The reality of the New Economy is now very widely accepted on all sides. Politicians, managers and gurus alike hymn its wonders and point to alleged results like the surge in US productivity. But sceptics also abound. Some point happily at the collapse of various dot.com lunacies. The more thoughtful note that e-commerce is still only a tiny part of the whole world economy, though growing extremely fast, and that the revolutionary new technology of information and communication has had relatively little impact on the management of most businesses.
You will hear or read sceptics claiming that Internet use in the US is levelling off, and that the various calamities in e-retailing show that people actually like and prefer going into shops. The best advice, though, is to take no notice of the nay-sayers. Even if future events prove them right, which is improbable to the point of near-impossibility, you cannot afford to risk the business or your personal future on ignoring the threats and the opportunities; on not playing to your strengths while allowing your weaknesses to continue.
It is absolutely true that: "The Internet decade has seen the unscrupulous rewarded, the dimwitted suckered, and the ill-qualified enriched at a pace greater than at any other time in history. The Internet has been a gift to charlatans, hypemeisters, and merchants of vapour". But the authors, Joseph Nocera and Tim Carvell of Fortune magazine, go on to say..."despite all that, it still changes everything". As another article in the same issue puts it: "The dot.com revolution is dead. Long live the Internet Revolution".
QUADRUPLE REVOLUTION
That revolution is what Thinking Managers has been loudly preaching for the past few years. I used to call it a Triple Revolution, one that combines an information revolution, a management revolution, and a global one. But I've recently added a fourth leg: a customer revolution. All these developments were under way, however, for reasons that were independent of cyberspace, before the first website was created in 1993. The spectacular growth of computer networks was being exploited by progressive managements to transform their internal and external relationships across the frontiers of both countries and industries.
You cannot discuss one of these upheavals without the others, since they are interdependent. The growing importance of the customer, and the big shift in the balance of power towards the purchaser, is another clear trend. The Internet has given this a tremendous forward push. Markets have more transparency when purchasers can compare prices so readily; and service enters a whole new dimension when the customer can achieve a permanent connection with the supplier - in both retail and wholesale markets. So what does the Internet change? It changes...
• how businesses communicate
• how they are operated
• how they win competitive advantage
• how they do business
• where they do business
• how they serve the customer
Proofs of these six changes are abundant. (1) Supplier partnerships have led companies to communicate by linking their computers. (2) Business operations are becoming flatter and often much faster. (3) Aggressive competitors are becoming global forces by using the Net to disrupt existing industry structures to their advantage - like Amazon. (4) Direct selling is threatening middlemen and producers in market after market. (5) Global sourcing is a fact of life. (6) Airlines are dealing with their customers over websites in preference to travel agents or the telephone. And so on.
DOT.COM LESSONS
Given that all this is true, what has gone wrong with the dot.coms, and what lessons can other managements learn from the failures? Jerry Useem, writing in Fortune, delves thoroughly into the experiences and destroys a dozen myths. First, the New Economy is the Old Economy. There has been some serious disruption, and more and more serious assaults will be made on established firms. But the vast bulk of economic activity, and of those conducting it, is continuous, not discontinuous.
Second is a lesson that nobody should ever have needed to learn: that you can only make money by selling goods or services for more than they cost to supply. The corollary to this eternal truth is that marketing costs are not capital investment, but running expenses. The e-retailers especially spent far more money on recruiting customers than they could recoup by any likely level of sales. Their breakeven points soared out of sight, and only inane injections of venture capital kept them afloat.
The millions of subscribers attracted to "free" websites are only valuable if they can be converted, at some reasonably near point in time, into paying customers. The longer the delay, the greater the consumption of capital and the further away the breakeven point. That gives established firms the time to catch up, adding e-commerce to conventional channels and perhaps finding (as stockbrokers have and retailers will) that clicks and bricks can work perfectly well together.
Even purchasing, which is under the biggest e-threat of any activity, looks likely to run the old alongside the new. A great deal of purchasing, especially of commodity-style goods, will pass over the new B2B exchanges. Vertical set-ups serving specialised sectors or supplies will flourish - but only those that get in first and fastest. This new-fangled necessity for speed of entry and development hasn't gone away, but it doesn't remove the old-fashioned need to build a business methodically and well on all the required foundations.
BRAND FAILURE
The most fascinating failure of the dot.coms is basic; it concerns the brand. Thinking Managers has often urged the growing and sovereign importance of branding, that of the company and of its goods and services alike. But as Jerry Useem trenchantly observes, the dot.coms adopted a wildly mistaken strategy:
1. Spend your venture capital lavishly on "building the brand" up-front
2. Score a large and increasing number of "hits" and "eyeballs"
3. Then sell your offering to your enormous, supposedly lucrative customer base
This model was encouraged by the success of Amazon (and before that, Netscape). But these two breakthroughs were based on important offerings (cut-price books over the web and the Internet browser) that both attracted and served the customer. They were not brands in search of a business. True brand-building follows a quite different routine:
1. First build a profitable customer base
2. Broaden the base with new markets and lines
3. Only boost marketing expenditure to create brand strength as sales and profits rise
In other words, the laws of business economics have not been suspended for the benefit of e-entrepreneurs. But the Fortune coverage, while suitably sceptical, is by no means downbeat. On the contrary: it quotes well-informed people who say things like: "Anyone who thinks the Net is not transformational is dreaming". You will get the same message from the Harvard Business Review. Where once, quite recently, it all but ignored the Net, it now majors on the subject with articles on aspects like The Future of B2B and The Real Business of the Internet in November-December.
According to Richard Wise and David Morrison of Mercer Management Consulting, the B2B future involves, not simple exchanges, but five new models: the mega-exchange, processing large-scale transactions; the specialist, handling complex and relatively expensive products like electronic components; the "e-speculator", chancing his arm on things like replacement car parts; the solution provider, to whom you might turn for speciality chemicals, say; and the "sell-side asset exchange", acting as broker between suppliers and buyers in relatively fragmented businesses. All these are clearly evolved forms of today's wholesales and brokers, but with their functionality greatly enhanced by the Net.
CONTEXTUAL MARKETING
As for the latter's "real business", that turns out to be something called "contextual marketing". This revolves round exploiting new technologies that "will enable businesses to reach customers whenever and wherever they want to buy". It contradicts the basic principle of the website, where the company is passive and depends on an active customer for results. The authors, David Kenny and John F. Marshall of Digitas, argue that massive spending on developing corporate websites - $10 billion in 1999 - has so far been deeply unprofitable. In fact, about half of the sites generate "no commercial return at all".
They also generate little customer loyalty - a defect shared by some of the best-known dot.coms. Fortune notes that CDnow had 83% recognition among on-line shoppers, but a mere 17% loyalty rating. Some analysts believe that Amazon will have to keep its customers for a full dozen years to make sense from its massive invesment in the site. You cannot rely on the customer to make your website work - but you don't have to, according to Kenny and Marshall, if you shift your point of contact to the new mobile world.
In a world of few certainties, one surefire development is this: before long, everybody will be connected to the Net by anything from a Palm Pilot or a wireless phone to an "e-wallet" or an Internet-enabled POS terminal - or an interactive TV, for that matter. They will have access wherever they are and whenever they want. The right marketing strategy in these circumstances will be radically different. The authors say that you must:
• Focus on context, rather than content
• Build a ubiquitous "agent" that travels alongside your customer
• Master technology that tells when you're needed
• Be where your customer is ready to buy, and when
Being translated, this means that General Motors, say, would capitalise on all the information carried within every one of its vehicles on the road - telling oil firms how much petrol there is in each car's tank, warning restaurants that the car is nearby, giving mechanics service information. Frankly, this example - like the others - is so deeply unconvincing that its publication in the distinguished HBR is something of a mystery.
OVERRIDING REALITY
That mystery isn't much lessened by the authors' closing advice, which is (1) become a direct marketer (2) master new technology skills quickly (3) measure everything for relevance to customers and market penetration. Forget the Internet for a moment. If you're not already doing these three things, you should be. In fact, that's the overriding reality. The Net accentuates the positive and magnifies the negative. The Harvard editors don't know what consequences Net ubiquity will have, but they do share Fortune's (and my) conviction that "the Internet changes everything" - even if you cannot tell or forecast precisely how.
There's no imprecision about the correct course of action, fortunately. Use the new technology internally to cut operating costs, improve information flows and communication, broaden decision-taking, provide training and development, and so on. Extend that system outwards to customers and suppliers, for much the same purposes. This is risk-free stuff, where the benefits are gross and net. It also provides the basis for becoming an Internet company - and remember the words of Intel chairman Andy Grove, "All companies will be Internet companies, or they will be dead".
Fortune speculates that this point has already been reached. The revolution is moving fast from New pace-making e-companies to the Old Economy at large. The opportunities are getting bigger, not smaller. And the closing message is dead right: "The real wealth creation is yet to come". Be sure to create some for yourself.
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