DISCOVERING MANAGEMENT
INDIVIDUAL REPORT- WEBVAN
WORD COUNT: 2600 words.
[COMPANY NAME] [Company address]
TABLE OF CONTENTS
Abstract ............................................................................................................... 2
Executive Summary .......................................................................................................................... 2
1.0 WebVan analysis overview ..................................................................................................... 3
2.1 Market Understanding, Planning & Testing .................................................................... 3
2.2 Customer relationship management................................................................................................ 6
2.3 Role of top Management .................................................................................................................. 7
2.4 Operations ....................................................................................................................................... 9
3.0 Conclusion and References ...................................................................................................... 11-12
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Abstract
This report critically analyses the business model of Webvan, which was the first ever company
to introduce the creative idea of online grocery shopping to its customers. Although an initial
success, the company failed due to a misalignment between its finance, marketing, and
operations sector. Through the critical discussion of the successes and failures of this internet
grocery company, this paper provides critical analysis on the strategic factors to take into
account in market planning, operations and customer relations, and the significance of
maintaining a corporate reputation for a company to be successful.
Executive Summary
Grocery shopping is an essential need in one’s life. Webvan is an online grocery store founded
by Louis borders in San Francisco in 1999, that aimed to provide its target customers with the
convenience of online grocery shopping with fast paced delivery at their doorsteps. Being the
first to introduce the innovative idea of online grocery shopping, they had a first mover
advantage in the industry and therefore attracted the attention of various customers and
investors. It’s promise of fast, easy delivery door to door pushed venture capitalists to invest in
them, leading the company to subsequently release an IPO. After its initial expansion, the
company could not manage its operations, logistics and customer relations together effectively,
that led to its eventual bankruptcy in 2001. This report gives insights on WebVan’s business
strategies and through theories and academic evidence, it provides discussion and
recommendations on how despite having an innovative business model, how critical it is for a
company to manage all strategic factors altogether.
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1.0 WebVan analysis overview
Markets have seen many creative businesses survive & flourish and others fail or fade over
time. Although an idea and how unique it is, does play a role in attracting the initial attention,
yet the implementation and various other strategic factors must be in the right place to ensure
the success of the venture over time. One such example is Webvan, where the idea of e-grocery
and delivery was one of a kind. This idea led them to achieve a lot of traction in the initial
phase, but ultimately the business could not sustain itself due to lack of futuristic planning,
diversion of focus and operational challenges. This analysis shall explore the factors that helped
Webvan to grow in the initial phase, possible reasons for failure of the company and the factors
that should have been considered before investing hugely into the logistics and infrastructure.
These strategic factors can be categorized mainly into Market Understanding, Planning &
Testing, Customer relationship management, Role of top Management and Operations.
2.1 Market Understanding, Planning & Testing
To start with, one of the main important factors for any business to consider even before
commencing operations is the strategic planning. This involves understanding the market,
defining the customer segment, and assessing the viability of the business model in various
scenarios. A well outlined strategic plan is critical for an organization’s success. Michael
Porter, known as the guru of strategic planning, defines a well outlined strategy as “a broad
formula for how a business is going to compete, what its goals should be and what policies will
be needed to carry out those goals”. Kaplan and Norton, the gurus of ‘strategic
implementation’, describe an organization’s strategy as ‘how it intends to create value for its
shareholders, customers, and citizens’. In order to understand the market, a company's
environment needs to be understood and analysed first. Porter’s five forces model is a good
way to analyse the company’s competitive environment. As we know, just being a new and
creative idea does not rule out the possibility of being copied by other players in the market.
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Hence, the threat of new identities and substitution is always there. In Webvan’s case, there
were new players who were starting to operate in the same domain, which would ultimately
lead to sharing the market potential in terms of available customers (potential customers).
Additionally, the model of Webvan assumed that people no longer wanted to shop from the
supermarkets personally, which was not really the case. Hence, bargaining power of customers
was really high in this scenario. Along with that food retail operating at thin margins, requires
an additional effort and arrangements in order to secure a deal with the suppliers. Also, it was
observed that there was not enough customer base to start with, as internet penetration was
limited in the 2000s. Most of these factors were either not analysed properly or paid attention
to in Webvan’s case, which led to its early failure.
Testing on a smaller scale and then expanding has been the normal course of action for newage businesses, as they venture into the unknown. But oftentimes, the management becomes
over-ambitious and decides to go full throttle and launch the operations over a wide span of
locations. Although this strategy helps in capturing the market early on, it requires huge upfront
investment with no prior history of understanding how the investments will turn out to be.
Webvan tried the same approach by heavily investing into technology and physical
infrastructure such as warehouses and logistics networks, but they were not able to sustain the
cost and operations for long.
Webvan’s management in inventory and marketing was improper and not well balanced,
because of which it faced a loss of more than 130 dollars per order (Wharton, University of
Pennsylvania, 2001). At a strategic level, webvan targeted a wrong market that aimed at
meeting the demands of price sensitive customers. At the same time, the company invested
heavily in forming their own delivery infrastructure to ensure that the delivery reaches the
customer’s doorstep in time. However, since it targeted customers that were price sensitive, the
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company’s costs were rising, and revenues were decreasing consistently. This proves that
despite having a creative idea, the company could not be successful as the market plan of the
company was not well formulated. Hence forming a well outlined market plan that targets the
right market and investing more in marketing rather than in costly infrastructure could have
prevented webvan from going into bankruptcy. Statisitia ranked Webvan as one of the most
expensive
start-ups:
In addition, Stephen Lunce, in his study, “Success and failure of pure-play organizations:
Webvan versus Peapod, a comparative analysis” compares the two electronic grocers from the
perspective of strategic management, logistics and marketing strategies and provides a
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comprehensive analysis of what was different about Peapod, which led them to be doing better
and survive as compared to Webvan. And arguments do tend to emphasize on the importance
of these strategic factors and show that just being an innovative or a creative idea is not enough
to ensure long-term success.
2.2 Customer relationship management
To be able to understand the customers very well and respond to their expectations is the key
to success of any business. This also promotes a positive brand image in the market, which
definitely attracts investor attention. Webvan did invest a lot of money into the technology,
automation and infrastructure. Their order automation system was estimated to have ten times
the productivity of a traditional “shopper” based on the time and efforts which would otherwise
be spent on wheeling a cart through a store. Also, in order to meet the customer expectations,
Webvan invested into the delivery infrastructure to ensure timely and quick delivery which was
quite impressive compared to even today.
Positive associations have been noted in the customer satisfaction and market share and
productivity at IBM (Naumann and Hoisington, 2001). Also, many other studies have found
out that customer satisfaction is positively associated with improved performance, loyalty and
hence, long-term growth (Heskett, Sasser, and Schlesinger 1997; Reichheld and Teal 1996),
which can be considered as one of the contributing factors to Webvan’s initial success.
One
However, Webvan could not manage their customers for long because of many unfavorable
decisions such as revamped business models and changing product offerings.
One of the main reasons why the company failed was because of its ineffective delivery system
that did not consider customer expectations. Online customers had to wait for a long time to
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get their delivery (Glasner, 2007). They had an inflexible delivery schedule as due to their fixed
delivery time, customers who were at work could not place their order. Webvan’s poor
customer relations management led to dissatisfied customers and hence investing in a
customer-oriented management system that incorporates customer feedback could have helped
them significantly to achieve their objectives.
Related to this, Piccinini et al. (2015) showed that being able to use customer knowledge is an
important factor to deliver digital services. But in Webvan’s context, there was a lack of
cultural understanding, which led them to assume that people did not want to shop in
supermarkets. Customers could not identify with the new website of HomeGrocer post
acquisition. Moreover, wanting to change the brand image within 2 years, portraying the
general delivery service, logo change and color of vans, all of it added to more confusion in
the minds of the consumers. These changes cost Webvan and they had to switch to lower
quality suppliers, which coupled with the previous factors led to decrease in demand and
ultimate failure of the company.
2.3 Role of top Management
A favourable corporate reputation can contribute to a company's various strategic benefits,
such as building obstacles to market penetration (Deephouse, 2000; Fombrun, 1996; Milgrom
and Roberts, 1982), promoting customer retention (Fombrun, 1996), and enhancing
competitive advantages (Barney, 1991; Roberts and Dowling, 1997). Reputation of the top
management definitely builds trust and is an important prerequisite to ensure that the future
vision of the organization is realized over time. Since they are the drivers of the business, it
can be said that managerial insights do play an important role in steering the company through
rough times. Webvan was able to rope in George Shaheen, a Chief Executive at Andersen
Consulting with a huge reputation. This led them to launch the company's IPO and expansion
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in more than a dozen new markets along with addition of new products to their portfolio. The
same can be directly compared to Tesla’s Elon Musk today. As he has had a previous track
record of building successful businesses and platforms, it automatically gives the investors a
confidence to pay attention to wherever he plans to venture into next.
Ravasi et al. (2018) published a study where they reviewed four decades worth of studies on
corporate reputation and introduced a model to measure corporate reputation (see below)
It is essential to measure Webvan’s corporate reputation using the given model. WebVan had
a creative, innovative new idea of online grocery shopping, this innovation really contributed
towards its initial expansion. Analysing its performance and products, its services were not
customer oriented due to its fixed delivery times and due to lack of business planning, its
revenues were declining, and costs were increasing, leading to poor financial results, and
worsening its reputation.
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As the reputation is all about perception, there are other ways to build a positive reputation of
the company also such as:

Creating a good environment at workplace, where each one is respected and can feel
being cared for and valued

Utmost high standards of ethics and professional behaviour within the leadership and
staff

Building a good financial track record and maintaining the same

Being socially and environmentally responsible: it is crucial for a business organisation
like Webvan to incorporate corporate social responsibility and be sustainable in order
to deliver value to its customers and achieve its objectives. A sustainable business
strategy aims to positively impact the society and the environment, thereby helping
address some of the world’s most pressing problems.
These are some of the ideas that Webvan could have worked on simultaneously, so that a great
organization could be developed going forward.
But changing CEOs more than once and not having any prior experience into the e-grocery
market, did not lead Webvan to a right direction afterall. Under the new CEO, the company
came under huge debt and with margins running thin, could not survive after a few months. On
the other hand, a similar organization, Peapod, also had quite a few changes to the CEO
positions, but most of them had some technology experience, which would have probably led
them to help the company survive the ‘dot-com’ craze.
Therefore, top management’s reputation may initially help in securing funding or even some
initial success, but long-term growth cannot be guaranteed.
2.4 Operations
Operations is a vast area that does not cover just how the business runs on the ground but how
multiple stakeholders interlinked together and work with each other to ensure the success of an
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organization. Stakeholder Theory can be used to understand the harmony between various
stakeholders and how they operate in conjunction with each other to deliver the final value to
the customer. It encourages organizations to create a positive, long-lasting impact on various
internal & external stakeholders by aligning their interests with each other and the common
goal. In the case of Webvan, this alignment became a real challenge after they started
expanding hugely without having a plan in place. Hence, they started having issues with
operating capital. Stretching of resources across the country and shrinking margins, acquisition
of HomeGrocer ($1.2 billion) and increase in existing debt, forced Webvan to cut costs by
closing some operations. It would have been a much better approach to try out local and focused
expansion first.
Also, given the business was into digital space, it needed a proper articulated and tested digital
business strategy. A digital business strategy is an “organizational strategy formulated and
executed by leveraging digital resources to create differential value” (Bharadwaj et al., 2013,
p. 472). A culture of control rather than a culture of agility became detrimental to their success,
as it was not able to fulfill changing customer expectations in a timely manner. Based on
Osmundsen et al. (2018), there are several drivers for digital transformation and innovation,
such as: Customer behavior and expectations, Digital shifts in the industry, Changing
competitive landscape and Regulative changes. Requirements of an effective Direct To
Consumer (DTC) logistic system are very different from traditional logistics because of
quantities, timing & demand management and that makes planning even less flexible. Webvan
used the mega-warehouse model, hub and spoke model and centralized the order fulfilment
and decentralized the delivery system (more cost but time efficient process). Along with high
fixed cost of inventory management software and high construction costs, it became
unsustainable to continue the operations from a financial standpoint. Hence, operations
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planning, and financial management are key pillars, to have been considered before investing
hugely into the infrastructure.
3.0 Conclusion
In summary, this report critically analysed how webvan failed due to its unsustainable
business model. The service failure of webvan resulted in various implications such as
customer dissatisfaction, decreased reputation, and losses in profits. Through the above
analysis, it is recommended for an online grocery store to have a website that is more customer
oriented, and also to have a well formulated business plan. In conclusion, it can be said that
the innovative and creative idea did help Webvan to get initial success, but to be able to grow
into a full-fledged profit-making sustainable business, a lot of other factors are also equally
important. It can be said that the creative process is inherently messy and iterative, which is the
magic ingredient behind breakthrough ideas (De Bono, 1970) and creativity plays a vital role
in bringing about improvements in organizational performance (Anderson et al, 2014). But,
having said this, creativity and innovation are very complex phenomena that are difficult to
predict and control in any meaningful way.
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