Limits to growth in the new economy: exploring the ‘get big fast’ strategy in e-commerce † Rogelio Oliva, a * John D. Sterman b and Martin Giese c Rogelio Oliva is an assistant professor in the Technology and Operations Management Unit at the Harvard Business School. He holds a BS in industrial and systems engineering from ITESM (Mexico), an MA in systems in management from Lancaster University (UK), and a PhD in operations management and system dynamics from MIT. His current research interests include service operations, and the transition that product manufacturers are making to become service providers. John Sterman is the Jay W. Forrester Professor of Management and Director of the System Dynamics Group at the MIT Sloan School of Management. Martin Giese is a management consultant with Solon Management Consulting based in Munich, Germany. He holds a law degree and a diploma in journalism from Hamburg University, a Master of Public Administration from Harvard University Abstract Many e-businesses have pursued a ‘get big fast’ (GBF) strategy, pricing low and marketing heavily to build their user base, in the belief that there were significant sources of increasing returns favoring early entrants and large players. Until early 2000 the capital markets rewarded the GBF strategy, but since then market values have collapsed and scores of new-economy firms have failed. The rise and fall of the dot coms is not merely a case of a speculative bubble. Many firms stumbled when they grew so rapidly that they were unable to fulfill orders or provide quality service. GBF proponents focus on the positive feedbacks that create increasing returns and favor aggressive firms, but have not paid adequate attention to the negative feedbacks that can limit growth, e.g., service quality erosion. The faster a firm grows, the stronger these negative feedbacks may be. We address these issues with a formal dynamic model of competition among online and click-and-mortar companies in business-to-consumer e-commerce. The model endogenously generates demand, market share, service quality, employee skill and retention, content creation, market valuation, and other key variables. The model is calibrated to the online book market and Amazon.com as a test case. We explore growth strategies for e-commerce firms and their sustainability under different scenarios for customer, competitor, and capital market behavior. Copyright  2003 John Wiley & Sons, Ltd. Syst. Dyn. Rev. 19, 83–117, (2003) Introduction: ‘‘grow or die’’ or ‘‘grow and die’’ ‘‘We argue that capital market participants should have seen the problem coming. They should have known that valuation levels were absurd, based in large part on the greater fool theory. The data to anticipate the problem were readily available before the industry shakeout began and stock prices collapsed’’ (Sahlman and Stevenson 1985). These words refer not to the Internet bubble that collapsed in March 2000 but to the Winchester disk drive industry in the early 1980s. The rise and fall of the disk industry in the early 1980s and the Internet stock bubble in the late 1990s show many similarities. Business to Consumer (B2C) electronic commerce a Harvard Business School, Morgan Hall T87, Boston, MA 02163, USA; E-mail roliva@hbs.edu b MIT, Sloan School of Management, 30 Wadsworth St, E53-351, Cambridge, MA 02142, USA; E-mail jsterman@mit.edu c Solon Management Consulting, Residenzstrasse 10, D-80333 M ¨ unchen, Germany; E-mail mg@solon.de Ł Correspondence to Professor Rogelio Oliva, Harvard Business School, Morgan Hall T87, Boston, MA 02163, USA; E-mail: roliva@hbs.edu † We thank Arthur Andersen LLP (JS) and the Division of Research at the Harvard Business School (RO) for financial support of this work. System Dynamics Review Vol. 19, No. 2, (Summer 2003): 83–117 Received August 2000 Published online in Wiley InterScience Accepted December 2002 (www.interscience.wiley.com). DOI: 10.1002/sdr.271 Copyright  2003 John Wiley & Sons, Ltd. 83