E-Business Strategies: Storm Warnings

Baldwin Louie — Mon, 20 Mar 2000 17:00:00 -0500

If you think you have plenty of time to develop and execute a killer e-business strategy, think again. Even if your industry has yet to be named the latest red-hot market for e-commerce, it still isn't safe to operate at the leisurely three- to five-year pace of traditional strategic planning.

What's the reason for the urgency?

An explosive combination of ever-faster, ever-cheaper computing power, the ubiquity of the Internet, and the accelerants of readily available capital and entrepreneurs determined to spend it. By the time the revolution reaches your doorstep, the revolutionaries will be hard to see and even harder to stop. Even if 90 percent of all the startups that enter your orbit crash and burn in short order, their impact on your operating model will still be sudden, deep and permanent.

To see just how fast e-commerce can undermine a traditional industry's structure, tune into the drama unfolding now in the recorded-music industry. The four remaining record labels anoint a few performers with contracts, pay them next to nothing, and spread among distributors, retailers, radio stations and promoters the enormous difference between costs to manufacture the recordings and prices paid by the consumer.

The collective forces upsetting this once-stable universe are new standards for high-quality data compression (notably MP3), the increasing speed and spread of the Internet, and a generation of new appliances that can take music off the Net and play it back. The recording industry was quick to dismiss what was initially impractical, inferior technology. But that technology is evolving rapidly, and today there are sure signs of panic.

Already, sites such as MP3.com and Music.com can mediate relationships between artists and their audiences without ever needing to reduce the music to a fixed media, the key source of both cost and market power in the old order.

Without much planning, these developments have created the beginnings of a new way of solving the original problem - getting music from performers to listeners - along with new competitors for everyone.

Andrew Bridges, an intellectual property lawyer at Wilson Sonsini Goodrich & Rosati who successfully defended the manufacturers of the Rio MP3 player, tells a remarkable story of how the industry outsmarted itself and suffered a devastating legal defeat. One tidbit: The Rio case represents the first time in the history of the Recording Industry Association of America that it ever sued someone and lost.

So how do you know if a storm is headed your way? The following few key questions can help you decide.

Are you in a highly regulated market? Regulated markets by definition are not used to operating competitively. So when new competitors show up, the leaders don't know how to respond. Worse, the new competitors often operate outside the regulated structure, turning regulated players' protections into obstacles that make it even harder for them to compete.

In financial services, for example, the pure-play Internet companies have been able to cobble together alliances that offer insurance, brokerage and banking services in ways that incumbent financial institutions found difficult to do under federal banking law. Ironically, the law was written to protect market segments, but suddenly it was doing just the opposite, leading the industry to push hard - and successfully - for its repeal.

Regulated industries have little incentive to invest in technology in the first place, leaving them without the customer and marketing databases that might otherwise be chief weapons in a counterattack. This was a painful lesson for deregulating industries like telecommunications and electric utilities, which have few resources to compete with, beyond expensive, aging physical equipment - also euphemistically known as "stranded assets."

Are you in a fragmented market? Markets with many buyers but no dominant sellers are prime candidates for transformation. They usually operate at high levels of information inefficiency: Buyers have to order from different suppliers, distributors and agents; sellers have to spend a lot of resources processing a large number of small orders across huge geographies.

Markets for many consumer products, such as cosmetics, fit this description; so do agricultural products and supplies. Because there are no dominant players, these markets are ripe pickings for more efficient, virtual exchanges that allow buyers and sellers to aggregate demand, improve margins and squeeze out the middleman. The recent announcement by Ford, GM and DaimlerChrysler to use the Internet to buy raw materials for cars sent shockwaves through the parts-supplier industry.

Is the product you deal with based on information? In Being Digital, Nicholas Negroponte famously described the Internet Economy as the movement of activities from the world of atoms to the world of bits. The change is even faster, though, when the activity starts out as bits.

The music industry is particularly vulnerable to sudden change because the product starts and ends as information. There is no inherent reason why recorded music ever has to take a physical form. Yet all of the industry's assets are tied up in the manufacture, packaging and distribution of the physical media. Technology that eliminates the need for the media puts all of those assets suddenly at risk. A similar revolution is further along in the software business, where physical distribution is rapidly disappearing.

Other entertainment products (movies, books and magazines) are just waiting for the right technologies for delivery. But there is information content, to varying degrees, in every industry. For example, much of what happens in financial services is bit-based from the beginning (money is a kind of information, and most of it never takes a physical form), which is the reason banking, insurance and mortgages have been early e-business targets.

Are the customers in your industry poorly organized? Markets with many buyers and a few powerful sellers develop when buyers have difficulty aggregating demand to get price leverage over sellers. Power may reside with manufacturers, or more likely with a complex web of distributors, agents and brokers. This is the case in the automobile, real estate, insurance and even funeral markets. Cartels in these industries worked out rules of engagement long ago that minimize competition, so chances are slim they will use technology to innovate.

The technologies likely to disrupt these markets are those that will easily and efficiently allow consumers to self-organize; the squeeze will probably come in pressure on the middlemen to justify and deliver the value they're currently extracting from the price. Consumers may form buying clubs, for example, as Cendant (CD) did early on with its Netmarket offering.

Consumers may also find ways to buy direct from the manufacturers and avoid the expensive network of regional and local sales offices, warehouses and retail outlets. Producers and consumers already are forming coalitions to break the current industry structures in each of the markets mentioned above, largely because the intermediaries are resisting the efficiencies of new electronic markets.

It's interesting to note that the "industries" called "Europe," "Asia" and "South America" meet almost all these criteria.

If you work in an industry where these warning signs are present - or maybe you want to disrupt one - you need an aggressive and dramatic e-business strategy. You must move pre-emptively and in a variety of ways - aid and abet the assassins (maybe even invest in them), launch your own killer apps, and learn to manage the inevitable channel conflicts and organizational stress and strain that will accompany the transformation of your business.

Above all, maintain an early-warning radar system. If you wait for the sky to light up, you've waited too long.

Warning Signs

Do Web upstarts pose a threat to your industry? These questions can help you find out.

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Larry Downes is coauthor of Unleashing the Killer App: Digital Strategies for Market Dominance, published this month in paperback by Harvard Business School Press.

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E-Business Strategies: Storm Warnings