It has been diffcult to pick up the business section of a newspaper this past year without reading about some development affecting electronic home shopping: broadband networks that can accommodate increased two-way data transmission, experiments with existing media like CD-ROM and on-line services, and new alliances. The most enthusiastic observers predict industry sales of more than $50 billion during the next ten years. Delayed trials of certain services have made others more cautious. In neither camp, however, is there much of a consensus about the likely structure, profitability, and impact on traditional retailing of electronic home shopping. Very little about the opportunity it represents is clear.

Our own bottom-up forecast of how the industry will develop is conservative, yet suggests attractive potential. As shown in Exhibit 1, our estimate is based on the product categories that can be addressed by remote channels. Since we assume that the new electronic services will not increase overall consumer spending, our estimate includes the share of current channel volume likely to be cannibalized by interactive services. The result: we think there will be a $4 to $5 billion market in the US by 2003, the first year in which interactive home shopping will be truly accessible to the mass market. (This forecast is equivalent to one-third of the 1992 US market for all mail and telephone retail sales.) After 2003, there is potential for sales volume to rise sharply as the mass market is more fully penetrated.

A point worth noting, however, is that the value that will be created is not likely to be incremental to the overall retail industry. Rather, it will represent a redistribution of profitability from current channels, such as stores and catalogs. Incremental value would be created only if the channel offered much cheaper distribution or created much higher sales. Neither is likely to be the case in the near to medium term.

Our goal in this article is to help both current and future participants in the industry—especially manufacturers, catalogers, and retailers—develop a strategic "road map" for navigating through so uncertain a landscape. First, we draw on our experience around the world, as well as on a McKinsey research project devoted to interactive multimedia, to identify the conditions that will have to be met if electronic home shopping is to become an important channel. Second, we describe the basic building blocks of the channel and outline three scenarios for how the industry’s structure might evolve. And finally, we propose ways for merchants to plan flexible near-term courses of action that are appropriate to their organizations’ starting positions, yet able to adjust to future changes in the industry.

In doing all this, we will focus on the US market. Although the US is moving earlier and faster than many other countries to deploy technology and infrastructure and to develop interactive applications, there is no reason to believe that its experience will be unique. An understanding of how its market evolves may help potential participants around the world discover what the technology is capable of, what shopping ventures best exploit it, and how consumers may react. Observers can also learn from the mistakes that will inevitably be made during the early days, and perhaps identify opportunities to "leapfrog" a stage of development.

Creating the market

Charting possible courses of action here is particularly challenging in that participants will, in effect, be paving the highway themselves, as they go along. Electronic home shopping is an industry that still remains to be created through the collective actions of a broad array of channel participants. Indeed, major developments will have to take place if the channel is to realize the more enthusiastic multi-billion-dollar projections.

But if these developments do occur, there will be scope for significant volume and profit creation. Within ten years, assuming that distribution networks are built as planned, interactive home shopping in the US could generate up to $5 billion in retail sales while supporting 8 percent retailer margins on average. If four major services were to develop in the US, conservative estimates would put the net present value created by these services and their participating merchants at more than $350 million. The value captured by the industry as a whole, including other participants along the supply chain, would be far greater.

The developments required involve:

Technology

Wide availability of interactive broadband is critical to the capture of home shopping’s potential

Wide availability of interactive broadband—for example, the two-way fiber optic networks being built by cable TV and regional telephone companies—is critical to the capture of home shopping’s potential. Unlike current broadcast television and narrowband on-line, as well as CD-ROM, shopping services, interactive broadband will facilitate the high-speed transmission of interactive, video-based shopping services to consumer households. This means consumers will be able to select products of interest from attractive, informative, and targeted demonstrations. This improved convenience, information content, and presentation quality will lure a new class of merchandise (and merchants) to home shopping, enhance its consumer value proposition, and thus stimulate demand.

Early home shopping services in the US, both passive and interactive, only begin to suggest the value that interactive broadband will bring. Passive broadcast services (like QVC, HSN, and Catalog 1) do not allow consumers to customize their shopping experience; customers have to be convinced to buy products that they did not specifically seek out. Similarly, the on-line networks and CD-ROM platforms used by interactive service pioneers—2 Market/En Passant, The Merchant, and the Electronic Mall (CompuServe), among them—have suffered from technical constraints leading to slow access, poor video demonstrations, and the need for separate ordering media, such as toll-free numbers for CD-ROM services. These limitations suggest that such services may be transitional, at least in their current form.

It will take at least ten years, however, for interactive broadband services to emerge as a significant mass-market channel. This time lag is due largely to a slow buildout of nationwide broadband networks and to the gradual deployment of sophisticated, inexpensive set-top boxes. In the US, only 12 million households (11 percent of all those with television) are likely to have access to an interactive broadband network (PC and/or TV) by the year 2003 (see Exhibit 2). And if premium cable subscription rates are a good indication, only 40 to 45 percent of those households are likely to subscribe to the premium services that include home shopping.

Just as important, although PC penetration is already fairly high in many Western countries, TVs equipped with set-top boxes may also be required if those services are to be widely used. But set-top boxes are still relatively expensive. They will need to become much cheaper if they are to penetrate a large section of the consumer population.

Competitive and consumer behavior

To make the industry’s economics attrac-tive, promote consumer trial, and allow necessary skills to be developed, a critical mass of services will have to be available. This is because merchants will incur a number of fixed costs—content capture and integration chief among them—to participate in interactive broadband, and these costs will only be acceptable if they can be distributed across either a large number of services or a select few with wide audiences. A variety of services will also be needed to generate sufficient activity to capture consumers’ share of mind, as well as to build new kinds of skills, especially in creating entertaining and informative programming, which can be developed only through trial and error.

For consumers to recognize, welcome, and act on the value delivered by the channel, they must learn to appreciate its convenience and timeliness—and to seek services with these features. They must also become more comfortable with remote distribution channels and learn how to find merchandise on interactive services. The recent growth of catalog, television, and on-line shopping suggests that this is already happening. Consumers must also come to accept the use of technology in the home—a process that seems, from ample evidence, to be under way.

Roles and services

Initial shopping services will focus mainly on the technology’s transactional capabilities

Even at this early stage, the types of services and participant roles that will be the building blocks of the channel are beginning to emerge. At one end of the spectrum are those that are purely informational; at the other, those that are entirely transaction- or sales-oriented (see Exhibit 3). Since the economic imperative of the channel’s development requires that merchants maximize revenue per household in the near term until a sufficient number of households can be reached, we believe initial shopping services will focus mainly on the technology’s transactional capabilities, which maximize the channel revenue earned for each dollar of retail sales generated. Developing and delivering these transactional services will require a number of channel roles to be filled, any of which may be feasible for a merchant with the relevant skills.

Informational services

Longer term, advertising will almost certainly be bundled into every element of the interactive home shopping business system

In the short term, informational services will likely take the form of standalone interactive advertising. Longer term, of course, advertising will almost certainly be bundled into every element of the interactive home shopping business system:

Solicited advertisements (ads chosen by consumers for viewing) will be used for complex, infrequent, high-commitment purchases of products like autos or financial services. Because consumers will value objective information for such transactions, the advertisers—such as independent consumer rating services—best able to provide it will probably attract the most interest.

Unsolicited advertising will allow spot advertisers to increase their effectiveness. Imagine watching a 30-second spot advertisement for Lexus during Monday Night Football. You have seen the ad before and you are interested in getting more information—and possibly arranging for a test drive at your local dealership. At present, you would have to look up your dealer in Yellow Pages or call the toll-free number listed, talk to a salesperson, and give your address. With interactive capabilities, you would need only to click on the icon at the bottom of your screen. Such enhanced convenience should stimulate latent demand, increase overall response rates, and thereby provide access to a greater number of screened sales prospects.

Sponsorships will increase an advertiser’s audience for either solicited or unsolicited advertising by, for example, enabling consumers to receive discounts or promotions—a free movie on demand, say, or a 20 percent reduction in the monthly subscription fee—for agreeing to watch a specified amount of advertising. Before starting a new movie, a viewer could opt for the "free view option" by consenting to watch a whole ten minutes of advertising.

The challenge, irrespective of format, will be to maximize the value captured per household. On average, $1,500 is spent every year in the US on advertising to each household across all product and media categories. Television at present captures only 22 percent of this sum—or approximately $330 per household. With interactive broadband likely to reach less than 15 percent of households by the year 2003, the revenue potential of interactive home shopping will be severely limited if information transfer remains its sole or primary focus.

Transactional services

Any service that incorporates customer ordering and product fulfillment is a transactional service. Examples include interactive shopping shows, electronic shopping malls, and "on demand" infomercials. Although informational services compete for the 3 to 5 percent of sales currently spent on advertising-related activities, transactional services compete for the 15 to 20 percent of sales currently spent on generating transactions. Since neither kind of service is likely to change the amount of discretionary expenditure at household level (currently $40,000 per year in the US), the revenue-generating advantage of transactional services is likely to persist, even though informational services have the ability to address a broader array of product categories (see Exhibit 4).

Channel roles

Delivering interactive home shopping economically will require low content-generation costs and efficient order processing and fulfillment resources similar to those of home shopping programs on cable TV today. Improved services could help broaden the current market—now reaching saturation in the United States—by attracting customers who prefer to be active rather than passive shoppers.

Three primary roles are needed to build a transactional service: merchandise provider, shopping service provider, and shopping service distributor:

The merchandise provider is responsible for selecting and sourcing merchandise and for determining how best to price and present it. Merchandise providers often complete fulfillment and customer service for identified purchasers as well. Retailers, catalogers, and manufacturers all might serve as merchandise providers.

The shopping service provider is responsible for aggregating the various merchandise providers into a shopping service and devising applications that enable consumers to access and purchase the products offered. Examples of companies positioning themselves to become service providers include ShopperVision, an on-line grocery shopping service, and CD-ROM-based shopping services such as The Merchant and 2 Market.

The shopping service distributor is responsible for providing consumers with access to service providers’ applications. Through their physical networks, distributors can own proprietary electronic links into consumers’ homes, or be "open." An example of an open distributor is the Internet, a highly decentralized network that offers open access to would-be content providers as long as they observe common protocols. Companies positioning themselves to own their distribution networks include regional telephone companies, such as US West and Bell Atlantic, and cable television operators, such as TCI and Cox Cable.

Note, however, that roles and activities may overlap across the industry’s business system (see Exhibit 5). Note, too, that many participants will choose to play multiple roles in order to compete in electronic home shopping. For instance, electronic networks such as Prodigy, CompuServe, and America Online not only offer content distribution, but have also developed proprietary shopping services for their subscribers. Other companies, such as Spiegel, play the role of merchandise provider (drawing from their multiple catalog and retail businesses) and are developing shopping services such as Catalog 1.

Possible scenarios

How the three primary roles will interact and divide channel value is uncertain. As our colleague John Hagel argues in this issue of the Quarterly,¹ there are three possible scenarios for the overall evolution of the interactive multimedia industry. Here we build on these scenarios to tease out their implications for interactive home shopping. In each one, a different role holds most of the channel power. As a result, each scenario has different implications for merchant competitive strategy.

Scenario 1: Merchandise provider power

If consumer purchase behavior is most influenced by the variety of merchants offering their products on the network and if excess distribution capacity exists, merchandise providers will enjoy the strongest position. That means the umbrella service’s image or brand name will create limited value relative to that associated with the names of attractive merchants. The power exerted today by strongly branded apparel, like Nike footwear, provides the best analogy for this scenario.

The owners of such brands can choose currently between competing retailers for distribution and are able to influence discounting and product presentation. The majority of the value created along the supply chain thus accrues primarily to the brand rather than to the retailers or distributors. In other words, the best near-term opportunities in scenario 1 are for merchants. Service packagers and distributors will split the remaining channel value.

Scenario 2: Distributor power

The second possibility is that channel power will derive from access to consumers. If consumers are willing to use only a select number of distributors or if distribution capacity is limited because of high entry costs, the few fortunate "gateways" will be able to extract the bulk of channel value. Think, by way of analogy, about US broadcast television up to the early 1980s, when the three main networks held considerable distributor power. They set the price for advertising and earned premium returns in comparison with less pervasive and well-monitored networks, such as cable. Main street retailers have also traditionally held distributor power. The consumer draw such retailers have enjoyed has led to premium rents and ample access to eager tenants.

Scenario 2 offers the least attractive opportunities for merchants, unless they aspire to be shopping service distributors. As economic rents flow to distributors, merchandise and service providers will fight for marginally attractive returns. As they do, the latter will attempt to pass on the cost of distribution to the former. As a result, merchandise providers will earn returns on interactive channel sales that are equivalent at best to the returns achievable through other channels.

Pursuing the distributor role could be attractive for a merchant, yet it requires specific skills

Pursuing the distributor role could be attractive for a merchant, yet it requires specific skills. Distributors will need broad category coverage in order to support the concentration of consumer activity on a few gate-

ways. Given their general lack of experience in negotiating with service providers, most merchants are poorly equipped to pursue the gateway role independently. If they do seek such a role, they will need to find strong partners.

Scenario 3: Shopping service provider power

The third possible outcome is that distribution becomes available widely and publicly, as on the Internet

The third possible outcome is that distribution becomes available widely and publicly, as on the Internet. If this happens, the shopping service provider is likely to extract the most of the value along the supply chain, since the quality of the content mix, applications, and support is what will drive consumer demand. To be successful, service providers will need to excel at customer segmentation and merchant/merchandise selection. This will enable them to create electronic "destination" shopping malls capable of motivating consumers to take the time to "drive" to them.

Scenario 3 will be less attractive for merchants than scenario 1, but more attractive than scenario 2, since the distribution of channel value between merchandise provider and service provider will probably be merchant-specific. The greater the demand for a merchant’s products by targeted customer segments, the greater the share of channel value it will capture. In addition, this scenario allows the merchandise provider to integrate forward into the service provider role. If distribution is widely available, a merchant will face only low entry barriers to launching a proprietary service. To be successful, however, merchants will need to be skilled at consumer marketing, as well as order processing and fulfillment.

Developing an individualized approach

Since there is no way of knowing at this juncture which scenario will actually come about, merchants cannot rely on a crystal ball in developing an entry strategy. Each starts with a different mix of skills and objectives; each has a different view of the attractiveness of interactive retailing and of its own readiness to compete. There can be no "one size fits all" approach to the development of strategy for electronic shopping.

For a small group of capable, prepared merchants, it may make sense to adopt an aggressive entry strategy to stake out a broad, influential channel role. For an equally small group of low-cost, broad-based merchants, it probably makes sense to sit it out for the next few years. For the remainder—the vast majority of potential participants—the best near-term course is to focus on careful piloting and testing. Whatever the choice, it will be important, given all the uncertainties, to retain as much flexibility as possible and follow a thoughtful learning agenda. This will help in identifying attractive opportunities early on as the industry evolves.

New opportunities

Many US retailers, catalogers, and branded apparel manufacturers have already been solicited to take part in interactive home shopping. For some, the request is to put their content into a new CD-ROM catalog or an on-line service such as CompuServe. Others have been asked to participate in one of the myriad interactive home shopping trials that are being planned. It is difficult for a merchant to respond appropriately to these opportunities without having a view of the benefits it might gain from interactive home shopping (see Exhibit 6)—and of its readiness to compete in this new arena.

Among the potential benefits are opportunities to boost return on invested capital (ROIC) by achieving:

Higher revenue, either through additional sales to existing customers or through attracting new ones. For example, a retailer currently operating in a regional market might be able to reach an entirely new set of customers through national electronic distribution. Alternatively, a cataloger might be able to sell more to its existing customers by giving them more information, in a more entertaining way, than it can achieve via catalogs. The real incremental revenue potential of electronic home shopping will vary by merchant, depending on current reach, cannibalization risks, and competitive set.

Lower costs, by replacing a high-cost sales generation channel with a more effective and efficient alternative. For some, electronic shopping will indeed be a cheaper way to generate retail sales. In particular, those merchants with high sales generation costs, such as advertising and marketing, sales staff, store operations and/or fulfillment, may find electronic home shopping a more efficient way to reach the same customers. Moreover, it is not likely to require such heavy investment in fixed assets as store-door retailing in order to generate a similar level of sales. This benefit, naturally, will be more attractive and more capturable for merchants that have not already invested in a large store network. The actual replacement of stores by electronic shopping is likely to be far in the future.

Merchants will also see opportunities to improve their strategic positioning. Interactive home shopping may offer important offensive and defensive capabilities. First, it may permit many merchants to differentiate their merchandise offerings from those of existing or potential competitors (for example, by offering better information)—and even to preempt their entry if a dominant position is established early. Second, it may help merchants defend their share of sales to an existing customer base if the merchandise they sell will also be available from competitors.

New capabilities

Certain organizational capabilities will be required for success in interactive electronic shopping. These include:

Merchants will need to be adept at picking the merchandise items with the best potential

Merchandising skills. Interactive home shopping will require an approach to merchandising unlike any used by current channels—including traditional retailing, catalog retailing, and cable TV shopping—if merchants are to take full advantage of what interactive multimedia technologies offer. In particular, merchants will need to be adept at picking the merchandise items with the best potential. It is already possible to identify some characteristics of the merchandise that is likely to sell well in an interactive forum: items that are unique (collectibles); items where product information is an important part of a purchase decision, but where pre-purchase trial is not critical (appliances, but not cars); items purchased regularly, where convenience is valued (packaged goods); items where audio or video demonstrations are helpful (music CDs), and items that can actually be delivered electronically (for example, downloaded software).

However, the real learning on what sells and what does not will have to be acquired through practical experience. Other relevant skills include continuously matching merchandise offerings to consumer needs, setting and maintaining attractive pricing, and capturing back-end merchandising opportunities—for example, through follow-up catalog sales to customers who have made a purchase through an interactive service.

Programming skills. As noted above, major advances in program development will have to be made if interactive home shopping is to reach its full potential. In particular, programming will need to be cost-effective, entertaining, compelling, and informative—a formidable challenge. The skills required to produce such programming are likely to include creating sufficient merchandise-selling opportunities and combining the best qualities of print advertising (helpful information in an easy-to-use format) with the excitement and urgency of televised entertainment. For many merchants, this will mean entering alliances as they venture far beyond their traditional skill base.

Skills in relationship marketing will be even more important in an interactive context

Marketing skills. Retailing in general is evolving to a point where relationship marketing is critical to success. These skills will be even more important in an interactive context, where the technology offers tremendous opportunities to increase sales productivity by targeting specific customer segments and offering them an enjoyable, specially tailored shopping experience. Key elements of these capabilities include promotions management (creating exciting promotions to boost sales), direct marketing skills (stimulating viewing and purchasing through the use of targeted on-screen messages, and using vehicles such as telemarketing and direct mail for additional stimulus), and database marketing skills (using customer purchase and demographic databases to segment customers and predict their responses to merchandise offerings and promotions).

Fulfillment capability. Merchants will need to receive and fulfill their customers’ orders in an accurate, cost-effective, and timely fashion in order to retain their loyalty. This can make all the difference between a tolerable interactive shopping value proposition and a winning one. Capabilities likely to be required here include integrated order taking (enabling the customer to order directly from the interactive service—that is, on-screen—without having to make a separate phone call), accurate demand forecasting, dynamic inventory management, on-line inventory visibility (QVC today can inform a customer at the time of the order whether the merchandise is in stock and when it will be delivered), and fast (within, say, 24 hours), accurate order fulfillment.

Customer service capability. Consumers may demand a higher level of service in order to overcome whatever reservations they may at first have about using an electronic shopping service. What matters to them will include real-time, accurate product information (sizing, fit, durability, fabric content, care instructions, and so on), order tracking, problem resolution, and hassle-free product returns.

Alliance management skills. Few merchants will rely on a skill-building program to develop all the necessary capabilities in-house. Such a program would be prohibitively expensive and slow. Therefore, alliances with other skilled channel participants, such as programmers, advertising and marketing agencies, and electronic networks, will almost certainly be required.

Merchant groupings

As Exhibit 7 indicates, merchants considering entering interactive retailing can be divided into three basic groups depending on the attractiveness of the channel and their readiness to compete:

"Early movers." This relatively small segment comprises highly-skilled merchants with existing access to such key capabilities as direct marketing and fulfillment. These merchants have the capacity to derive the highest benefits from new media as their learning curves are much shorter than others’ and they already have many of the necessary resources at hand.

This group also includes those likely to be vulnerable if they do not move early and stake out a broad role. Multi-category retailers and catalogers with a heavy emphasis on branded merchandise, for instance, could be at risk of eventually being replaced in the interactive channel by manufacturers—unless they create a strong retail brand franchise and proprietary access to home shopping channels. A merchant threatened by cannibalization from new interactive services might, thus, decide to be a first mover despite uncertainty over the outcome in order to lock in distribution and gain a head start in capturing channel expertise and a low-cost position.

"Watchers." This segment consists primarily of retailers and catalogers with low-cost sales models, high volume, and broad-based distribution. They are unlikely to view electronic home shopping as a sufficiently attractive channel until costs fall and distribution widens, given their scale-sensitive economics. Also included here are manufacturers of unbranded or less distinctive products, which cannot attract a sufficiently large initial consumer franchise, as well as focused retailers in categories not easily suited to electronic shopping (for example, building supplies).

For "testers" electronic home shopping appears to be an alternative rather than an imperative

"Testers." In this segment are the majority of merchants that face either attractiveness and/or skill challenges. Gathered here are many multi-category and specialty retailers that are competing successfully in traditional retailing, are uncertain who will win in interactive retailing, and neither need nor want to make a choice now. Here, too, are branded general merchandise manufacturers with robust consumer franchises and attractive retail distribution channels already in place. For this group, electronic home shopping appears to be an alternative rather than an imperative, and the question of participation is one of timing as well as importance.

Action programs

Suitable action programs will vary from group to group. But in any event, they should concentrate on appropriate strategies for the next five years or so, given how rapidly the industry is likely to change.

Early movers

This segment of merchants can aspire to the widest range of roles and consequently has a number of strategic options. In any case, the near-term goal for early movers should be to gain experience and control early enough to be a driver of how the industry develops.

One option is to focus narrowly on the merchandise provider role. This option will be appropriate under any scenario—as long as the merchant has distinctive merchandise and a strong consumer following. Under scenario 1, with its likely shakeout among shopping service providers, this is a particularly attractive option. Early movers should pursue broad participation in several shopping applications in the near term, but avoid taking on full ownership of a shopping service. Although exclusive relationships should be avoided, merchants should also recognize the costs of pursuing numerous applications in parallel and balance their overall exposure.

A second option is to move beyond merchandise provision and adopt the service provider role. The feasibility of this strategy will depend on a merchant’s ability to attract other targeted merchants, develop a user-friendly application, integrate attractive content, and negotiate consumer access with appropriate distributors. This approach will be most attractive for merchants that have a lot to lose by not shaping the interactive home shopping channel. It is likely to have the biggest payoff if scenario 1 or 3 develops.

Those who aspire to a still broader role—for example, that of shopping service distributor—should consider entering into discussions with potential joint venture partners, including programmers (such as media companies) and shopping service distributors (such as telcos and cable companies), and watching carefully for any signs of overcapacity or consolidation.

Watchers

These merchants may have the least to gain from making major immediate moves into interactive shopping. They should consider waiting until the channel has established a broad distribution base to see what impact that makes on its cost structure. However, "watcher" merchants should not necessarily avoid any near-term activity in interactive shopping. On a very limited basis, and only if attractive terms can be arranged, small interactive trials can be valuable.

For instance, "watchers" might consider participating in a CD-ROM trial with vendor co-sponsorship or joining an on-line shopping service with a limit on transaction fees. Watchers should also take a careful look at their current business while waiting to see how interactivity develops. Whether or not they eventually move into electronic shopping, they should take steps to ensure that their existing customer value proposition is robust and sustainable.

There is likely to be a period of shakeout among service providers as distributors determine which they prefer

Under scenario 2, a wait and see strategy is especially relevant—in fact, most merchants should be watchers under circumstances that favor shopping service distributors. In such a case, there is likely to be a period of shakeout among service providers as distributors determine which they prefer. Although more attractive terms may be offered to merchandise providers that collaborate early with the "winning" services, the risk and implied cost of allying with a losing distributor favor a slow, pragmatic approach.

Testers

Merchants in this group should take active steps now to learn about the potential opportunities in electronic home shopping without committing themselves to any one position. Although those with strong brand images and existing consumer franchises may choose to postpone entry until a viable service provider and distributor prove themselves, taking part in targeted tests and pilots will be useful for most. These tests should be aimed at understanding what electronic home shopping has to offer, at building required skills, and at understanding the attractiveness of potential channel roles.

Home shopping tests do not necessarily have to be in interactive media

Home shopping tests do not necessarily have to be in interactive media, but could instead take place through such vehicles as catalogs. For instance, retailers or manufacturers that lack direct marketing or database marketing skills could, like Nordstrom’s, consider using targeted catalog launches and/or joint ventures to build these skills. Merchants that possess relevant skills but are uncertain of the channel’s attractiveness should consider limited, low-cost participation in interactive shopping tests geared toward assessing consumer responses, not testing technology. Manufacturers, for example, could take part in QVC and HSN shopping programs, contribute their merchandise to a broadband home shopping trial, and/or co-fund a retail partner’s participation in such a test.

Given that structuring and managing alliances are likely to be new to many merchants, it would also be prudent to start experimenting now by, say, identifying alliance opportunities on the basis of skill gaps, opening preliminary discussions with potential partners, and keeping close tabs on the success of existing industry alliances. Finally, like "watchers," testers should take the time now to think through the future competitiveness of their existing business in order to protect and defend their customer share as necessary.

A learning agenda

It may seem odd to argue that all merchants should consider developing a formal learning agenda for interactive shopping, even if they have no immediate interest in entry. Yet this is necessary, because interactive shopping will ultimately affect participants and non-participants alike, although it will be at least five to ten years before its impact can be properly assessed. Therefore, developing and executing a learning agenda, whether offensive (aimed at making sure that a merchant establishes the best possible position in the channel) or defensive (aimed at ensuring that it defends its business against electronic shopping incursions) is essential to staying on track as the industry evolves.

We would suggest that any learning agenda include two particular components: a skill-building program and an early warning system for identifying and reacting to pivotal industry events.

Skill building

As we have seen, winning in interactive home shopping will entail developing new skills in areas such as merchandising, marketing, fulfillment, and customer service. Merchants choosing to compete in this new arena will need to understand the implications of their strategy for each kind of capability, assess current performance levels, and decide how best to close any gaps. For instance, resolving fulfillment capability issues will be especially critical for a retailer without current catalog operations.

There are many ways in which necessary fulfillment capabilities can be acquired without building them internally, including limited participation in shopping services—like QVC today—that offer centralized fulfillment; contracting fulfillment out to a third party such as Federal Express; and entering into an agreement with another merchant, such as a cataloger, to handle fulfillment. Each option has its own time, cost, and effectiveness tradeoffs. Merchants must carefully assess the options relative to their current position and industry outlook to develop an appropriate skill-building program.

A skill-building agenda will also be of great use to merchants unsure of the eventual attractiveness of the interactive shopping channel (for example, the testers and watchers segments). If this new channel meets the more optimistic projections, it will alter the competitive landscape even for traditional merchants. They will have to make many of the same improvements in merchandising, marketing, and fulfillment skills, just to satisfy their customers and defend their franchises from the incursions of electronic retailing—in other words, just to hold their position. As consumers become even more demanding about finding merchandise in stores that is tailored to their specific needs, customer segmentation and database marketing will become critical tools in retaining their loyalty.

In addition, as customers get used to the rapid fulfillment of their electronic orders (it is already possible to receive products within 24 hours of ordering from QVC and leading catalogers), they will become even more intolerant of stockouts and "rain checks" at traditional merchants. It therefore makes sense even for uncommitted merchants to draw out the implications of a world with electronic home shopping so as to pinpoint the skills they will need to continue to compete in their traditional environments.

Early warning system

Since the path of electronic home shopping is so uncertain, it is vital to be proactive in making necessary course corrections. Merchants must invest in keeping abreast of industry developments and continually reassess their current activities to check whether they need to change tack. We believe that certain triggering events will, over the next five to ten years, signal a movement of the industry toward one or another of the scenarios outlined above. John Hagel describes several such "triggers": changes in technology, competitive behavior, and consumer behavior. (Exhibit 8 illustrates how these signposts might manifest themselves in the electronic home shopping industry.) Thus, merchants should make someone within their organization responsible for tracking the industry in order to recognize these pivotal events if and when they occur.

Drawing out the implications of industry developments for a given merchant’s strategy will also be important. Periodic senior management forums aimed explicitly at reviewing home shopping strategy in the light of industry events, competitive moves, and the like, can provide managers with the opportunity to correct their course quickly when it becomes necessary.

The development of the interactive home shopping channel is likely to affect ever-broadening circles of participants, including merchants, advertising agencies, equipment providers, and consumers, affecting first the United States and then spreading to other national markets. As it develops, the US experience will provide a partial road map for these other markets. We believe the road map outlined here can help managers in all countries—and all segments—make actionable sense out of developments as they unfold.