Who will win: Dot-coms or Not-coms?
Will Your Company be Road-Kill on the Information Superhighway?
The frenzy over internet and other technology related stocks indicates that investors expect a large fraction of the economy’s future profits to come from the so-called "New Economy." In total, New Economy firms contribute modest revenues to GNP and many of them have accumulated losses as opposed to profits. However, among publicly traded securities, they boast whopping valuations. For example, at one point, Amazon.com was worth more than all bricks-and-mortar booksellers combined.
Will New Economy firms render all other businesses irrelevant? Certainly not! Some parts of the economy are the exclusive domain of these new firms and are likely to remain so. It is hard to imagine that e-mail, cyber-chat rooms, and internet portals will ever be dominated by "Old Economy" firms.
“...successful New Economy firms have the asset strength to buy and reposition Old Economy assets.”
At the same time, vast portions of the economy rely on physical assets and make physical things. Businesses in fields like construction and heavy manufacturing are unlikely to be displaced by internet upstarts. Can these firms ignore the emerging technology? No. The internet and the technology of networked computing will affect all firms because, to some extent, all firms depend on information, the use and management of which will be transformed completely.
In reality, the economy spans a continuum from "information" dominated firms to firms that deal in "things." These extremes have also been characterized as "bits" and "atoms." In between, many industries exhibit some of both elements. Today, it seems to be a foregone conclusion that information-based firms will be road-kill for the "dot-coms" on the information super-highway. Many industries that are currently dominated by existing, "not-com" firms are under attack from New Economy upstarts.
It is important to consider that changes that favor growth of dot-coms, also create opportunities for new kinds of physical things. Many technology firms in fact make "things" such as the computers, networks, switches, servers, and cables upon which the New Economy depends. In addition, seemingly Old Economy businesses such as automated warehouse equipment, boxes, bubble wrap, and delivery trucks have attractive opportunities driven by the New Economy. These kinds of physical infrastructure and consumable items should benefit from substantial increases in future demand, pulled along by the dot-com engine. The AOL Time Warner deal makes clear that successful New Economy firms have the asset strength to buy and reposition Old Economy assets. At the same time, Old Economy firms with solid cash flows still have the ability to pursue the New Economy by large acquisitions, such as AT&T's cable TV purchases for broadband access to homes and internet telephony and NTT’s purchase of Verio.
How "Old Economy" firms can become internet savvy
Executives should take steps toward understanding the possible effects the internet will have on their firms and industries. A great first step is to use the tool themselves. For example, at General Electric, Jack Welch has required all senior executives to have an "internet mentor," many of whom are much younger than the executives whom they are helping.
In addition, executives can and should try the following, if only to get insight into what others are doing and to start thinking about what role the internet should play in their firms' strategies:
Make a consumer purchase on the world wide web Do research as a consumer (e.g. for a car, CD, or medical infor-mation) Conduct investment research Make a securities trade Open an internet bank account Check out your own firm's web site Check out competitors' web sites Check out some "best in class" web sites such as Cisco, Dell, and Amazon
Using the Internet to Improve Your Business
There is no "one size fits all" approach to making the best use of emerging technologies in networked computing and the internet. As with many other investments it is prudent to adopt internet tools based on perceived value, probability of success, management effort, and downside potential.
In the sections that follow we will discuss four approaches:
Gathering competitive intelligence in the strategic planning process Refining market segmentation and market segment strategies by reaching different sets of targeted customers through the internet Internet enabled strategies End-to-end Internet Business Solutions
Competitive Intelligence
Most firms can improve their competitive intelligence at modest cost thanks to the internet. The burden of information gathering plummets. Many competitors are careless about what is on their web sites. It is easier than it has ever been before to assimilate data from diverse sources such as public filings, trade associations, competitors' web sites, and specialty information providers.
Many web sites - possibly including your competitors' sites - are information leaks. They may not be integrated into marketing filters & processes, leaving inappropriate content available to your browser.
You can test your own firm's web site as an example of why web sites often reveal more than they should. For example, do high level executives in your firm review all high level marketing literature? Do they apply the same scrutiny to your web site? Do your customers use your web site? Is it also accessible to competitors or is it password protected for your private community?
Many firms and sites specialize in making available at low cost or no cost precisely the kind of information that helps you figure out where competitors are going. For some examples, see Table 1.
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Search engines and directories let you search for names, keywords, or topics. However, they do not all work the same way. Some are best at finding a few words in a string - the proverbial needle in the haystack. Others do a better job of helping you refine your search based on what you find. For example, the author has used the following tools for different purposes:
AltaVista search engine - for key words and strings of words Yahoo directory - for quality-screened links HotBot, Lycos, Infoseek - for refining searches PointCast and AOL News Profiles - for getting press releases with key words e-mailed to you
These tools are good for finding information on other topics as well.
Market Segmentation
The purpose of market segmentation is to sort customers into groups based on differences and then tailor offerings and strategies to those differences. Traditional approaches to market segment analysis often use trade association data, for example. However, this information is demographic, not behavioral. It can be hard to measure many attributes, and research to refine the information is often time consuming and expensive. It may be difficult or impossible to run experiments. Furthermore, in changing markets, information is often out of date before it is available. Table 2 shows a comparison of traditional and internet-enabled benefits to market segmentation.
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Internet-Enabled Strategies
The following examples are strategies that several firms developed to take advantage of some features of the internet, without fundamentally changing their business models.
Value-Based Pricing: Airlines use yield management software and low price fares on the internet both to sell out seats that would otherwise go unsold and avoid the expense of their own call centers or a commission to a travel agent.
Self-selection by consumers: A medical insurer can track consumers' paths through its web site. The path reveals information about the preferences of the consumers, such as whether they are concerned about price of care, extent of care, or access to health information. The insurer can refine its offerings to yield higher consumer satisfaction and lower costs of care. These offerings can be tested in a matter of weeks based on consumers' reactions on the internet.
Two tiered offering as a price spoiler: Two capital equipment manufacturers compete in a category. Their offerings typically sell for several million dollars and require highly technical and expensive selling efforts. Company A leads the world market. Company B has a similar offering with low market penetration. Company B offers customers two ways to buy their offering: 10% below the leader's price for the full service selling approach, but 40% below the leader's price for an internet transaction where the customer bears its own expenses of evaluation, site visits, etc.. The result is that Company B has captured significant sales to price sensitive customers without having to incur the typical level of sales expense. In addition, Company A is always having to explain the large price dispersion and has had to cut price somewhat on a large number of units even though they still incur the expenses of the full service selling approach.
Implications: The internet enables many useful strategies without forcing firms to pursue the full "internet business solution" right from the start. Early adopters are transforming their businesses and increasing productivity. Many firms can reap rewards without jumping into the total approaches of Dell, Amazon, and Cisco Systems.
End-to-end Internet Business Solutions
On the other hand, why not put the internet at the very center of your business? The Information Technology Services Marketing Association has developed a thought-provoking case study of how Cisco Systems saves money and achieves scalability by using networks and servers instead of people. Cisco's own web site makes a similar case. Both are worth studying if you want to consider how completely the internet can transform your own, your suppliers', your competitors', or your customers' businesses.
So who will win?
Winners are likely to emerge from across the spectrum of New and Old Economy competitors. The key to winning will be the successful integration of new technologies with a deep understanding of what it means to create value for customers.
The more a firm is information-based (banks, travel agents, stock brokers, telecommunications), the sooner this transition will occur. Conversely, the more a firm relies on physical assets (cement, power generation, airplanes), produces physical goods (furniture, food, integrated circuits), or physical services (car repair, digging trenches), the longer this transition will take.
In either case, the winner must address how to create value for customers in ways that apply the enabling technologies. Since the technology solution to value creation relies on both technical and customer insights, the winner could either be an Old Economy firm that adopts technology successfully or a New Economy firm that manages to understand its selected customers and markets without much previous experience in serving them.
Successful firms will use networks to coordinate information flows across traditional boundaries both within and between firms. In the extreme, we can expect "virtual integration" in which suppliers and customers work together closely without the common ownership of assets that characterize vertically or horizontally integrated enterprises.
Will Your Business Lose to a Dot-Com?
The travel industry highlights the potential transformation of the economy by the internet. Traditional travel agencies face falling revenue and profitability. Many are losing money and going out of business. Those that are trying to survive are pursuing additional sources of revenue such as per-ticket fees in addition to airfare. One presumes that they provide some services that one cannot get from online sources such as the airlines themselves and Preview Travel.
And while travel agents are losing money, do not forget that their internet based competitors are, too. So it goes with much of the dot-com economy. Dot-coms have some great advantages, but traditional companies have some powerful advantages of their own. Table 3 compares these advantages.
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Case study: Merck-Medco vs. Drugstore.com
Who should win the battle to fill the most mail/e-mail/telephone prescriptions - stodgy old Merck or Drugstore.com with backing from Amazon? This market segment is about ten percent of the total market for prescription drugs in the United States and it is growing at more than twenty percent per year.
Filling prescriptions is traditionally a paper intensive business; it appears well suited to an internet business solution. But Merck-Medco appears to be winning. Its advantages include all those listed above: existing relationships with customers, the ability to fill prescriptions in all states amid a confusing morass of reimbursement rules, high enough volume to justify state-of-the-art automated operations, and enough cash flow to invest aggressively in its own internet technology. Merck has not spent large sums promoting its web site - it can include promotional material in its shipments that are ordered via traditional channels.
Meanwhile, Drugstore.com spends millions just trying to get traffic to its web site. And when the traffic comes, the company is far from an efficient operator. It has high cost fulfillment operations and small enough volume that its costs for drugs are high, as well.
The Wall Street Journal reports that Drugstore.com has a long way to go (Table 4). It has much higher traffic but it remains way behind in transactions and revenues. Merck-Medco books about eight times the sales on one fourth as much site traffic. In addition, Merck’s internet business is profitable while Drugstore.com is losing millions.
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And some predictions...
The more an industry is characterized by information rather than physical properties, the sooner it will be transformed. However, many so-called Old Economy firms can transform themselves before being displaced and have numerous advantages over their dot-com attackers. Bricks and mortar and similar assets do matter - somebody has to make/service/deliver things. Today’s manufacturers and providers of physical services are the logical winners as long as they apply networked computing to the parts of their businesses for which it makes sense.
The biggest advantages of existing businesses are their customer relationships and knowledge of their markets. Incumbents should focus on continuing to provide value in their existing market segments while leveraging new technology.
Distribution channels and supplier relationships will change. There will be new alliances, many of which will replace traditional integrated firms with new "virtually integrated" teams.
The internet creates opportunities for new forms of physical assets. We will still need the last mile of delivery - whether of physical goods or over a wire. Firms that can provide new infrastructure of this kind but for a networked world have a great opportunity.
The author thanks Joe Giglierano of San Jose State University and Eric Schmidt of Centerpoint Broadband Technologies for stimulating and helpful discussions on these topics.
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