Logistics Information Management

Interpreting the role of disruptive technologies in e-businesses

Gurpreet DhillonDavid CossRay Hackney
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Interpreting the role of
disruptive technologies
in e-businesses
Gurpreet Dhillon
David Coss and
Ray Hackney
The authors
Downloaded by University of Pennsylvania Libraries At 07:54 30 January 2016 (PT)
Gurpreet Dhillon is an Assistant Professor of MIS and
David Coss is a Graduate Student in the College of
Business, University of Nevada La Vegas, Las Vegas,
Nevada, USA.
Ray Hackney is Director of Business Information
Technology Research at The Manchester Metropolitan
University, Manchester, UK.
Keywords
Electronic commerce, Company failures, Book trade,
Service quality, New technology
Abstract
In interpreting the role of disruptive technologies in the
relative success and failure of firms, this paper uses
Christensen's principles to review the strategies of
Amazon.com and Barnes & Nobel. The core argument of
the paper is based on the assertion that firms that fail to
recognize the uniqueness of a disruptive technology fall
short of succeeding in their line of business. The argument
is conducted by reviewing the various aspects of
disruptive technology, as they relate to the business of
selling books online. In a final synthesis, insights based on
occurrences within the US e-business context are
presented.
Electronic access
The research register for this journal is available at
http://www.mcbup.com/research_registers
The current issue and full text archive of this journal is
available at
http://www.emerald-library.com/ft
Logistics Information Management
Volume 14 . Number 1/2 . 2001 . pp. 163±170
# MCB University Press . ISSN 0957-6053
163
Background
The purpose of this paper is to understand the
role of ``disruptive technologies'' in the
success or failure of e-businesses. Disruptive
technologies, following Christensen (1997),
are defined as technologies that result in bad
product or service performance. Examples of
disruptive technologies cited by Christensen
(1997) include the advent of transistors
relative to vacuum tubes and the emergence
of health maintenance organizations as
opposed to conventional health insurers.
Such technologies are disruptive since they
fall short of improving the performance of
products and services along the lines that have
historically been valued by most customers in
the majority of markets. Similarly, it could be
argued that certain Internet-based solutions
could be disruptive technologies within a
given market. Within the context of this
paper, we argue that e-commerce solutions
relating to selling books are disruptive
technologies within the market of selling
books. This does not necessarily mean that
selling books over the Internet is not a
profitable venture. It means, however, that
the adoption of this disruptive technology
without careful consideration could result in a
relative failure of a company. We conduct this
argument using the historical account of
happenings within Amazon.com and Barnes
& Nobel ± the two leading Internet-based
booksellers in the USA.
Technology, within the context of this
paper, refers to the process that transforms
labor, capital, materials and information into
a product and service that has a greater value.
A sustaining technology, therefore, is the one
that nurtures improved product performance.
This is usually achieved by improving
performance along dimensions that have
traditionally been valued by the customers. A
disruptive technology, on the other hand, is
the one which brings in a rather different
value proposition. As Christensen (1997)
notes, disruptive technologies underperform
established products in mainstream markets,
but have features that only a few customers
value. The product or service emerging from a
disruptive technology is usually cheaper,
simpler, smaller and frequently easy to use.
Companies faced with disruptive
technologies fall short of the ideal
performance when their managers fail to
overpower the ``laws of organizational nature''.
 Interpreting the role of disruptive technologies in e-businesses
Gurpreet Dhillon, David Coss and Ray Hackney
A detailed explanation and validity of this
assertion can be found in Rosenbloom and
Christensen (1994) and Christensen (1997).
In order to manage the disruptive technologies
so as to gain advantage in the marketplace,
organizations need to have the ability to
harness the ``laws of organizational nature'' or
the forces ensuing from disruptive
technologies. Christensen (1997) identifies a
set of four principles, and argues that a
consideration of these would enable the
success of enterprises faced with disruptive
technologies. Christensen's four principles
are:
(1) Companies depend on customers and
investors for resources.
(2) Small markets do not solve the growth
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needs of large companies.
(3) Markets that do not exist cannot be
analyzed.
(4) Technology supply may not equal market
demand.
The paragraphs below discuss Christensen's
four principles of disruptive technology and
interpret the happenings within the US online
bookselling industry.
Brick to click and click to brick
Clearly the disruptive technology in the form of
the Internet is here to stay. For example,
Forrester Research is predicting retail sales on
the Web to grow from less than 1 per cent in
1999 to 6 per cent by 2003. Given this context
it is worthwhile to evaluate how companies,
traditional and new, have taken on board this
technology to their advantage. In the
paragraphs below, we examine the happenings
in the US online bookselling business.
The publishing industry had a market
valuation of $23 billion in 1999. A subset of
this industry is concerned with the purchasing
of books either from the local bookstore or
over the Web. This aspect is often termed as
the ``trade'' segment and includes hardcover
books and higher quality trade books. In 1998
Americans bought over one billion trade
books worth roughly $13.3 billion in revenue
to retail stakeholders. The retail stakeholders
include both large and small bookstores that
are vying for the 270 million American
consumers. This competition has led to the
shrinkage of independent bookstores from
6,500 in 1991 to 3,500 in 1998. In the early
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Volume 14 . Number 1/2 . 2001 . 163±170
1990s when major retail chains like Barnes &
Noble and Borders Inc. introduced
superstores with up to 60,000 sq. ft of retail
space with 175,000 titles in stock, with
espresso cafeÂs, they changed the process of
buying books into a social atmosphere. Then
in 1995, Amazon.com opened its Web site,
allowing consumers to browse 4.5 million
titles from the comfort of their own home.
Today these three entities (Amazon, Barnes &
Noble and Borders Inc.) account for 45 per
cent of total trade sales.
In order to assess the successes and failures,
given the backdrop of the Internet, we have to
consider two particular pieces of information.
First is the revenue growth rate of Web retail
sales, which, according to Forrester Research,
will be substantial in the next three years.
Second, according to Media Metrix, who rank
retail dot.com sites by the number of hits the
site receives, Amazon.com was No. 3, Barnes
& Noble were No. 6, and Border Inc. was
No. 65.
Given this context, which company is better
positioned to face the onslaught of the other?
Since the Internet is clearly a disruptive
technology (cf. Christensen, 1997), what
impact is it having on the major players within
the USA? These are the questions that will be
addressed using Christensen's (1997)
principles of disruptive technology.
Principle # 1: companies depend on
customers and investors for resources
This principle is derived from the theory of
resource dependence (Pfeffer and Salancik,
1978). The inherent argument of the theory is
that it is the customers and the investors who
control the flow of resources. The theory
suggests that an inability of a company to
satisfy the customers and investors in its
resource allocation sets it on the path of
failure. Evidence suggests that the highest
performing companies are those that have the
ability and the systems to ``kill'' the ideas their
customers and investors do not relish (see
evidence from the disk drive industry as
presented by Burgelman (1991), Utterback
(1994) and Christensen (1997). If Internet
commerce is to be regarded as a disruptive
technology, what then should companies do
to make it a success? Clearly customers seem
to like the convenience of buying online, and
e-businesses are poised for a remarkable
growth. But what about the investors? If a
company has invested more than necessary in
 Interpreting the role of disruptive technologies in e-businesses
Gurpreet Dhillon, David Coss and Ray Hackney
a disruptive technology and the customers
seem to like it, but it has a negative cash flow
and has a bad debt load, there is a strong
likelihood that the investors (or venture
capitalists) would not be as enthusiastic as
they would have been. According to the
theory of resource dependence, such a
situation puts the company on to the failure
(or not too successful) path.
The theory of resource dependence
assertions is evidenced within the B2B
marketplace. Although venture capitalists
have been rather aggressive in pouring money
into the B2B arena (nearly $800 million was
invested in 77 e-exchanges in early 2000 and
another $500 million in mid-2000), the
customers have not been too responsive. For
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example, within the chemical industry, when
Industrialvortex.com attempted to aggregate
products from numerous suppliers, they faced
stiff resistance since the suppliers felt that
such an e-marketplace would give buyers an
easy access to cheap suppliers (as reported in
Business Week, 11 September 2000). In this
case, although the venture capitalists had
supported the initiative, the customers were
simply overwhelmed with the idea and did not
come on board.
Let us for a moment consider the case of
Amazon.com. One of the primary problems
facing Amazon was to build a brand image
within the book industry. This it was able to
do with relative ease by leveraging its future
earnings potential in the equity market to
raise capital to spend huge amounts of money
on advertising and to form key alliances with
Internet service providers and search engines.
Now the problem for the future is that it did
such a good job building a brand name in the
book business it is finding it tough to move
into other markets. Therefore, as it tries to re-
position itself to enter other markets with a
new marketing campaign, its flank is exposed
to other online book retailers like Barnes &
Noble to come in and take away some of the
online market share Amazon developed. To a
limited extent this was evidenced recently
(September 2000) when Barnes & Nobel
moved in to occupy the privileged spot on the
US Yahoo.com site, which for the past three
years had been occupied by Amazon.com. To
go a step further, Barnes & Nobel has also
entered into a strategic partnership with
Yahoo.com. Such a move clearly does not
please the Amazon investors, although it may
have a limited impact on the customers.
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The whole exercise to reposition Amazon
requires a large amount of capital. Already
investors are not expecting Amazon to have
positive earnings until 2005 and it still will not
be a profitable company until 2015 because of
all the accrued losses over the years. If it has
to go to the equity markets again and push
these timetables back again, Wall Street and
the investment banks could react in a very
negative manner towards Amazon. Evidence
of nervousness in the marketplace can be
gauged from the fact that on 22 July 2000
Lehman Brothers Inc. released a grating
report about Amazon's credit rating situation.
The report suggested that, in the first
dquarter of 2000, Amazon's operating cash
flow decreased from $31.5 million to a
negative $320.5 million. The report also
asserted that the company's inability to make
hard cash on unit sales was a consequence of a
weak balance-sheet, poor working capital
management and a massive negative
operating cash flow.
Lehman Brothers Inc.'s report has come
under criticism from a number of quarters,
but the debate has been rather academic as to
whether the analysis presented by debt
analysts should prevail over that of the equity
analysts. One aspect is, however, certain, and
that relates to the decreased confidence that
the market might have in Amazon. Already,
following Lehman Brothers' report, Amazon's
stock dropped 19 per cent in one day; and the
question that arises is: do the investors have
faith in Amazon's business? Would they back
its attempt to diversify and grow?
The happenings at Amazon hark back to
the basic argument proposed by the theory of
resource dependence and Christensen's
principle. The course of events and
management decisions are indeed setting the
company on to a failure (or not too
successful) course. The firm and the equity
analysts are banking on the customers alone
for a recovery. The company is expecting a 59
per cent jump in sales to $4.5 billion, while
the operating and marketing expenses would
increase by 8 per cent and 7 per cent
respectively. Amazon CEO Bezos contends
that in the end his company would be far
more profitable than any conventional brick
and mortar firm. Although this may be true,
the competition for Amazon does not come
from a traditional retailer, but from
companies such as Barnesandnobel.com, the
 Interpreting the role of disruptive technologies in e-businesses
Gurpreet Dhillon, David Coss and Ray Hackney
online arm of the brick and mortar Barnes &
Nobel.
Principle # 2: small markets do not solve
the growth needs of large companies
It goes without saying that it is the disruptive
technologies that enable new markets to
emerge; and many companies that
successfully leverage the disruptive
technologies to their benefit gain significant
first mover advantages. However, once these
companies get entrenched in their specific
market, they find it difficult to enter newer
small markets, which could potentially be very
profitable. Evidence suggests (for example,
refer to the Apple case as described by
Christensen (1997, pp. 134-6)) that large
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companies, enabled by disruptive
technologies, which have successfully seized
opportunities within new markets have done
so by creating a separate entity to
commercialize the disruptive technology.
The B2B chemicals sector is a good example
to illustrate this point. There are nearly 15
different electronic marketplaces to support the
complex supply chain within the chemical
industry. There are a multitude of buyers and
sellers; and the market is valued at almost $1.6
trillion. Apart from Indie ChemConnect Inc.,
which had significant first mover advantage by
entering the market in 1995, the other successes
have been the e-business backed by traditional
brick and mortar firms. Prominent among these
are Elemica, Omnexus and Envera, which have
been backed by Bayer, Du Pont and Dow
Chemicals respectively. This clearly supports
the above assertion that a large firm wanting to
wear an entrepreneur's hat and enter a relatively
smaller market could possibly do so by
launching a new venture that has the capacity to
capitalize on the disruptive technology.
From Amazon's stand-point it is in a
dilemma. On the one hand, CEO Bezos wore
an entrepreneur's hat to launch a very
successful online firm; on the other, at the
present time, the company has become so big
that it finds it hard to enter newer markets.
Critics of Amazon's strategy contend that
most powerful brands in the world stand for
something simple (e.g. Microsoft for
software, Gateway for computers), but
Amazon seems to be moving away from just
books to toys, furniture and cars. In Bezos'
mind this may be a conscious move to
reposition the company image. Bezos has
been quoted as saying that Amazon stands for
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high quality customer service over the Web
(as quoted in Business Week, 10 July 2000).
Amazon's behavior could be explained using
Christensen's second principle that small
markets do not solve the growth needs of the
large firms. Amazon clearly has become a
large firm with $1.6 billion in annual sales and
7,500 employees; and the online trade
segment of the book publishing industry is
but a relatively small market. In order to
remain on the growth path, Amazon strategy
has been to reposition itself such that it
should no longer remain just in the business
of selling books online.
Compare Amazon's strategy with that of
Barnes & Nobel. In order to compete with
Amazon and have a stake in the business of
selling books online, the traditional brick and
mortar firm decided to launch a totally
separate firm that would look at the online
side of the business. This company did not
affect the current working on the brick and
mortar firm. In fact Barnes & Nobel has been
criticized for the lack of integration between
the online and the traditional lines of business.
Such a move can be compared to the online
B2B forms backed by Bayer, Du Pont and
Dow Chemicals in the chemical industry.
In considering the strategies of Amazon and
Barnes & Nobel in light of Christensen's
principle, it seems clear that Barnes & Nobel
is on the right course and that Amazon may
have to work extremely hard to maintain its
position in the online book sales business.
This is especially when Amazon has invested
nearly $300 million to build five distribution
centers in 1999 and hired scores of customer
service representatives. In many ways, the
Amazon model is moving in the direction of a
click to brick model. However, one thing is
certain, that, if Christensen's principle holds
ground, Amazon may not remain a major
competitor to Barnes & Nobel, at least in
online book sales; although in the long run
Amazon might succeed overall and may
equate itself more with an ``online Walmart''
than with Barnes & Nobel.
Principle # 3: markets that do not exist
cannot be analyzed
Disruptive technologies present an interesting
dilemma. Management principles suggest
market research and good planning as critical
aspects of implementing a strategy. However,
since research about future success can only be
carried out for technological impacts that have
 Interpreting the role of disruptive technologies in e-businesses
Gurpreet Dhillon, David Coss and Ray Hackney
already taken place, it is difficult, if not
impossible, to analyze a market for disruptive
technology. Such analysis can only be carried
out for sustaining technologies. A good
example can be found in the case of E*Trade.
Although E*Trade redefined the manner in
which stocks could be traded, the company fell
short of understanding the nature and scope of
the market, i.e. to what extent it could succeed
in being an exclusive online firm? Since it was
easier for E*Trade to judge the conventional
markets (the typical brick and mortar firms), it
decided to pursue the strategy where its online
brokerage and banking operations would be
supported by real-world outlets. In realizing
this strategy, E*Trade is building a network of
18,000 ATMs in drugstores, supermarkets and
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gas stations. Likewise, the first standalone
E*Trade offices are expected to go up on a
30,000 square-feet area in midtown New York.
Considering the moves and marketplace for
Amazon, two possibilities can be interpreted.
First, as mentioned earlier, Amazon felt the
dire need to build warehouses since it did not
want to disappoint holiday customers in
1999. It did achieve this, which is evidenced
by repeat orders constituting 76 per cent of
sales. Although investments in warehouses are
one time investments and could potentially be
used in the future, one thing is certain, that
Amazon would have to go beyond the online
book sales business to positively realize the
earnings. In contrast, Barnes & Nobel
acquired the Ingram Group. Stephen Riggio,
CEO of barnesandnoble.com, the vice chair
at Barnes & Noble itself, gave the following
statement about why it acquired the Ingram
Group. ``It has great management, it has great
technology, it has great expertise in logistics
and fulfillment. And in order to be successful
in e-commerce going to the next century, we
think a company needs that core competency.
Our core competency is book selling,
Ingram's is logistics, technology and
fulfillment and they have ten centers.'' Clearly
the original core competence of Amazon (i.e.
selling books online) got diluted and it had to
search for new greener pastures.
The possibility pursued by Amazon has been
to diversify into other products. This was
essential because of the existing over-capacity
in warehouses and in the distribution channels.
Furthermore, there was limited space within
the online book market to grow, at least within
the USA. Again, it has been rather difficult for
Amazon to adequately forecast demand for
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newer products. And on $676 million in sales
for the fourth quarter (1999), Amazon had to
write down $38 million on inventories,
particularly for electronics and toys. Whereas
at one time Amazon could boast of excellent
inventory management, today apparently there
are problems managing it adequately. Inability
to turn over its inventories rapidly can be
attributed to poor retail management, and
largely so because it is hard, if not impossible,
to forecast various aspects of the marketplace.
This is evidenced when considering Amazon's
rate of inventory turnover. It plummeted from
8.5 times in the first quarter of 1998 to 2.9
times in the first quarter of 2000. In 1999,
while Amazon's sales grew 170 per cent over
1998, its inventories soared to 650 per cent.
Classic supply chain management suggests
that, when inventories are growing faster than
sales, it means that a company is not selling as
much as it is buying. Ideally, inventory
increase should grow along with growth in
sales rates.
To a large extent the two possibilities
pursued by Amazon are a consequence of an
inability of the firm to adequately judge the
marketplace. As has been suggested, ``markets
that do not exist cannot be analyzed''.
Christensen affords further evidence by
bringing to bear data from the conventional
disk drive manufacturing industry. While it
was possible to forecast the demand for
sustaining technologies such as the 2.5 inch
and the 14 inch Winchester drives, it was next
to impossible to come to grips with the
forecasts for the 5.25, 3.5 and 1.8 inch drives,
which were the disruptive technologies at that
time. The actual shipments for the 2.5 and 14
inch Winchesters matched the actual
demand. However, the actual shipments far
exceeded the forecast for the 5.25 inch drives.
In the case of 3.5 inch drives, what they
actually shipped marginally exceeded the
demand, and in the case of 1.8 inch drives the
actual shipments were far less than had been
forecasted.
Principle # 4: technology supply may not
equal market demand
Since the pace of technological improvement
usually far exceeds the performance
improvement rate that mainstream customers
can absorb, the companies whose
technological features match customer
demands today may overshoot mainstream
market needs tomorrow. Such a trend harks
 Interpreting the role of disruptive technologies in e-businesses
Gurpreet Dhillon, David Coss and Ray Hackney
back to the classic product life cycle model
often used by marketers to develop and
implement their marketing strategies (for
example, see Tellis and Crawford (1981) for
review and critique). In the initial stages,
when no product or service is available in a
given market, emphasis tends to be on
``functionality''. This emphasis then gradually
shifts to reliability, convenience and price.
Within the scope of the Internet acting as a
disruptive technology, a good example comes
from the business of developing conventional
photographic films. The first mover
advantage clearly went to America On Line
and Kodak, albeit at a price. The service was
carefully positioned to address the needs of
those who wanted to have the ability to share
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digital photographs with friends and family.
Hence the emphasis was on functionality.
However, companies such as Ememories and
Ofoto soon jumped into the business and
started offering free processing along with the
ability to share digital photographs. Such
advancement was clearly surpassing what the
current market could absorb. The customer
expectation hovered around functionality and
reliability aspects. With a sluggish Ememories
Web site and limited functionality of Ofoto,
the funtionality and reliability aspects seemed
to have been ignored (see Business Week, 28
August 2000). Christensen (1997) refers to
such phenomena as ``performance
oversupply'' and defines it as a key
characteristic of a disruptive technology.
Amazon certainly had the first mover
advantage in selling books online. This it
achieved by focusing on the technology, apart
from the Internet, to make browsing and
buying easy. Based on well-founded research,
Amazon had realized that ease of use of the
Web site was a key determinant of customer
retention. Amazon had also realized that Web
shoppers are willing to go three clicks into a
Web site to find what they want. If they don't
find it within three clicks they get impatient
and try a different Web site. Such a
technological advancement for Amazon was
clearly strategic and relied on enhanced
functionality of its Web site. Such a move
helped it gain a strong market position in the
online book sales business. Barnes & Nobel
quickly realized that the use of ``one-click''
technology gave significant advantage to
Amazon and hence it incorporated the same
idea into its strategy. This has, however,
resulted in conflict with Amazon, which
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claims that it has ownership of the technology
and that it has approved patent rights. The
Amazon argument has, however, been
diluted, primarily because of its efforts to
reposition itself, in an endeavor to move far
beyond an online book selling business.
Barnes & Nobel, however, have continued to
mature in the online book selling business. By
focusing on reliability and convenience
aspects in the first quarter of 2000
barnesandnoble.com experienced a 147 per
cent growth in revenue and obtained a 67 per
cent second time user rate. It has also been
able to realize the benefits of innovative ideas
like e-publishing. During spring 2000 it
offered Steven King's new short story that
could be purchased and instantly downloaded
through a secure system.
Innovators' dilemma and surviving the
e-world
Christensen's (1997) principles have provided
some useful insight into the nature and scope
of disruptive technologies, especially with
respect to selling books inline. Clearly the
straightforward search for profitability and
growth, coupled with the challenge of
managing a disruptive technology, can
perhaps be the reason for the partial success
or failure of some of the e-businesses. In the
paragraphs below we review the insights that
would hopefully enable managers grappling
with disruptive technologies in the e-world to
be more successful.
First, for any business operating under the
umbrella of a sustaining or a disruptive
technology, remaining close to the customer
and matching product and service offerings
that mirror their needs and expectations is the
ideal situation. However, especially in the
context of a disruptive technology such as the
Internet, this may be a rather precipitous
expectation. Often the market is unable to
absorb the progress afforded by a given
disruptive technology. Furthermore, the
customer service paradigm offered by
companies dealing with sustaining
technologies is markedly different from the
one that prevails for the disruptive
technologies.
In dealing with the markets and the
progress offered by the Internet, Amazon and
Barnes & Nobel have taken two different
stances. While Amazon moved away from its
 Interpreting the role of disruptive technologies in e-businesses
Gurpreet Dhillon, David Coss and Ray Hackney
earlier core competence of selling books
online to servicing the customer needs,
Barnes & Nobel capitalized on managing the
supply chain better and has only recently
started focusing on the customer needs.
Barnes & Nobel has, however, done so within
the scope of online book selling business.
Amazon, because of external pressures to
show a profit has expanded its product
offerings, simply to spur customers to spend
more. In many ways, Amazon has gone to the
other extreme of overwhelming the
customers. Research has shown that, in
structuring organizations for competitive
advantage, overwhelming the customer might
have a negative consequence (cf. Dhillon and
Hackney, 1999)
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Second, in the face of disruptive
technologies, it is rather challenging to make
adequate resource allocation decisions. Even
though a firm is committed to managing and
drawing advantage from a disruptive
technology, implementation and permeation
of the ideas through the bottom rungs of an
organization are a challenge. Both Amazon
and Barnes & Nobel have experienced the
inherent problems, while Amazon has gone
overboard in investing in technology to such
an extent that it currently has over-capacity
(e.g. Amazon has spent nearly $300 million
building a warehouse network that has clearly
been underutilized). However, Amazon's
argument is that it did not want to disappoint
its customers at any stage. Over-expenditure
in the infrastructure and the information
technology to support it has to some extent
hurt Amazon's profitability, which has led the
analysts to have doubts about the
profitability. This in turn has forced Amazon
to move away from its core business
competence. Barnes & Nobel, on the other
hand, experienced problems in realizing
benefits from its investments in infrastructure
and technology. Barnes & Noble did a poor
job in getting its front line managers involved
in the development of the e-commerce
project. One of the reasons, besides Amazon's
competition, for spinning off
barnesandnoble.com from brick and mortar
Barnes & Noble was to avoid the issue of
charging sales tax to the online consumer.
Another issue involved between store
managers and the dot.com division was how
to credit the sales and the returns of books if
the stores were used as distribution networks.
This type of conflict exists because of the
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Volume 14 . Number 1/2 . 2001 . 163±170
bonus structure of retail managers and their
bottom line. Recently, with Stephen Riggio
taking control of barnesandnoble.com, whose
older brother runs Barnes & Noble, the 550
stores have been helpful in promoting the
Web site by offering online discount coupons
to customers who buy products in the stores.
This type of communication between the
companies will help to position
barnessndnoble.com to leverage the
management skills that exist within brick and
mortar Barnes & Noble.
Third, it goes without saying that the ability
of a company (i.e. the capability) to compete
within a given context is a function of the
idiosyncratic skills and processes in place (cf.
Dhillon and Lee, 2000). Whenever firms used
to dealing with a sustaining technology are
faced with a disruptive technology, they face
the challenge of importing the capabilities
generated in managing a sustaining technology.
However, such capabilities had been forged
within the value networks of the sustaining
technology, and hence the challenge.
Amazon had entered the business of selling
books online and had considered its core
competence to reside in inventory
management. This competence, however, has
been depleted over the years. Whereas in the
past Amazon had the ability to produce 70
turns a year on its inventory, compared to the
2.7 times a year for the traditional bookstore,
today, as mentioned previously, its
inventories have ballooned by nearly 650 per
cent. In the past this efficient high turnover
rate created a negative operating cycle of 33
days, which produced a very positive reaction
in the cash flow of the operation. This
occurred because Amazon waited to order
most of its books until the book was already
sold. This resulted in 33 days during which
Amazon had a float of interest free cash to
invest and generate additional revenue before
it had to pay its suppliers. With the
understanding of this core capability, Jeff
Bezos set out to build Amazon to benefit from
the economies of scale.
Barnes & Nobel, on the other hand, until
recently, failed to recognize the uniqueness
involved in selling books online. It inherited
the principles and capabilities founded in
dealing with sustaining technologies and was
just attempting to extend these into the new
arena. Barnes & Noble is well armed and
positioned adequately to battle with Amazon
for control of the online book industry. It has
 Interpreting the role of disruptive technologies in e-businesses
Gurpreet Dhillon, David Coss and Ray Hackney
addressed four important strategic issues,
with which all companies entering the e-
commerce arena should be concerned. It is
aligning the IT activities with corporate
business strategy by answering the questions
of how its IT activities are going to reach new
markets, generate revenue, and make a profit.
It has a good understanding of its core
competencies and IT capabilities, which it
allows to influence its corporate strategy. It is
starting to realize the benefits it can gain from
leveraging the knowledge pool from managers
in the 550 retail stores. It has also developed
an effective Web site, which has the easy to
use platform customer's desire. By adopting a
proactive role (cf. Cortada, 1998), Barnes &
Noble has been able to develop a strong and
Downloaded by University of Pennsylvania Libraries At 07:54 30 January 2016 (PT)
profitable e-business strategy that will take it
into the next decade with few battle scars.
Conclusions
As we start the new millennium and the new
economy replaces the old regime, there will be
some power struggles for control of the
e-commerce market. Up until 1999 the
e-commerce market totaled less than 1 per
cent of the entire retail market. This small
amount was not enough to get the attention of
the big players in the retail industry. In the
meantime, the likes of Amazon.com,
Buy.com, CDNow.com, eToys.com, and
eBay.com have developed a very strong
presence in the online retailing community.
With the e-commerce market share expecting
to increase to 6 per cent by 2003, the more
traditional retailers, especially those
companies that are currently being threatened
such as Tower Records, Toys'R'us and
Barnes & Noble, will have to develop an e-
business strategy to protect their market
share. Barnes & Noble, which has been
threatened by Amazon.com, has done a very
good job at developing and implementing its
e-business strategy. Even Wal-Mart, who is
the biggest retail giant, has entered into the
online retailing industry. Wal-Mart's online
superstore is home to 24 different shops
ranging in everything from travel planning to
pet supplies. It too has done its research of the
competition and has copied the ease-of-use
format, which offers the personalized services
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Volume 14 . Number 1/2 . 2001 . 163±170
customers like. Wal-Mart has been successful
in the traditional retail market because of its
core competence in logistics; now it plans on
using this core competence to establish itself
in the e-commerce market. Other brick and
mortar companies like Gap, Macy's, Sears,
Tower Records, Toys'R'us are being forced
to dive into the e-commerce market to
develop their online brand identity or lose
their market share to a start-up dot.com. As
these different companies bring their core
competencies with them to the online
community they should be able to develop
and maintain a profitable e-business strategy
to maintain, or at least compete for, their
market share within their core industry. In the
end, success will be defined by the ability of
the respective firms to differentiate between
sustaining and disruptive technologies and
their ability to manage the resource allocation
problem, competence in matching the market
to the technology and systematically
identifying and positioning their capabilities.
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