Managing hyper-growth : a system dynamics analysis of competitive dynamics in business-to-consumer electronic commerce

Abstract

Many Internet companies have decided to follow a 'get big fast' strategy: they invest heavily in marketing to build their user base and market share. At ]east for now, the capital markets seem to encourage this strategy: the stock price of the leading competitor in a category (say, Amazon in online book selling) typically trades at a significant premium to the stocks of other category competitors, as a multiple of revenues or users. Is this behavior rational? The paper addresses this question with the help of a System Dynamics model that reflects two particular online retail markets (books and pet supplies). The Dot Com Model captures the characteristics of the main competitors -- their basic economics (how they make money), operating and financial strategies -- and the behavioral decision rules for consumers, managers, and investors in the enterprise. The purpose of this model is to evaluate the different growth strategies seen in Internet businesses, explore their sustainability under different competitive scenarios, and to test the 'rationale' that capital markets are using to value these companies. The Dot Com Model is used to identify a typology of winning strategies and failure modes and the range of scenarios and conditions under which each of those strategies applies. Finally, the paper explores the reference modes for the eventual reduction of the 'speculative excess' in dot.com stocks and the return to more traditional valuation heuristics (multiples of net income, discounted cash flow analysis).