Managing revolution: Don't bank on internet success - A new rule of business seems to be that only those online will survive. But there is more to e-commerce than just pouring money into your company web site

Managing revolution: Don't bank on internet success - A new rule of business seems to be that only those online will survive. But there is more to e-commerce than just pouring money into your company web site - The lunatic, irresponsible internet gold rus

Last Updated: 31 Aug 2010

The lunatic, irresponsible internet gold rush so deplored by sane, respectable captains of industry has developed an equally irrational second phase, led this time, not by teenage scramblers, but by the captains themselves.

Over just two days in late February, the Financial Times announced that United News & Media was expected to separate and float its UK internet assets; Reed Elsevier unveiled pounds 600 million of internet investments; Siemens set out ambitious targets for its e-businesses; and the Prudential revealed plans for an Egg-float that would value the baby bank at pounds 2.8 billion.

The Pru's short-term prize (if not the target) was to rescue its faltering share price. At Reuters, too, the mere announcement of a strategy produced a sharp upturn in market value. Rivals are in hot pursuit. In financial services, say, Barclays, Abbey National and Halifax are all apparently hopeful that their fledgling internet strategies can scramble Egg's prospects.

All this poses three questions, which should trouble the sleep of the managements concerned. First, is their internet strategy correct? Second, can their customers execute that strategy successfully? Third, are too many e-bankers, e-retailers and so on, chasing too few e-customers?

It is perfectly clear that most new car purchases will be made via the web sooner rather than later, for example. There is no reason to suppose, however, that car sales in total will increase, or that the car manufacturers will preserve their retail market shares against the assault of internet newcomers. Whatever steps General Motors, Ford and the other megaliths take in cyberspace, the operation will be purely defensive.They cannot protect their profit margins against predators who are not lumbered by fixed assets or fixed mindsets.

The great gains available to the giants are not external, but internal. The vast web sites that the US auto-makers are assembling will cut costs and raise efficiencies - and thus compensate somewhat for the competitive squeeze. The financial services companies could take note. Too often, their customer-facing services are visibly execrable: just try dealing with a bank account at Hove through a call centre located in the Midlands.

The many systems of the banks are still expensively unable to speak to each other and, sadly, because the fast and fertile web-based improvements that might be possible internally rarely merit front-page coverage, they rarely merit much boardroom attention either.

Externally, established companies do have certain strengths in their venturing through cyberspace. They have an installed base of customers, deep financial resources, managerial depth, and well-known brands. So why do the would-be e-banks sacrifice their branding for Egg, cahoot and other weird titles? Does this reflect a strategic view that the new activities will be mere add-ons, serving 200,000 or so e-addicts, while leaving the rest of the bank to business as usual? If so, that is a fundamental error, made in many sectors. Remember the mantra: 'The internet changes everything'. The winners, oldsters and newcomers alike, will have to build or rebuild their entire business systems, or 'value chains', around the new technology.

As Carl Howe of Forrester Research recently told a BT audience, the way to win is to select profitable customers, deliver a compelling software-based experience, link to suppliers over networks, and cannibalise your existing business. Assuming that the established companies can master these arts of execution, severe damage must be done to their traditional trade.

They will not, to repeat, find new customers to compensate for all the diversion of the old. Nor can they counter all the attacks that will come from newcomers. Take Paypal as one brand-new but fast-growing example.

Fund transfer is one of the most tiresome banking services, and can be very costly. Paypal does it instantaneously by allowing you to send the money between e-mail addresses. The facility is free: Paypal plans to make its money by investing the cash float.

The rule of thumb for more established businesses seems to be: take a bundle of separate, current internet activities and put them under one leaky umbrella. Name a suspiciously round number for your future investment, and, if that cuts no ice with the stock market, double it. Place a manager from the existing business in charge of the internet umbrella but retain tight boardroom control of everything this lucky person wants to do. Make sure that nothing on the internet menu subtracts from the powers, privileges and portfolios of the non-internet managers.

To be sure of internet success, they should really do the exact opposite - but even then, they can never be really sure. Innumerable other Paypals are right now dissecting existing traffic and looking for or already exploiting ways of robbing existing suppliers of profitable custom. The predatory multitude won't lose 'em all.

Robert Heller was founding editor of Management Today.

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