I am sitting here on a Friday at 4.23PM in…
“Digitization is reviewing the rules of competition,” write Martin Hirt and Paul Willmott in McKinsey & Co Quarterly’s May 2014 review while reflecting on the impact that digitization is having on established and new companies alike. The article ends with 6 critical decisions that CEOs need to answer in order to react to the advent of digitization. This article will expand on the third decision.
Click here to read about the introduction and first decision.
Click here to read about the second decision.
Decision 3: Cooperate or compete with new attackers?
Digitization can be an opportunity and a challenge. One of the main reason why it can be a challenge is that it creates lower barriers to entry. Because of lower startup costs, small companies can flood a market and, even though they may not be a great threat for big companies when taken individually, they are when they are considered altogether. Small companies also represent a threat because their size makes them able to quickly adapt to change and because they can each specialize in one part of a given market. When every relevant section of the market has been cornered, no matter how big a firm is, how should it react? One option would be copying the new attackers’ products or business model. Another would be acquiring such attackers. However, both of these strategies require significant investment in terms of money and resources. Big companies that have been around for a long time may have a hard time making the switch to digital. Not to mention that digitization brings about a whole new set of product opportunities, and it’s not possible for a company to protect itself from threats coming from every side. For this reason, cooperation with smaller digital disruptors may make in some cases more sense than competing. An example of the benefits of partnering with new attacker is the partnership between online retailer Etsy and fashion retailer Nordstrom through Etsy Wholesale.
Answer: unless you have the time and resources to create a more innovative product than your competitors, consider partnering with them to better your key activities and enhance your value proposition.
Etsy Wholesale is a private platform where wholesale buyers can connect with Etsy’s artists, designers, and vintage vendors to bring their products in their stores. The choice to create Etsy Wholesale, as written in Etsy’s official blog, came from observing that Etsy vendors were getting commissioned by buyers of various stores to produce big quantities of their products to include in the stores’ product offering. In some cases, Etsy vendors opened stores of their own, given the success they had on the e-commerce platform. Etsy Wholesale launched a Beta version on August 2014. In order to buy, users need to enter their sales tax ID number and prove they are a legitimate retailer. In order to sell, vendors have to apply and share information about themselves and their wholesaling guidelines (whether they send out samples, if they have business insurance, etc.).
Etsy Wholesale + Nordstrom
However, Etsy Wholesale isn’t Etsy’s first attempt to connect with wholesale. Etsy experimented with creating such connection through its first retail partnership with furniture and houseware retailer West Elm. It then did the same with Nordstrom. Etsy teamed up with Nordstrom and selected a few sellers and items from Etsy’s marketplace. The sellers were contacted with a request to not only sell their products, but also share some information about themselves: the seller’s name, the business name, their city/state and a short bio including their story and inspiration. This information was then presented in the stores alongside the artist’s collection. The names and location were written in the object’s hang-tag, and the bio was posted on the signage around the Etsy corners at various Nordstrom locations.
These kinds of partnership, however, are a bit different from Etsy Wholesale. As expressed by now Etsy Wholesale product manager, Vanessa Bertozzi, in a comment to her post: “For the Etsy Wholesale marketplace, we here at Etsy of course will be just the platform, as you say, where boutiques and other retailers can connect with individual artists’ brands. So in those cases, there wouldn’t be Etsy hang-tags. The Nordstrom and west elm deals are co-co-co-branding with the three parties all involved.” Nonetheless, fast-forward one year later, Nordstrom joined the Etsy Wholesale platform as one of their first buyers.
Nordstrom’s strategic decision to first partner with Etsy and later become an Etsy Wholesale user will bring about great benefits for the fashion retailer. Customers are bored with mainstream cookie-cutter merchandise and have been starting to long for the “old” shopping experience, meaning going to local shops, befriending the owners, and knowing how products are made. They also care more and more for Corporate Social Responsibility, which is linked to supporting local causes and caring about the people and community that a business is in. Finally, thanks to the advent of the internet, customers have access to infinite shopping choices to fit their particular tastes – whatever you want, the internet has it. Etsy satisfies these requirements because it revolves around sustainability (products are made-to-order and by hand), customization (products are made-to-order) and social responsibility (supporting small and local vendors against big chains).
Nordstrom’s decision to partner with Etsy was the perfect way to not only “connect customers with artists in their own backyard, and make each of our stores a true reflection of their local community,” as shared by a West Elm executive, but also to tackle a big competitor. Everything one could find at Nordstrom could be found at Etsy, handmade, unique, and cheaper. Given Etsy’s growth in sales (1.93 billion U.S. dollars in 2014) and the growing tendency to shop online rather than in-store, it presented a major threat to Nordstrom. Some may argue that Nordstrom could have created its own Etsy-like platform or even bought out Etsy. However, Etsy’s user base was simply too large for Nordstrom to try to recreate it with their own platform and Etsy, whose sales volume is just $1 billion short of Nordstrom, was probably going to be a costly purchase to say the least.