Electronic commerce is having an impact on managers and management which is grossly out of proportion to its actual present-day importance. Current sales over the World Wide Web are a tiny proportion of total commerce, and profits are far tinier still. But make no mistake. This small penetration is expanding at a dizzying and all-important pace. The Web is where the action is, not only in the stock market, but right across the entrepreneurial world.
As a vivid illustration, Harvard Business School runs an annual competition for the best business plan. This year 50 proposals were submitted: 40 of them were related to the Internet. Moreover, half of these start-ups, according to the HBS publication, NewBusiness, are likely to get venture capital backing: 'Web entrepreneurship is no simple trend', writes Anne Kavanagh. ' It's a tornado'.
E = ENTREPRENEURIAL
The crucial point to bear in mind is that the tornado is not confined to e-commerce. The 'e' doesn't only stand for 'electronic': it means 'entrepreneurial', too. David Do, an HBS prizewinner, expresses this truth well. 'If you are going to start an Internet play, you should really bring some strength you have in the offline world'. The strength of the Web proposition, like that of any new enterprise, rests on the validity and power of 'the business model', a phrase that's now being heard more and more. Forget the technology model for the time being: it's the business that matters.
Do's model, localRewards.com, stems from the 14 years of experience which his business partner, Anne Stanton, has garnered in coupon books and customer loyalty programmes. The defect in the typical loyalty scheme model is that it doesn't differentiate between competing supermarkets, say, and offers people an unvarying, general, remote and boring diet (like airmiles). The Do model gives substantial, specific savings on local, everyday purchases. The customer enters the Web site and sees what's on offer that day.
The model is expected to be profitable, which is one reason why localRewards.com won the HBS prize. But take careful note of the entrepreneurial process that the venture followed:
1. The partners looked at an existing, large-scale industry, not a brand-new business area.
2. They analysed the industry's weaknesses from the customer's point of view.
3. They constructed a new approach that addressed the identified weaknesses and then generated potential strengths
4. They used the Web as the only possible means of delivering the new approach, taking full advantage of its unique ability to provide interaction - in this case, between local customers, national companies offering loyalty concessions, and the local merchants who will supply the 'prizes'.
In this example, everybody wins. There are, however, going to be plenty of losers on the Web. They fall into four categories: (1) companies (like Amazon and Freeserve) which deliberately court losses in the pursuit of the largest number of customers in the shortest possible time; (2) companies (which may include the first category) that simply get their business model wrong; (3) companies that are forced into loss or potential loss by forceful e-competition.
This third category creates a fourth: companies that finance purely defensive Web operations, designed as 'spoilers', aiming to blunt the attack rather than to grab hold of any golden opportunities created by the Web. This is hardly an entrepreneurial operation - and remember, again, that successful e-enterprises will win by their enterprise rather than their technology. The latter is the enabler: the business model is the driver.
CUSTOMER RELATIONSHIPS
Look again at the localRewards.com strategic approaches. The partners attacked a large market that they understood thoroughly, found a potential way of serving that market more effectively for both the primary customer (the company paying for loyalty) and the ultimate customer, and built the business model round these insights. King C. Gillette with his cheap safety razors (but costly blades) and Sony's Akio Morita with his portable (but personal) radio, the Walkman, followed the same fundamental entrepreneurial routine.
In fact, the rules for successful Web start-ups have direct relevance for any business that wants entrepreneurial breakthroughs. Randy Komisar of a firm called Onset acts as a 'virtual CEO' for start-ups which have a real CEO of their own. He acts, it seems, as a 'sounding board, strategist, financing advisor, negotiator, relationship facilitator, team-builder and trouble shooter'. On the Seventh Day, no doubt, he rests: not surprisingly, Komisar includes employing somebody like himself among six principles that have been followed by the successful venture capital deals among 300 subjected to analysis:
1. Appoint a full-time but non-executive mentor with experience of running both start-ups and large companies: on the survey evidence, that improves the success ratio from 25% to over 80%.
2. Be prepared to change your business model as you go along. Plans almost always need major correction to meet market changes.
3. Don't hire top management until you know that the business model really works - otherwise, the recruits will revert to their previous ways of managing.
4. Spend money only if it will add value in the eyes of the investors.
5. Make sure that the product or service isn't just needed, but truly wanted.
6. Hire special people. Ordinary ones will only create an ordinary business.
VENTURE CAPITAL
These half-dozen principles (taken from NewBusiness) translate admirably into the world outside venture capital. In the first place, any manager investing in a project is really a venture capitalist. You are investing other people's money in the hope of creating much more value than the funds which the project will absorb - even though your investment criteria will almost certainly be far less ambitious than those of venture capital funds. They want a tenfold return in five years.
That is roughly 60% per annum compound. They require this lordly margin to offset the inevitable losses on many, maybe most of their investments, and still leave a handsome gain. But the typical non-venture company often invests at projected rates of return below its cost of capital and then (absurdly enough) fails to monitor what has actually materialised.
A good mentor won't let you fall into those two grievous errors. Komisar is right: you should have a guide and counsellor, somebody who has been there before, to help get your new enterprise off the ground. You won't want to entrust all Komisar's functions to a non-executive import, but you must answer these questions:
1. Who can I turn to for dispassionate, objective but deeply informed advice?
2. How and by whom will the business strategy be formed and monitored?
3. Who will manage the financial strategy?
4. Who will handle any negotiations that the business needs?
5. Who will manage relationships with outside parties (including suppliers) and/or other parts of your own company?
6. Who will recruit the team members and build team-working?
7. Who will fight and put out the inevitable fires?
If the answers to the last six questions are the same person - yourself - think again, and urgently. All the successful e-ventures (in both senses of 'e') have been genuine team enterprises. If you work in a large and established company and want to recreate the success of independent ventures, you must build a genuinely independent team of original minds who will help carry out the key functions; will 'own' the strategy and the business model; will invest money wisely to add value; and will concentrate on supplying customer wants. It goes without saying that independent start-ups (just as Komisar's research shows) need to cook from the same recipe.
ENCOURAGING PUBLICITY
Few companies are applying the receipe to e-business, despite the enormous and encouraging amount of Web publicity. According to one survey, 92% of companies have Web sites, but only a minute proportion - 7.96% - are actually conducting commerce over the Web. As for advanced networking concepts (like that used by localRewards.com), they are found in a mere 0.05% of cases - and that is where the big, rich opportunities lie, whether you have a Great Idea (Amazon in books), or are Building on an existing base (Egg, the e-banking arm of the UK's Prudential insurance business), or Transforming your business model (Charles Schwab moving its direct stockbroking online).
The three categories and the examples come from Helena Wand of Recite Associates, a consultant who was telling a BT seminar how to manage online growth. As she says, that requires a radical shift in strategy. Once again, it's a shift which must be made if you want to compete on or off the Web in these entrepreneurial times:
1. Nature: go from static to dynamic
2. Environment: go from physical to virtual
3. Discussion: go from analytical to intuitive
4. Time-Frame: go from years to months
5. Key Technique: drop leverage for destruction
6. Participants: not just strategists, but everybody
7. Technology Role: from enabler to disruptor.
These imperatives for digital strategy are a shopping list for all true and would-be entrepreneurs. Anybody can see the advantages of having a strategy that evolves and strengthens as it responds to marketplace changes and information, and does so in real time. You still need analysis, but not the kind that drags on for months before you make up your mind: rather, you use analysis to test your intuitive ideas and turn them into an effective action plan.
INTERNET TIME-FRAME
But you want that plan up and running in months. Take the Internet time-frame (with usage doubling every 100 days) as your ideal. Remember the case of Jan Leschly, the CEO who has proudly led SmithKline Beecham into the Web world on the typical 18-month time-scale. His son, a Web entrepreneur, laughed at Dad's pride: his own business was up, running and sold (for $200 million) in a few months. The old business motto was 'Biggest is Best': now it's 'Faster is Better' - especially if Faster means First.
In the old days, too, you developed your existing strengths, leveraging your market penetration, economies of scale, etc. Today trying to preserve your business model may paradoxically destroy it: so attack it before somebody else does. Thus Compaq cannot match Dell's direct selling unless it dismantles its existing network of intermediaries. The technology empowers you to become, like Dell, the disruptive force in your market, taking advantage of its accrued diseconomies to establish a new business model that works in your favour, first and foremost.
The most important technology, though, is people management. Involving everybody is an extremely powerful tool and the acid test of providing effective leadership. An entrepreneur named Kent Dauten supplied that in turning a $12.5 million investment in medical records storage and retrieval into $90 million in 30 months. 'We implemented incentives that would motivate talented people, and then we coached them to achieve our goals and build a business... They believed that we could create something bigger and we did'. The e-formulas are simple, and anybody can apply them with success - if only they believe in themselves.
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