Assess Barnes and Noble’s response to the substitution threat from Amazon. How did Amazon respond in turn, and to what net effect?

Barnes and Noble’s Response:

Barnes and Noble had started studying online business during late 1994. It was not in response of Amazon.com’s going online that they thought about doing online business. Their mission in starting online book retail was clear – To leverage Barnes & Noble brand name online. They soon realized the substitute threat from fully online retailer, Amazon.com. They now worked on establishing the strategy that could be in par with or possibly outperform that of Amazon. The following were their actions in response to this move –

– As an initial step, On Jan 28 1997, they entered into alliance with AOL, becoming exclusive bookseller
– Formed alliance with Firefly to develop personalized book recommendation service with the vision of incorporating this feature in its web site.
– On March 13, 1997, established transaction oriented web site that enabled online book selling. On the same day, filed suit against Amazon, challenging its claim of “Earth’s biggest bookstore”.
– Established online business strategy to bring in incremental sales by providing easy access for people to buy books and by tapping international markets.
– Established separate company – Barnes & Noble .com – with separate COO to account for centralized scope on online business.
– Established high performance logistics network that could reduce delivery times to a greater extend and that can ship on the same day an order was placed.
– Necessary upgrade and enhancements were made to the “back-office” software systems to account for online business. The existing systems provided stable back-end for the front-end web site.
– Offered deep discounts up to 40% for best selling hand covers
– Enabled direct-from-warehouse pricing for its customers
– Implemented more scalable and sophisticated user personalization tools on the web site, notably, “collaborative filtering” that presented users with books selections based on previous similar user profiles.
– Entered into alliance with other web sites to provide mutual links and thus increase site traffic.

Amazon’s response:

Amazon responded to Barns & Noble’s growth as a competitor in the following manner –

– Doubled the amount of book titles
– Expanded best-seller discounts to 40%
– Increased sales associate’s first time sales commission from 8% to 15%
– Developed user personalization tool in alliance with Firefly’s major competitor
– Eventually, increased discounts applied at various points during the competition, lead to slow pay back of Associate’s program, web site advertisement and back-end systems. It was expected to break even in 1999.

(c) Deepesh Joseph, 2006-2008