Limits to growth in the new economy: exploring the ‘get big fast’ strategy in e‐commerce

Abstract

AbstractMany e‐businesses have pursued a ‘get big fast’ (GBF) strategy, pricing low and marketing heavily to build their user base, in the belief that there were significant sources of increasing returns favoring early entrants and large players. Until early 2000 the capital markets rewarded the GBF strategy, but since then market values have collapsed and scores of new‐economy firms have failed. The rise and fall of the dot coms is not merely a case of a speculative bubble. Many firms stumbled when they grew so rapidly that they were unable to fulfill orders or provide quality service. GBF proponents focus on the positive feedbacks that create increasing returns and favor aggressive firms, but have not paid adequate attention to the negative feedbacks that can limit growth, e.g., service quality erosion. The faster a firm grows, the stronger these negative feedbacks may be. We address these issues with a formal dynamic model of competition among online and click‐and‐mortar companies in business‐to‐consumer e‐commerce. The model endogenously generates demand, market share, service quality, employee skill and retention, content creation, market valuation, and other key variables. The model is calibrated to the online book market and Amazon.com as a test case. We explore growth strategies for e‐commerce firms and their sustainability under different scenarios for customer, competitor, and capital market behavior. Copyright © 2003 John Wiley & Sons, Ltd.