Beat of Passion

An example of business-to-consumers (B2C) failure is eToys.com.

Edward Lenk, who was previously a vice president of Walt Disney Co.began eToys, following in the footsteps of the Internet super-success Amazon.com, Inc. Lenk intention was to use the Internet to sell products in a better way. The arrival of Christmas provided him with an idea for the perfect product: toys.

EToys beat the retail chains to the Web and thus secured important deals with some of the most popular Internet Service Providers (ISPs) in 1997. However, the industry's leading competitors that led by Toys "R" Us, soon rose to the challenge and began offering toys on-line. At first, without being tied to stores, as its competitors were, the company was able to carry a light load of inventory. Unfortunetely, overoptimisic predictions for its second Christmas season caused the company to abandon this advantage, leading to its ultimate downfall.

Potential causes for eToys.com failure:

• Lack of business experience

Most wrong decisions were made because the founder of eToys that previously worked for the Walt Disney Corporation, but had no experience with the retail toy industry, lacked a clear understanding of business fundamentals in the areas of finance, marketing, distribution and inventory and were not able to formulate a sound business strategy which was required before the launch of any products or services in the market. Without industry-specific information and start-up experience, mortality risk increases.

• Vulnerable financial structure (back-up funds)

The financial capital is a significant predictor of business failure. Although eToys start-ups raised funds through venture capital for initial operations, the company struggled to bring additional capital from an increasing number of reluctant investors. This affects the company ability to raise capital, as well as to finance its development by using internal resources. EToys which demonstrates a fast sales growth actually need more outside financing. The reason for this is that the company has to prepare for the increased sales by making considerable investments in equipment, manpower, raw materials and inventory, which are made before the proceeds from the sales are received. EToys failed to plan their cash needs for accelerated growth and run into financial difficulties at times that are supposed to be good from the company's point of view.

• Slow delivery

When e-commerce was new it was unproven territory for both customers and businesses alike. The nature of demand for products and services on the Net was still not known well, and to make matters worse, customers' expectations were sky high. Because of the resulting dynamic changes posed by e-commerce, eToys was caught off guard and was too slow to respond to the changes. For example, customers in many cases expected next-day delivery from the suppliers. Suppliers, on the other hand, did not have proper back-end distribution operations in place to deliver products in a reasonable time period. Late delivery combined with the shipping and handling costs, to a certain extent, were responsible for reduced interest in online purchases. For example, eToys was accused of falling short of one of its initial goals-speedy and reliable customer service. Thousands of customers complained that their orders were either late in arriving at their destination or contained the wrong merchandise, which resulted in paying for pick-ups, refunds and reordering.

• Inefficient promotion

The Internet has abundant free information that can be used to do effective marketing research. However, 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. EToys believed that advertisement was the key to success and acted accordingly by outrageously overspending on promotion and that, ultimately, was responsible for the demise of eToys.com.

• Mushroom growth

Another cause of failure is the competition environment. EToy.com was competing with companies such as Toys R’ Us that had not only an online presence, but also the perceived stable infrastructure of bricks and mortar. EToys.com strategy to offer more diverse products conflicted with the strong “toy store” branding they had created. The price wars and high customer acquisition costs also caused problems for eToys.