June 2000 

Many traditional CEO's have watched from the cyber sidelines in the last 6 years as the dotcom opportunities and fortunes flashed in front of their eyes. CEO's of traditional companies can now benefit from these dotcom learnings. Now, with dotcoms out of favour with investors, the time is now for the old world economy companies to strike back? Making the decision to move your business online involves many questions. Marc Phillips provides some answers and recommendations ?

1.      Select robust Internet business models

One of the most important elements for a traditional company CEO in making any online strategy decision should be sustaining a long term business proposition.  Despite successful bricks and mortar companies being challenged by the Internet revolution, a healthy skepticism has existed amongst traditional company CEO's. The recent slide in inflated share prices for dotcom companies should not be overlooked by traditional company CEO's.

Many dotcom companies have a sustainable business model and traditional businesses are being forced to focus on the Internet as the new channel that will bring profits unmatched by traditional channels. These dynamics are working in favour of the traditional company CEO who can now look at Internet business models that are workable over the long term.

Analysing those dotcom company share prices that have held up since April, 2000 will be more effective for traditional CEO's as most are well below or hovering around their initial share offer price. These prices also provide relief for those cautious CEO's that knew the hype could not go on forever.

2.      Understand the Working Together Culture of dotcom companies

It is important that the traditional company CEO's understand that the culture of most Internet proprietors is to work with as many partners as possible. This is inherent in the culture of many dotcom CEO's as the Internet is a network of computers. Therefore, partnerships, alliances and acquisitions with dotcom companies is now easier to negotiate, provides speed to market for offline companies and is needed for legitimising the long term business models of the dotcom companies.

Exemplifying these trends, Korea’s largest online shopping mall and logistics portal Hansol CSN, who command around 36 per cent market share, and ATR Korea, a provider of advance technologies and resources for logistics, banking, ASPs and networks have recently partnered with Descartes Systems Group Inc a provider of global Internet logistics solutions. This federated network enables Korean industries to extend their logistics infrastructure and market opportunities into the global marketplace. Hongsik Kim, President and CEO of Hansol CSN part of he chemical, paper, electronics and telecommunications company Hansol Group believes “Descartes DeliveryNet Solution will allow us to rapidly connect to the many trading partners in our logistics network and strengthen our ability to offer profitable delivery services to our customers.”

By 2003, the Internet will become the core mechanism for conducting business either business-to-consumer or business-to-business. Therefore, traditional CEO's should be looking to counter the shift away from traditional channels and form alliances with many companies that have established online infrastructures.

3. Foster eInnovation

Whilst the traditional CEO's maintain a corporate watch over cyber stocks and reputable dotcom companies within their industry, it is important that they also foster innovation from within their company. Inviting participation from within the company in order to empower employees with skills and knowledge to enable the Internet strategy as well as providing incentives will shift the incumbent culture of traditional organisations towards the online world.

In any company there are individuals that aspire to thrive in the online world. Their enthusiasm should be harnessed and traditional CEO's would be wise to encourage them to create new online business models. Too often, traditional CEO's believe that the Internet evangelists in the company are unfounded in their online pursuits. Make no mistake about it, a CEO that does not provide a workplace that fosters innovation will find that the best intellectual capital will leave their organisation.

4. Pro's and Con's of Spin-offs

There are many questions that the traditional CEO should be asking yet a frequently asked questions is, 'Should I spin-off the online division into a separate business entity or build the online division in house?'

Although the cool and trendy offices of Singapore and Hong Kong's dotcom companies are envied by corporate office dwellers, the fact remains that spin off companies are the exception rather than the norm.

On a positive note, creating a branded spin-off of the traditional business gives a newly formed on-line division the strength of a known name. This approach provides a way for financial markets to see a clear division between traditional and Internet activities – although customers usually want to see them as one entity.

Spinning off a company as a dotcom entity of its own is of value but devising how to spin off is vital. CEO's of a brick and mortar public companies are acknowledging the gains in staking a claim in the Internet space yet many of these dotcom have eaten into solid offline earnings. The danger is that if CEO's spend a lot of money on the Internet, it can result in a fall in stock prices.

One of the major issues that a traditional CEO faces is that in spinning off a piece of the traditional business is the brand equity or core competency affected? Associating the old economy business with a new economy e-business with the current business name is a strategy most often used.

Jupiter Communications see that 90 per cent of sales in 2002 will shift from traditional channels to online channels. These are the types of overwhelming statistics that attributed to Wal-Mart, the national supermarket chain in the USA, launching its website and then moving to spin-off its online business as a separate entity. Instantly, this provided greater financial benefits in terms of financial statement ratio's. Additionally, Wal Mart felt that their incumbent organisational structure was too mature for the dynamic Internet environment that requires the ability to react to market changes without large bureaucratic processes.

Branded spin-offs where the spin-off retains the name of the parent company, is considered by consumers to be an extension of the off-line company. Traditional CEO's should be aware of the pitfalls experienced by their predecessors. It is common that spin-off online division's quickly face problems of inconsistencies between the traditional company and the online company leading to dissatisfied customers and lost revenue for all channels ! Consistency across all channels is vital requiring dedicated resources for coordination of supply chain and technical integration.

An excellent example of a spin-off is Japan's largest convenience store, Seven-Eleven Japan Co Ltd, which recently launched an e-commerce website called 7dream.com. 7dream.com shoppers browse over 100,000 items, including music, flowers, and photo supplies, place their orders online, and then go to their local 24-hour 7-11 stores to pay for and collect their purchases.

This shows how a partnership allows old economy companies such as Seven-Eleven Japan to innovate and create new business models. The online spin-off 7dream.com has become possible in Japan, as convenience stores are within walking distance from almost any location.

Seven-Eleven chairman Toshifumi Suzuki said, "This will be a first step toward the full-fledged start of business-to-consumer e-tailing in a uniquely Japanese style based on the extensive network of the nation's convenience stores." E-commerce is exploding in Japan, as consumers spent USD$3.2 billion online last year, and projected that they will spend USD$68 billion online by 2005.

5. Co-branding is an Option

Another option and consideration for the traditional CEO is to co-brand their service with a dotcom company. One of the most high profile co-branding exercises with a traditional company and pure play business was the investment by ANZ Bank, one of the major retail banks in Australia in E*TRADE Australia.

Under the deal struck in late 1999, E*TRADE Australia agreed to offer on-line securities trading and related services to ANZ’s customers. ANZ customers would be able to access the co-branded website from the ANZ website. The initial 10 per cent shareholding and the options were issued to ANZ in return for the benefits which E*TRADE Australia anticipates receiving from its alliance with ANZ through promotion of the co-branded service as the preferred product of ANZ and the marketing of co-branded services by ANZ, at its cost to its customers.

The primary benefit of the alliance is that E*TRADE Australia will have access to ANZ's approximately 4 million-strong customer base.

The important elements of this deal for traditional CEO's to consider include:

·        The opportunity for E*TRADE Australia to move into a new league of growth that may have taken considerably longer to achieve through organic growth.

·        The market reach delivered by this alliance effectively places E*TRADE Australia in a highly competitive position in the online financial services industry.

·        E*TRADE Australia's ability to achieve the objective of being the market leader by the end of 2000 is substantially enhanced.

·        The agreement builds in a high degree of incentive for ANZ to maximise take-up among its client base by tying eligibility for equity in E*TRADE Australia to the delivery of valuable clients.

ANZ will make a significant marketing investment into educating its client base on the benefits of online investing with the aim of generating traffic to the co-branded site. ANZ has a demonstrated ability to successfully partner with other companies to deliver innovative product offerings to the Australian market.

The business to business model is based on focusing on e-commerce and extracting the costs from the value chain. The benefits are an infrastructure that supports e-commerce and process improvement of the business.

6. Employ experienced ex- dotcom staff 

Traditional CEO's should also beware of the recent staff redundancies from dotcom companies and take advantage by seeking to employ these Internet aware executives.

By accessing the skills of ex-dotcom people, the savvy traditional CEO can bring new knowledge of new economy into the traditional business model with relatively little effort. The attached table provides a list of the layoffs that have occurred in June in the USA.  Asian based CEO's should heed the trends of the USA and be aware that a fall out is a certainty in Asia.

Source: APT Strategies

7. The Teen Market are the eGeneration.

Traditional business need to consider new markets and an obvious yet often overlooked market is the teen market. A compelling question that faces traditional CEO's is "Who is making up the new markets that will walk through the doors of tomorrow's online businesses?" Regardless of the answer, traditional businesses will be forced to extend the online division of a traditional business to a younger market. It is essential to understand the new markets such as Screenagers.

Today's teens are turning the Internet and their mobile phones into their own personal place to be heard. Companies such as Bolt.com and Upoc, have successfully capitalised on this new-media angst by providing teens with a platform for expression, communication and spending. New York-based Upoc has raised US$3.3 million in its first round of venture capital that features blue-chip investment banker Allen & Co. Upoc's mission is to convert nation's 56 million youths, aged 12-24, into wireless communications junkies.

Bolt.com's strategy is much more "old-fashioned”. Bolt foregoes trying to appeal to perceived notions of what is hip and instead encourages its audience to actively explore what they like, and to write about their experiences.

Bolt has already recruited 2.5 million members, 30% are from 200 countries around the world, may of them from Asia. The online market for teen advertising, sponsorships and commerce shows great potential. Teens will spend $1.2 billion online in 2002. The year after that, teenage user penetration will reach 72%, resulting in a target population of nearly 18 million by 2003:

Partnering up with a pure Internet company could be the answer. Build distribution with existing proven infrastructures. Building an infrastructure in house to go online would cost millions and creating international distribution centers in other countries can be difficult. Why not build on other people’s infrastructures – the cost is a fraction per transaction.

CEO’s of new economy are faced with a steep learning curve in playing in the same league as CEO’s of traditional bricks and mortar companies. As exposed by the recent market crash new CEO’s have the Internet know-how but lack the experience of traditional CEOs in the face of a pre or post Internet IPO crisis. Fusing together the experience of the old economy and new economy – a CEO of a traditional company can offer a raft for young CEO’s an opportunity to anchor their new business models.

Moving traditional companies on-line without eroding bottom lines and damaging reputations can only be overcome by well thought out strategies. The ease of making money on the Internet is traded off by the difficulty of sustaining long-term profits and creating a robust business model. Although the process can be difficult we have seen thousands of start-ups generate huge profits and great or moderate success. Enterprises facing the online challenge of global markets must consider the impact of diverse cultural, political, language and taxation issues. The traditional CEO of today and tomorrow faces very competitive challenges that are increasingly morphing both the online and offline world.

For further information contact APT Strategies at info@aptstrategies.com.au