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From .com to .profit Nick Earle, Hewlett-Packard E-Services Solutions; and Peter G. W. Keen, Keen Innovations of Great Falls, Virginia. 0-7879-5415-2/Cloth/240pp/US$25.95 20% off to APMF readers: Buy the whole book from the order form here (PDF) The New Race: Gorillas in our Midst The most widely cited winners that have emerged from the .com era are Amazon, Dell, and Cisco. Think of these Big Three as the gorillas in their ecosystem - this is Geoffrey Moore's insightful term, and it captures the dynamics of competition in high-tech markets and the Internet. Gorillas dominate a hypergrowth territory, piling up so many advantages that their market valuation soars while their cost of capital remains low. Amazon is already a mature company, as vulnerable to new modes of competition as it made the established bookstore chains vulnerable to an entirely new business model. Dell is the equivalent in logistics of Toyota; Toyota set the agenda for three decades of manufacturing through its leadership of just-in-time, lean production, and total quality management. Dell has done the same in the personal computer retailing business. But it, too, faces challengers with new business models, most notably the manufacturers and retailers that are using massive price discounts and free offers to attract buyers of low-end PCs. For now, Cisco's gorilla advantage is such that it was able to spend almost $7 billion for a company (Cerent) in stock at a total cost of just over 3 percent of its equity base. Cisco as yet hasn't seen much challenge to its spot in the telecommunications equipment ecosystem by that challenge will come. Although the first gorillas in Internet business did not make any major innovations in technology, they didn't stick with the core technology either. Amazon brought a new way of thinking about online customer relationships, distribution, cost structures, and branding - and used the Internet technology available to every firm. Dell brought its established skills in customer service via call centers, business process streamlining, supply chain management, and management of financial capital - and used the widely available core Internet technology. Cisco did the same, bringing a business model that emphasizes aggressive innovation via the acquisition of the technology and skills it needs to maintain leadership. Each of the gorillas is a leader in using the emerging tools of e-services, all of which are becoming available to every player. Somewhere out there are plenty of new companies who will exploit e-services technology and business smarts the way Amazon, Dell, and Cisco exploited standard Web technology - and that have the superb business smarts and ability to execute their invasion of the territory. Indeed, the .profit game is already seeing plenty of baby gorillas - potential winners. These are the fast-growth companies that bring compelling business models to the gorilla game. Many of these, perhaps most, also benefit from the e-services technology base in ways that the .com firms could not. First to the Web is no longer the advantage. There are plenty of baby gorillas, some recent entrants, some Fortune 1000 companies, sone yet to be born. They will bring an effective new business model to the game, raise the capital to feed themselves till they are big enough to roam the wilds at will - and use the new widely available technology. These days, it's all much more a matter of first-to-the-portal, supply chain hub, customer relationship niche, and business process edge. That combination won't necessarily come from a start-up any more than it did in the .com phase. Because Amazon stands out as one of the successes of Internet history, and because Dell and Cisco have dominated their business territories, it's easy to associate Internet success with Startup-Company.com. But Dell and Cisco were already major successes and well established as leaders in revenue and profit growth, innovation, and customer service. America Online predated the first phase of the Internet by a decade and is just as much a gorilla as Yahoo, a start-up firm with a similar business model. Managers should never assume that it will be new companies that continue to set the pace. Instead, it will be any company that gets the management combination right. The points we make in this chapter are simple: everything follows from business managers' taking charge of the business model as their own responsibility. It they don't, then .com becomes by default the business model in action, regardless of whether or not it addresses the value imperatives of Internet business. Fractured Business Models If you've ever fractured a rib, you'll remember only too well just how painful it is. You appear to be fine. Friends may wonder what all the fuss is about. You walk around, talk, eat - and think of almost nothing else but the pain. You can't move quickly and you certainly can't exercise. You are, in the literal sense of the term, healthy: no infections, no change in your weight and cholesterol count, and no apparent heart problems. You are just out of commission. This analogy is a useful one in thinking about business models. It's best illustrated by Amazon.com, Dell Computer, and Charles Schwab on the one side - healthy business model and ribs so far intact - and Compaq, Barnes and Noble, andMerrill Lynch on the other. All three of these latter companies have been outstanding performers for a decade or more. If the problems they now face were the result of incompetence of blunders, then there would be little to learn from their experience. If they were examples of dinosaurs, unable to throw away their old models and leap headfirst into cyberspace, then all we need say is "Sayonara. You're gone." But these companies are superb. That's the point. A competitor changed the rules and turned "superb" into "vulnerable" at the most basic level of their identity; strategy and operations. These are just a few of the best-known examples of leaders in an industry getting a hit in the ribs when they were in their best health. .Com caught them by surprise, but they may well come back. That's why it's best to think of them as suffering from fractured business models rather than broken ones and to then ask what other companies can learn from their situation and their efforts to repair themselves. How do companies learn from this and anticipate where they face the same risk with the same potential impact? there is no pat answer. There are many areas of business where the Internet was expected to pose a major threat to established business models but so far hasn't. Real estate and insurance, for instance, seemed like obvious targets of opportunity. But to date, there have been no real estate equivalents of Amazon and no insurance giant to match Schwab's disruption of its industry. That's not the point. The main lesson from the examples we have given is what might be called the Best Defense school of business: get your retaliation in first. Waiting to see if, when, and where a new gorilla will stomp into your territory guarantees that you'll have to reach instead of being able to take the lead or at the very least join in the game. Warning Signs and Hotspots If you can look ahead and see that within the next few years any of the following apply to your firm, you will be fractured or be able to do the fracturing: The 10 percent customer base or margin factor. What percentage of your customer base can your industry lose for good and still be viable? What percentage of its margins? The answer for most businesses is that a 10 percent loss of customers and 10 percent loss of margin means death. In retailing, if a mall has a permanent drop in traffic of just 7 percent, it will go out of business. Given that online prices average 10-15 percent below their offline equivalents and given that the logistics leaders have a comparable edge, the management message is, Don't wait for this to happen to you, even if the threat is only from companies totaling 1 percent of the market. Do the fracturing yourself for the next 1 percent of the 99 percent. Logistics. You're in a business with complex supply chain, distribution, and related business processes - inventory management, warehousing, shipping, and so on. There are delays, high administrative costs, and lots of paperwork. Much of your working capital is tied up in inventory and receivables. Returns of ordered goods are high. Distributors play a major role as an intermediary between you and your customers. If any of this applies to you, move fast. You must do so before you are left behind in the Internet logistics management transformation. On the positive side, look for any opportunity to take advantage of the logistics revolution. It will pay off very fast. Moment of value. What can you do for a customer now, regardless of where the customer is or what time it is? Customer moment of value contrasts with company place of location. Wherever online service either creates a new moment of value or transforms place of location into moment of value, your firm is in for a change. Consider, for instance, the medical field. It's very hard for people to get fast and personalized information from doctors and hospitals about health issues. If you are able to get an appointment, how long can you sit in the doctor's office and ask questions, chat with your family, and come back and ask some more? How do you locate the specialist you'd like to talk to? Where? When? On the Net, any time, anywhere - and no waiting. So far, that has not translated into revenues and profits - and that's not the issue. The medical services business is inevitably going to change. Online business innovation has long been basically about service at the moment of value: twenty-four hour ATMs instead of bank hours, 1-800 catalog ordering, and use of credit cards. The Internet so extends the opportunity that the price of business freedom is eternal vigilance - in other words, watch out for an eBay that's turned yard sales into nonstop moments of value for seller and buyer. Intermediary value. In essence, a Web address is a relationship interface - a contact point. Where is it likely to be far more effective than an alternative: a phone call, face-to-face contact with a person, or regular mail? The question is about it being "far more" effective than these, not just cheaper or more convenient. Build a Power Brand for your Business Brands have power - and take power. Internet relationship brands are killing off product brand equity. Amazon, Yahoo, and AOL have built the same degree of brand name recognition across the world as Nike, Coca Cola, and IBM. They are among the Internet power brands that are contributing to the death of product brand equity. When you're a loyal repeat buyer on your personalized MyXYZ site, XYZ is the brand, whatever products you buy there. The Internet business shakeout will result in a few power brands and plenty of niche players with their own strong brands. The question is, Which brands and which players? When the deregulation of airlines initially led to a flood of new entrants with high promise and high expectations and then industry consolidation reduced the competition to a handful of megabrands, there were plenty of surprises. A few of the new companies stayed in business - Southwest Airlines being the Amazon equivalent (and major .profit player, with the highest percentage in the industry of reservations made through its Web site). Some well-established players such as Eastern Airlines and Pan Am were gone and soon forgotten. Today's battle to become a portal is really about branding for a new economy. If you're not an Internet power brand, how do you differentiate yourself and stay visible? What do you do when your strong offline product brand had no value in the online world? You can't have a business model without having a branding strategy. Saying that your firm is going to be a portal may look great in the press announcement, but it's like saying it's going to be a brand. Customers make brands. Customers make portals. What value are you offering that will get those customers to turn to your firm into their brand value? Your company can call itself anything it wants. but unless customers view your site as somewhere to go on a routine basis, all you'll have will be a .com Web site. Here's the power brand business goal: Build a brand that attracts customers to routinely "park" at your site, and then add more and more reasons for them to come back rather than surf or search elsewhere. Turn the brand into your online market complex and the platform for a sustained stream of innovations. The most exciting, volatile, and controversial business model template refers to the one that is all about building power in the new marketplace today to ensure massive power for tomorrow. It's the Yahoomazon game - trying to become the electronic Wal-Mart, loved by customers, feared by competitors, and wooed by suppliers. It's also the one with most hype attached because the stakes and risks are so high - for company and investors. And they're high for competitors, of course. The business model is simple in essence: Through e-services, you can quickly and seamlessly add other people's services to your site. Previous Book Reviews and Extracts Previous monthly international business management book extracts plus other books on special offer are available from the Wiley Corner Book Extracts Index Page.

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