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.

 

In Playing the Same-Day Delivery Game Part 1, I discussed the differences between shopping experiences that take place in-stores vs. online, and I noted that same-day delivery services aim to provide shoppers with much of the convenience of online shopping, without the associated delays. I then discussed the Last Mile problem, which has historically been an impediment to the cost-effective provision of same-day delivery services.

In Playing the Same-Day Delivery Game Part 2, I discussed various configurations of delivery networks, including hub-and-spoke systems, aggregator systems, point-to-point aggregator systems, and point-to-point systems.

In Playing the Same-Day Delivery Game Part 3, I discussed the different options for delivery network operations — in-house and outsourced, and others — and the barriers to adoption of same-day delivery services, namely, will enough customers and suppliers sign on?

In this part of the analysis, I discuss why same-day delivery services have just now (over the past several years) appeared in the marketplace.

 

The last mile problem has existed since the advent of transportation and communications systems. So why have same-day delivery start-ups suddenly been popping up now, over the past few years? In fact, what has changed since the late 1990s when Webvan, Kozmo, and other startups tried, but failed, to do the same thing?

There are two separate factors contributing to the recent renaissance of same-day delivery services. The first is the improvement in logistics technologies, which have vastly reduced the costs of operating delivery service networks. The second is the implementation of same-day delivery services by Amazon and Google as a means to other ends.

Advances in Logistics Technologies

Improvements in logistics technologies over the past decade have significantly decreased the costs of operating delivery networks. But the logistics of operating transportation networks is still extremely complex, and the provision of delivery services in a cost-effective manner is still “fraught with risk.” As Russell W. Goodman in “Whatever You Call It, Just Don’t Think of Last-Mile Logistics, Last” comments,

… [T]remendous technological developments have optimized performance in transiting freight in all modes and on all routes. “Now the last frontier in the supply chain is the last mile,” Walker says. But many providers are reluctant to venture there, and that’s understandable. Like any frontier, the territory is fraught with risk.

“It doesn’t seem like it would be that difficult,” Walker acknowledges. “I’ve got a DC and 20 miles to drive. It shouldn’t be that hard. Well, there’s a tremendous amount of complexity.”

In its definition of logistics, Wikipedia describes the complexity involved with transportation systems:

Logistics is the management of the flow of goods between the point of origin and the point of consumption in order to meet some requirements, of customers or corporations. The resources managed in logistics can include physical items, such as food, materials, animals, equipment and liquids, as well as abstract items, such as time, information, particles, and energy. The logistics of physical items usually involves the integration of information flow, material handling, production, packaging, inventory, transportation, warehousing, and often security. The complexity of logistics can be modeled, analyzed, visualized, and optimized by dedicated simulation software. The minimization of the use of resources is a common motivation in logistics for import and export.

There are several technologies that have improved the cost-efficiency of delivery systems over the past few years. These technologies include the following.

 

Tracking Systems

Barcoding, RFID and other tracking systems enable suppliers and customers to track packages on their transportation journeys. On the importance of tracking systems, Barcoding Incorporated observes

Within your facility you can track the delivery of packages, parcels, mail, luggage and valuable documents, and electronically capture a proof of delivery signature. Package Tracking is one of the most requested applications from the Barcoding, Inc. website. Large mailrooms and shipping/receiving docks use our package tracking systems to increase accuracy and reliabilty.

 

Telematics

Wikipedia defines telematics as follows.

Telematics are an interdisciplinary field encompassing telecommunications, vehicular technologies, road transportation, road safety, electrical engineering (sensors, instrumentation, wireless communications, etc.), computer science (multimedia, Internet, etc.). Hence the application of telematics is with any of the following:

•  The technology of sending, receiving and storing information via telecommunication devices in conjunction with affecting control on remote objects.

•  The integrated use of telecommunications and informatics, for application in vehicles and with control of vehicles on the move.

•  Telematics includes but is not limited to GPS technology integrated with computers and mobile communications technology in automotive navigation systems.

In “Telematics: The Next Frontier,” Genevieve Conti describes recent improvements in telematics systems:

Flying cars may still be the province of "The Jetsons," but truck telematics have dramatically changed the way fleets communicate with and manage trucks and drivers - and there's more to come…

Implementing a telematics system will no longer break the bank, and the prices are only going to keep coming down…

The next wave of telematics technology will see increased Internet connectivity, which will be especially helpful in keeping drivers on "the grid."

WiFi, combined with 4G, allows for enormous amounts of data to be passed back and forth from a truck or driver to the back office, says PeopleNet President Brian McLaughlin.

 

Inventory Management Systems

It is essential for delivery services providers to manage their hub inventories effectively and efficiently. Inventory management systems help them to do just that. From Tim Crosby, “How Inventory Management Systems Work”:

[Inventory management] systems ensure customers always have enough of what they want and balance that goal against a retailer's financial need to maintain as little stock as possible. Mismanaged inventory means disappointed customers, too much cash tied up in warehouses and slower sales. Factors such as quicker production cycles, a proliferation of products, multi-national production contracts and the nature of the big-box store make them a necessity.

Modern inventory management systems must have the ability to track sales and available inventory, communicate with suppliers in near real-time and receive and incorporate other data, such as seasonal demand. They also must be flexible, allowing for a merchant's intuition. And, they must tell a storeowner when it's time to reorder and how much to purchase.

 

Delivery Route Optimization Systems

These systems help delivery services providers execute delivery routes in the most cost-effective manner. For example, Appian DirectRouteby TMW Systems describes its solution as follows:

DirectRoute, designed for distribution and supply companies, is richly graphical routing and scheduling software that helps transportation organizations in all industries lower their costs, control field operations and service their customers better. Optimizing route planning, automating driver scheduling and consolidating shipments for efficient delivery with DirectRoute can produce full return on initial investment within a few short months.

As another example, AccellosOne Optimize describes its system as follows:

[AccellosOne Optimize ] combines load building optimization, scheduling, and routing decision support for least cost shipping.  By automating your load planning process you can save 10-20% or more on your overall transportation costs…

AccellosOne Optimize’s powerful optimization engine utilizes state of the art optimization algorithms to produce loads and routes that balance profitability and customer requirements.  In order to maximize the return, AccellosOne Optimize considers multiple solutions to the problem it is presented such as; what consolidation options are available, which route consumes the fewest miles, are there pooling opportunities, is it less expensive to ship the freight on your assets or broker the load to a 3rd party, and which 3rd party offers the most cost effective option.

 

What’s Really at Stake in the Same-Day Delivery Game

Same-day delivery providers, such as Postmates (started in 2011), Zipments (started in May 2011), Deliv (started in early 2012), and Instacart (started in August 2012), are dedicated delivery services providers. That is, long term viability requires these companies to be able to generate a profit from their delivery operations alone.

However, for Amazon and Google, this is not the case. The same-day delivery services provided by these two companies constitute one of many different business units in both companies. What’s more, same-day delivery services are not an end in themselves, but rather a means to other ends. What this means is that Amazon’s and Google’s same-day delivery services do not have to become profitable business units on their own. Rather, they simply must generate “enough” value for the respective companies to achieve the ends for which the services were instituted. In particular, same-day delivery services were instituted as a means of (i) penetrating and generating shares of the grocery market, (ii) gaining market share in product search, (iii) generating consumer use data, (iv) establishing direct contact with users, and (iv) increasing the value of Amazon’s and Google’s ecosystems as a whole.

 

Grocery Business

Amazon and Google have been touting their new delivery services as a means of providing customers with same-day delivery of groceries. It’s no wonder that the two companies are trying to capture a piece of that market, since it’s such a sizeable market. In fact, Jason Del Ray in “Inside Google’s Big Plan to Race Amazon to Your Door”, tells us just how large the market is when he comments that Google’s instigation of Google Express as a same-day grocery delivery services provider “gives Google a crack at the $600 billion grocery market.” Farhad Manjoo, in “The Glorious Future of Shopping,” offers this same rationale – getting a piece of the grocery and household goods market – for Amazon’s and Google’s forays into same-day delivery:

Amazon’s main competitive disadvantage, today, is shipping delays. While shopping online makes sense for many purchases, the vast majority of the world’s retail commerce involves stuff like toilet paper and dishwashing soap—items that people need (or think they need) immediately. That explains why Wal-Mart sells half a trillion dollars worth of goods every year, and Amazon sells only $61 billion. Wal-Mart’s customers return several times a week to buy what they need for dinner, and while they’re there, they sometimes pick up higher-margin stuff, too. By offering same-day delivery on groceries and household items, Amazon and Google are trying to edge in on that market.

 

Product Search

While the grocery market is indeed huge, capturing a piece of that market isn’t the only reason that Amazon and Google are providing same-day delivery services. By offering same-day delivery of groceries (and other household goods), the two companies are also battling for control of product search, together with the associated ad revenues they enable. For example, Heather Somerville, in “Google puts pressure on eBay, expands same-day delivery,” states,

Same-day delivery also opens the door to selling advertising and other technology to retailers, and building a loyal following of consumers who see Google or eBay as their daily shopping destination.

While Google is king of web searches generally, Amazon has been stealing increasingly larger portions of the product search segment away from Google. By entering the grocery market, Google is hoping to recapture its losses in this segment of search. As Scot Wingo, in “Google vs. Amazon - Deep Dive into Same-Day Delivery Part I/II,“ notes:

… when consumers start their online buying process, more than twice as many start on Amazon as Google. Search is Google's cash cow and product search represents ~40% of queries, so Google's primary business counts on success in turning the tide against Amazon.

Jason Del Ray adds

With each product search that starts on Amazon instead of Google, the search giant’s main business of selling ads alongside search resultjs weakens.

 

Consumer Data

In addition to product search and the value of associated ad revenues, Amazon and Google are also using same-day delivery of groceries as a means to collect information on consumers’ purchasing habits.

As Heather Somerville indicates,

For every sale that Amazon makes, Google is cut out of not just the revenue but also the valuable consumer data.

Such consumer data is extremely valuable for use as a means of increasing ad revenues by honing advertisements to better meet the needs of consumers, thereby generating greater sales from advertised products. Jason Del Ray clarifies this concept:

For the most part, Google Shopping Express only provides retailers with aggregated customer data on who is buying what from their stores…

Another fear among some retailers … is that as long as the purchases keep running through Google instead of the retailer’s site, Google will start to collect more and more valuable information on who buys what. Google could then use that data to attract more money from brands looking to promote their own product through Shopping Express no matter which retail store it comes from. Some of that marketing money could in turn be shifted away from funds these brands typically allocate to retail stores to promote individual products.

 

Direct Access to Customers

Jason Del Ray makes another very keen observation. He notes that when customers order products from third-party suppliers for same-day delivery through Google, Google secures direct access to these customers. Such direct access could eventually be used by Google to squeeze out third-party suppliers and sell directly to customers.

What’s keeping some retail bosses awake at night, however, is the ongoing suspicion that Google could eventually build an Amazon-like marketplace in which the search giant sells products directly to shoppers and cuts out brick-and-mortar retailers altogether. Even some current Google Shopping Express partners see the potential for such an approach.

 

Spillover Effects to Complementary Ecosystem Parts

Finally, same-day delivery services are being used by both Amazon and Google to generate spillover effects – that is, complementary revenues – to other parts of their ecosystems. As this relates to Google, Heather Somerville notes:

Even if same-day delivery is unprofitable, analysts say the service will bring revenue to other parts of the companies. Google Shopping Express may revive Google Wallet, the company's payment system that shoppers must use for a delivery.

And as the halo effect relates to Amazon, J.J. McCorvey, in “AmazonFresh Is Jeff Bezos' Last Mile Quest For Total Retail Domination”, states

So by expanding grocery delivery, Amazon hopes to transform monthly customers to weekly –or even thrice-weekly –customers. And that, in turn, will produce the kind of order volume that makes same-day delivery worth investing in. "Think of the synergy between Prime, same-day delivery, and Fresh."

 


Go to Part 5: How Will the Same-Day Delivery Game Evolve?

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