn different document systems.
- Clients (the pharmaceutical companies) were not encouraged to make electronic submissions.
- There was no IS planning. The FDA knew that a business process design study was needed, but it did not do it.
However, the FDA learnied from its mistakes. An improved EDI-based system was installed in 1998/1999—after a BPR was done, training was completed,and standards were provided. The system became a full success in 1999.
Internet-Related E-Commerce Failures
Failures of e-commerce initiatives started as early as 1996. Early on, pioneering organizations saw the potential for EC, but expertise and EC business models were just developing. However, the major wave of failures started in 2000, as secondary funding that was needed by Internet-based E-Commerce began to dry up. Here are some examples (again, with key words highlighted).
- PointCast, a pioneer in personalized Web-casting, folded in 1998 due to an incorrect business model. Similarly, Dr. Koop, a medical portal, was unable toraise the needed advertising money, so the company folded. The diagnosis:death due to incorrect business model.
- An Internet mall, operated by Open Market, was closed in 1996 due to an insufficient number of buyers.
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Several toy companies— Red Rocket (a Viacom Company), eparties.com, and babybucks.com —failed due to too much competition, low prices, and lack of cash. Even E-toys, a virtual toy retailer that affected the entire toy industry, folded in 2001 due to its inability to generate profits and the need for additional funding for expanding its logistics infrastructure. It was sold to kbkids.com.
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Garden.com closed its doors in December 2000 due to lack of cash. Suppliers of venture capital were unwilling to give the company any more money to “burn.”
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Living.com, the online furniture store, closed in 2000. The customer acquisition cost was too high.
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PaperX.com, an online paper exchange in the U.K., folded due to lack of second-round funding (funding subsequent to a firm’s original funding but be-fore it goes to the stock market with a stock offering).
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Webvan, an online grocery and same-day delivery company, invested over$1 billion in infrastructure of warehouses and logistics. But its income was insufficient to convince investors to fund it further. It collapsed in 2002. Kozmo, another same-day delivery company in New York, Boston, and other large cities was unable to show sufficient profit and collapsed in 2001.
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In late 2000 Chemdex.com, the “granddaddy”of the third-party exchanges,closed down. Ventro.com, its parent company, said that the revenue growth wastoo slow and that a new business model was needed. Because of the difficulty in obtaining enough buyers and sellers fast enough (before the cash disappears),some predicted that as many as 90 percent of all 1998–2001 exchanges would collapse. And indeed, during 2001–2003 large numbers of exchanges folded or changed their business models.
Even Amazon.com, considered by many as one of the most successful e-commerce sites, did not reach profitability until the end of 2001. The major reasons for failure are incorrect revenue model, lack of strategy and contingency planning,inability to attract enough customers, lack of funding, channel conflict with distributors, too much online competition in standard (commodity) products (e.g.,CDs, toys), poor order fulfillment infrastructure, and lack of qualified management.
Failed E-Commerce Initiatives
Whereas failing companies, especially publicly listed ones, are well advertised, failing EC initiatives within companies, especially within private companies, are less known. However, news about some failed EC initiatives has reached the media and been well advertised. For example, Levi Strauss stopped online direct sales of its apparel (jeans and its popular Dockers brand) on its Web site (livestrauss.com) after its major distributors and retailer sput pressure on the company not to compete with their brick-and-mortar out-lets (channel conflict). Another EC initiative that failed was a joint venture between Intel and SAP, two world-class companies, which was designed to develop low-cost solutions for SMEs. It collapsed in August 2000. Large companies such as Citicorp, Disney, and Merril Lynch also closed EC initiatives after losing millions of dollars in them
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