Winning the Hardware Software Game Winning the Hardware-Software Game - 2nd Edition

Using Game Theory to Optimize the Pace of New Technology Adoption
  • How do you encourage speedier adoption of your product or service?
  • How do you increase the value your product or service creates for your customers?
  • How do you extract more of the value created by your product or service for yourself?


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A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.


Shopping Experiences: Bricks-and-Mortar vs. Online Stores

Let’s start with a comparison of shopping experiences in bricks-and-mortar versus online stores.

There are three major advantages associated with in-store versus online shopping experiences. First, buyers are able to handle the merchandise. This basic sensory experience reduces much of the risk associated with online shopping regarding not knowing exactly what you’re getting. Second, in-store shoppers are able to take immediate delivery of the items they buy – no shipping costs or delays. Finally, to the extent that shoppers need to return items, in-store returns don’t require any of the packaging or shipping costs associated with online returns.

The disadvantages associated with in-store purchases include (i) the time and inconvenience of going to the store, (ii) higher prices, and (iii) smaller selections.

Moving on to online shopping experiences, there are four major advantages associated with shopping online rather than in a bricks-and-mortar store. First, online stores are never closed, so shoppers can do their shopping at their convenience. Second, online shopping generally yields lower prices than shopping in stores, because online shoppers can do easy price comparisons across suppliers and choose those with the lowest prices. The third major advantage of online shopping is the long tail. Bricks-and-mortar stores simply cannot afford to afford all the possible varieties that are available to online shoppers. Finally, shopping online enables buyers to find vast amounts of product information (specs, reviews, etc.) that generally isn’t available to in-store buyers.

The disadvantages associated with online purchases include (i) delays in taking possession of purchased items, (ii) higher risks associated with not being able to experience an item in person (touch, try on, etc.), and (iii) costs associated with having the product shipped to the buyer.

The advantages and disadvantages associated with in-store versus online shopping are presented in Figure 1.

Figure 1

Same-day delivery services aim to provide shoppers with much of the convenience of online shopping, without the associated delays.


Major Impediment to Home Delivery: Last-Mile Problem

Wikipedia defines the last mile as follows.

Last mile is a term used in supply chain management and transport planning to describe the movement of people and goods from a transport hub to a final destination in the area.

The last mile has been a long-standing problem that has prevented cost-effective, same-day delivery of goods in all but the most densely populated areas. In “AmazonFresh Is Jeff Bezos' Last Mile Quest For Total Retail Domination”, J.J. McCorvey describes the last mile problem quite elegantly.

Creating a same-day delivery service poses tremendous logistical and economic hurdles. It's the so-called last-mile problem –you can ship trucks' worth of packages from a warehouse easily enough, but getting an individual package to wind its way through a single neighborhood and arrive at a single consumer's door isn't easy. The volume of freight and frequency of delivery must outweigh the costs of fuel and time, or else this last mile is wildly expensive...

In fact, Russell W. Goodman, in “Whatever You Call It, Just Don’t Think of Last-Mile Logistics, Last,” claims that “as much as 28 percent of all transportation costs occur in the last mile.”

Some delivery service providers, such as FedEx and UPS (but not the USPS…), have managed to tackle the last mile cost effectively (i) by developing complex logistical solutions, as well as (ii) by generating large volumes of shipments on their delivery networks, that is, benefitting from economies of scale. However, being dependent upon large delivery volumes to be cost-effective means there is a significant trade-off between time and cost of delivery: With more time, larger volumes of deliveries to a particular area can be generated, which decreases the costs of providing each individual delivery. So the longer the delivery time, the lower the delivery cost. Equivalently, the small volumes associated with time sensitive (e.g., same-day) deliveries make them very costly to perform.

Many businesses have offered same-day delivery services to their customers at cost-effective prices for quite some time. However, the bulk of these services have tended to be provided to business customers. Delivery services to business customers are generally much more cost-effective than those to residential customers, because they tend to involve deliveries (i) of larger volume purchases and (ii) in more centralized areas.

At the same time, however, it has been traditional for businesses in specific industries to offer same-day delivery services, even to residential customers. For example, businesses that sell large, bulky items – such as furniture and appliances – generally offer home delivery, since most customers are not able to transport these items by themselves. Also, companies in the business of providing ready-to-eat food (pizza) and gifts (flowers and chocolates) also offer home delivery. In these cases same-day, home delivery constitutes a large portion of the item’s value to the customer, so the customer is willing to pay the costs of delivery (either directly or through higher product prices).

But for most everyday items, home delivery to residential customers has continued to be prohibitively expensive to provide.


Go to Part 2: Configurations of Delivery Networks

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