The eEconomy Game Plan: Focus and Commit

Imagine yourself as the head of a large, established business which commands the market with a leading 40-point share. One day...

Imagine yourself as the head of a large, established business which commands
the market with a leading 40-point share. One day, you discover that a new
competitor is becoming a threat for you. How will you react? There are
basically two options: you either take a wait-and-see position, or in other
words you analyze your competitors attitude and get feedback from customers,
or you take dramatic steps to protect your market share for instance by
doubling your advertising budget.
If you run a large business like Procter Gamble or General Motors, your
strategy will probably be to wait long enough to see whether the upstart of the
competition becomes a real threat. If you already own the largest piece of the
market share, spending a lot to gain more shares isnt likely to produce
profits sufficient to justify the additional investment. Why?
Economic fundamentals that have held true for decades begin to change and many
traditional business strategies are becoming obsolete. In the electronic
economy now taking shape, companies are spending multiples of their revenues on
marketing and sales just to garner a few more points. In this game, share must
be defended vigorously to sustain leadership positions in markets that
ultimately will support only a few dominant players. The perfect profit formula
is not yet clear. What is clear, however, is that new business theories have
emerged along with new markets, services and companies. Electronic commerce is
changing the rules, and every business, even the most successful, needs a new
game plan.
The new competitive model is based on the use of the Internet
Economic principles driving the new rules of competition are the most evident
at America Online. America Online has effectively locked up the on-line service
provider market in just a few years, a market that matured so quickly it never
saw more than four or five serious competitors. But it is not just America
Online. Businesses whose strategy is based on the Internet (for instance for
on-line brokerage and bookselling) create a new pattern of competition which
brings about serious implications for businesses and industries not yet
affected by the electronic commerce.
After analyzing a broad sample of clients now implementing eCommerce
strategies, as well as evaluating notable successes and failures, Andersen
Consulting has concluded that electronic economy significantly raises the
stakes for strategy. Not only is there a new rule book, but the defensive and
offensive moves required to Win may also be counterintuitive to veteran
Capture Dominant Market Share Quickly
To appreciate the demands of an economy in which electronic constructs are
replacing physical ones, consider a basic economic principle of the industrial
economy the law of diminishing returns to scale. Owning two factories may be
better than owning one, but at some point, increasing production is no longer
beneficial. It means that scale advantages have limits. The implication is that
any company can compete against companies with greater market share if it can
achieve the scale required for optimally efficient output.
The Law of Diminishing Returns
Today, businesses are learning that the law of diminishing returns does not
always apply. In many cases, the optimal production point is no longer
determined by factory size, but by the point at which total market demand is
satisfied. This occurs in markets in which fixed costs are significantly higher
than variable costs. Such is the case for products in digital form, where a
single copy (of software, for instance) can satisfy total market need, and for
products with very high investment in intellectual content, like
pharmaceuticals. A typical example are products or services that become more
valuable as more people use them. Windows operating system and America Onlines
densely populated chat rooms demonstrate such examples. Choosing a restaurant
because it appears busy illustrates the same effect, albeit on a smaller scale.
In all of these cases, gains associated with increasing share of market do not
diminish with time but actually increase. This increase creates the law of
diminishing returns (respectively, increasing returns to scale).
Speed is the Basis
In this environment, companies must win market share rapidly which has driven
many companies to create new strategies. America Online distributed diskettes
of its software in everything from magazine inserts to fast-food giveaway.
Millions of neophytes could not resist to try this new software. Netscapes
strategy was to give its product away, with the intent of drawing revenues from
associated business opportunities. In the face of such strategies, companies
must respond quickly. They can no longer wait to gain market share or to be
cavalier about small losses.
A High-stakes Game
Funding the large investments required to capture significant market share does
not come cheaply, especially if many companies are competing for the same
market space. A substantial part of the investment must be made up front
-sometimes years before revenues begin to outpace operating costs. Under the
law of diminishing returns, a company had to invest only enough to ensure a
reasonably efficient operating scale to enter a market.
In an environment in which market share rules, companies must be able to create
and support the demand that market leadership entails. In a global economy,
companies must also be prepared to serve large market segments. Neither
proposition is cheap. America Online has achieved market dominance, but not
without investing a half billion dollars a year in sales and marketing.
Companies must therefore devise investment strategies and line up funding
sources well beyond those required for business ventures that operated by
diminishing returns rules. For example, two of the travel industrys best-known
Internet sites, Travelocity and Expedia, are backed by the deep pockets of
American Airlines and Microsoft, respectively. As one senior American executive
in the travel services industry put it: "Anybody who thinks that you can get
into the on-line travel services business with 10 million or 20 million is
Build Strategic Alliances
In todays increasing-returns environment, many companies must also rethink
their alliance strategies. No longer are alliances primarily about efficiency;
now the emphasis is on gaining access to markets (to exploit network effects),
and on creating product and service synergies in aligning with larger,
already-dominant companies. For example, companies like American Broadcasting
Company (ABC), The Motley Pool and The New York Times are each partnering with
America Online for access to its customer base and expected synergies with its
offerings. Access has proved to be so valuable that companies are now paying
more than a billion dollars for the ability to reach its customers.
And todays strategic alliances are not just about gaining access to the Web.
By enabling airlines to link their brands through "code sharing" on on-line
reservation systems, eCommerce is driving incremental growth in market share
for partners engaged in global network alliances. In the increasing-returns
environment, even with a superior product, it is extremely risky to go it
alone. An early understanding of the web of related goods and services, and
strategies for leveraging the position of existing players through alliances
will be critical to the success of even the best new entrants.
Innovate to Survive
Having the right technology and the right timing are not enough to ensure
continued success. Let us remember the following case: Word Perfect was once
the word processor of choice, yet its fall was precipitous when a new, more
powerful standard appeared in the form of Microsoft Word. Netscape once owned
more than 80 percent of the market, but experienced significant losses when
Microsoft Explorer appeared.
According to the traditional rules of the game, innovation is simply a way to
increase the market share. It is hard to estimate what innovation brings
sometimes it only produces a small increase of the market share, sometimes it
can produce a great deal more. Under the traditional model, with information
about goods and services flowing more slowly, consumers were unlikely to switch
their allegiances en masse, giving existing companies time to respond to market
shifts. Business competition in the past was more like the warfare of a long
campaign, sometimes taking years to capture a few miles of ground.
Speed and Strategy
In todays environment of emerging eCommerce, these circumstances do not apply.
Increasingly, product battles are more like Gulf War combat intensive global
conflicts are ignited swiftly an winners are determined at unprecedented speed.
Under the new rules, innovation has even more urgency than ever before. Any
company that finds itself in a dominant position for too long without a clear
strategy for innovating and adapting to new markets and customer demands runs
the risk of swiftly forfeiting its hard earned share to new competitors that
have tailored their offerings to the new customer demands. Auto-By-Tel has been
quick to innovate, moving from providing simple car-buying data to helping
customers select insurance and financing. The company recently announced an
affinity program (using Visa) that enables users to receive discounts. Dell
Computer has remained the preeminent direct personal computer retailer by
continuously innovating by way of the Internet. Buyers can custom-configure
computers on-line without ever talking with a salesperson in they choose.
Focus on the End Game
These four components critical to creating an effective strategy require
strategists to start with the end in mind. Without this end game or vision, it
will be difficult to maintain focus. Definition of the end reduces the risk of
a company diluting its strengths by following every new lead or responding to
every new threat.
But focusing on the end game can be hard. The rapid pace of change driven by
eCommerce and specifically the Internet has created a business environment of
great uncertainty.. Traditionally, companies have relied on three approaches
for managing this uncertainty:
In the past, companies often focused on the first two approaches. In a world of
increasing returns, companies must instead focus on the last two approaches by
first becoming a market leader and then sustaining this role through increased
organizational flexibility. The portfolio approach is no longer an option. The
required investment today is simply too great to sustain any real competitive
position in more than a few select areas.
Commit to Sustain
Start-ups face a daunting road, but the toughest challenges may be faced by
long-established companies just now venturing into eCommerce. New entrants,
unencumbered by a long history in the industry, can often more easily perceive
the potential for a new way of competing. Unlike incumbents, newcomers can be
more flexible because they face no trade-offs with the existing activities.
Thus, experienced players must find a way to succeed on a new playing field,
playing by new rules. Managers should initiate fundamental changes in strategy
and organization. Speed and flexibility are needed to win in the fast-paced
Internet world. With respect to the competition in the market, the importance
of having an escape strategy increases, no matter how certain success appears.
Why Is It Even Important to Quit the Game
The reasons for quitting the race are many: insufficient access to capital,
failure to secure the most critical alliances, weak brand awareness, and lack
of confidence. Ironically, the competitive frenzy of the current market, it is
often possible to succeed by quitting. Often, there is opportunity for lagging
players to achieve the requisite competitive scale by being acquired, an
attractive alternative when the lead has been lost.
9 1395 / darn
Business Strategy Principles
in the Period of eCommerce
lCapture dominant market share as quickly as possible
lPrepare to make a significant up-front investments
lValue alliances for their access to marketplaces and potential product and
service synergies
lInnovate constantly to prevent competitors from redefining the playing field

How to Manage Uncertain Business
lDeveloping a portfolio of business ventures, reserving the right to compete in
several markets.
lIncreasing organizational speed and agility to respond quickly to an
increasingly volatile marketplace.
lDominating the market by defining the rules of the game and the structure of
the future market.

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