ROBERT HELLER: MANAGING REVOLUTION - NOW FOR THE CORPORATE BACKLASH. The fightback has begun as the big companies marshall their forces against e-raiders. But the old-liners must exploit inherent strengths

ROBERT HELLER: MANAGING REVOLUTION - NOW FOR THE CORPORATE BACKLASH. The fightback has begun as the big companies marshall their forces against e-raiders. But the old-liners must exploit inherent strengths - The juddering thrust that has reversed high-tec

Last Updated: 31 Aug 2010

The juddering thrust that has reversed high-tech and especially internet stocks is a seriously large economic event. But unlike the internet (which, in the now-famous phrase, changes everything), the mighty setback in share prices changes only part of the cyber-landscape.

Finance is first. As long as the bubble lasted, e-entrepreneurs had access to unlimited supplies of capital on bizarrely easy terms. Never mind the insanity of the market caps, some business plans were just as loony. Raising capital is one thing, earning a return on the funds quite another. And the earning still depends on the ancient, iron laws of business economics.

In direct mail, for example, you need at least pounds 1 of subscription revenue, say, for each pounds 1 of promotion - the logic being that the second year's renewals will yield your profit. The ridiculous budgeted dollars 16 million for first-year advertising. Sales in its first active quarter struggled to an annual rate of dollars 2.7 million, leaving an impossibly large gap to close.

Many e-entrepreneurs have been seduced by the sagas of Yahoo!, AOL, eBay and Amazon, which all spent and still spend gigantic sums on promotion to gather users, maximise hits and establish unbeatable leads. In stock market terms, these four account for an overwhelming proportion of the value of all portal and e-retail stocks. But this heavyweight quartet (especially eBay) possess (1) rising returns, (2) economies of scale and (3) ease of customer retention that few others could match.

Writing in NewBusiness, Harvard Business School professor Tom Eisenmann points out, for example, that online car sellers like AutoByTel lack these three advantages. Cars may seem like highly logical candidates for online selling. But in the US (as in Europe), franchised dealers have legal protection that further limits the e-market: and American dealers are bringing legislative muscle to bear against the onliners.

In general, the backlash by established companies is a powerful trend that is plainly being enhanced by the e-stock reversals. In contrast to the new competition, now less able to tap capital so abundantly, the majors have undiminished riches. Thus armed, record companies, for instance, are attacking their web rivals on two fronts: reinforcing their own online ventures and suing the upstarts for copyright infringement. The musical oldsters may yet be killed by free downloads, but they won't just lie down and die.

In that industry, as in many others, the threat from cyberspace is dragging conservative and conceited companies into the new millennium - and none too soon. Almost unbelievably, 45% of 551 large US companies surveyed by consultants Watson Wyatt were found last year to have no formal recruitment strategy; 54% had no strategy for employee retention, either. That makes it even less surprising that the dot.coms attracted so many of the brightest and best.

Now established employers are learning and using the tricks of the bodysnatching brigade. Even the staid old McKinsey, according to Fortune, 'plans to offer associates the chance to invest in exclusive venture capital and private equity deals'. These, no doubt, look all the sweeter as so many options sink below the water-line. Becoming an instant multi-millionaire seems much less attractive when it doesn't happen.

The old-liners have great advantages over the onliners, provided they can exploit those assets (including the human ones) in the new environment.

Great global brands, vast installed customer bases, deep pockets, stable finances and management in depth are a formidable combination. But the old dogs must learn new tricks, and fast: Andy Grove, chairman of Intel, is probably right in saying that 'in five years, all businesses will be e-businesses'.

That prediction has in no way been weakened by the collapse of cyberstocks.

In the real world, web usage continues to grow at an unprecedented pace: new wireless devices like smart phones, notebooks and pocket gadgets are taking the net into a new dimension: purchasing is moving online in sector after sector: and companies with mysterious names like Inktomi, Akamai and Ariba are creating phenomenal growth and advanced management styles that challenge the old, sober ways.

Inktomi, Akamai, Ariba? If you're using a search engine, the odds are that the first supplied the software. The site you search for may well have been accelerated by Akamai. If it's a purchasing site, Ariba could be effectively running the show. None of these companies is immune from the iron laws of economics, and none of their market capitalisations is invulnerable.

But the miracle markets they have pioneered are here to stay - and how.

The odds are against any old-line giants ever producing such wondrous rabbits out of the hat. They are basically fighting defensive battles.

Attack, of course, is the best form of defence. But it's hard to hit a moving target, and the best e-revolutionaries are still racing away.

'Riding the Revolution' by Robert Heller and Paul Spenley is published by HarperCollins at pounds 24.99.

Find this article useful?

Get more great articles like this in your inbox every lunchtime

The art of leadership: From Marcus Aurelius to Martin Luther King

Transformational, visionary, servant… enough is enough.

Lockdown stress: 12 leaders share practical coping tips

In hard times, it's far too easy for the boss to forget to look after...

Don’t just complain about uncertainty, find the tools to navigate it

Traditional in-person research methods won’t work right now, but that’s no excuse for a wait-and-see...

How well have CEOs performed during the coronavirus pandemic?

A new survey offers a glimpse into what their staff think.

Why women leaders are excelling during the coronavirus pandemic

There is a link between female leaders and successful responses to COVID-19.

Why your employees don’t speak up

Research: Half of workers don’t feel comfortable to express concerns - and it’s usually because...