An example of an E-Commerce failure and its causes

Sunday, June 21, 2009

Potential causes for DotCom failures
Many newly formed DotCom companies around the world failed as the online bubble began to burst in mid-2000. It was predicted that a high percentage of e-commerce start-ups or newly formed pure DotCom companies would fail.
The causes of failure can be separated to two main categories – controllable and uncontrollable causes – as shown in chart. Controllable causes can be further divided into strategic, operational and technical causes, while uncontrollable can be divided into technical and behavioral causes.



Controllable causes
The analyses involve managerial decisions regarding strategic, operational and technical issues, which were under direct control of decision makers.

Strategic causes
Strategic causes evolved from decision making that determined the objectives, resources, and policies of the organization:
1.Lack of business experience. Most wrong decisions were made because DotCom entrepreneurs lacked a clear understanding of business fundamentals in the areas of finance, marketing, distribution and inventory.
2.Poor business model. The absence of sound business strategies can lead to poor business models and the absence of declared business benefits. Many DotCom firms were offering free services, totally depending on advertisement revenue.
3.Free-spending pattern. One of the reasons behind the failure of many DotComs was a wrongly focused free-spending pattern to support or to initiate high growth. The companies tended to overspend on marketing and IT infrastructure in an attempt to grow quickly.
4.Coders as planners. During the DotCom boom, many business ideas came from coders (programmers) who were inexperienced in devising sound business plans, proper utilization of funds, business strategies and decisions.

Operational causes
1.Vulnerable financial structure (back-up funds). Although most DotCom start-ups raised funds through venture capital for initial operations, they struggled to bring additional capital from an increasing number of reluctant investors.
2.Managerial incompetence and misuse of funds. Many spent money on fancy offices, expensive travel, free food, wrong projects and even hired unqualified staff.
3.Poor customer support. Most DotComs, however, was mainly interested in getting customer orders, but overlooked the importance of after-sales interaction with the customers.
4.Inefficient promotion. Most online companies invested massively on promotion without the backing of sound market research and, thus, failed to use the most effective media to penetrate the target market for the company's products or services.
5.Slow delivery. Resulting dynamic changes posed by e-commerce, many DotCom companies were caught off guard and were too slow to respond to the changes.

Technical causes
1.Web design: slow loading. Having a Web page with JavaScripts, Flash or frames, pop-up advertisements and lots of graphics does not guarantee success. On the other hand, too many graphics and other bells and whistles may slow down the loading time of the page on a user's computer, and the user may become too impatient to stay with the Web site.
2.Down server. Web servers need to be up and running with minimal interruption. Long server down time is also responsible for many DotComs' failures because customers quickly lose their interest if the site is down quite frequently due to repair or improvement, and may not want to visit the site again.

Uncontrollable causes
Like conventional businesses, companies offering products on the Internet are also negatively affected by factors that are uncontrollable. Uncontrollable causes can be classified into two categories: behavioral and technical.

Behavioral causes
1.Over-expectation. Over-expectation is seen as one of the many factors behind many failed DotComs. Many firms did not have adequate planning when they entered into the market with a dream that the products they were offering were good enough to attract consumers. They expected too much too soon.
2.Weak reliability. Reliability and trust in commercial transactions on the Internet are required for the involved parties so much, which may make or break an e-commerce project. Customers need guarantees that the product quality, delivery time, and customer service will be reasonable, and the confidential information will not be misused.
3.Weak customer loyalty. A common belief associated with e-commerce is that a weak customer loyalty to brand names or particular sites will lead to few loyal customers. Online brands that have a very short history fell into the trap of improper advertisement and low quality. It takes some time to build customer loyalty, but very little to destroy it.
4.Mushroom growth. Many DotComs flooded the market with similar products or services and created intense competition among them. Since the online industry was in its infancy, the acute competition seriously reduced the survival chances for some companies.

Technical causes
Some technical issues, categorized as uncontrollable, negatively affected Internet start-ups. In the technical issues are including Internet security and lost transactions are discussed:


1.Internet security problems. “Most of us who have purchased items via the Internet have felt reluctant about the transaction at some point – usually when entering our credit card number”. Hackers are unauthorized people who access in any firm's database as valid users and perform actions intentionally to adversely affect the company's business.
2.Missed transactions. Another hurdle that DotComs faced was missed transactions, where customers created purchase orders. For example, due to problems such as connection drops, busy signals and other technical glitches, the transactions were not processed.