The Future is a Synthesis of Bricks and Clicks
 

W. Chan Kim and Renée Mauborgne
  

MANAGEMENT VIEWPOINT

The past few years have been marked by the story of online attackers versus off-line defenders, the battle of clicks versus bricks. Then the Nasdaq plunged in April 2000 and Wall Street and the City were suddenly demanding that dotcoms turn a profit - fast. When they could not, funding evaporated and it seemed that we had reached the end of the beginning. The past three years has taught the business world a lot. In four important ways, it has made both new and old economy companies wiser:

Youth versus age

There was a time when seasoned executives ruled corporations. Many people who were ambitious, talented and young abandoned the corporate path for consulting and investment banking where they could rapidly win power, responsibility - and large salaries.

Then came the dotcom revolution. Thirty-something Jeff Bezos created Amazon, Jerry Yang and David Filo, in their 20s, started Yahoo! and 20-something Marc Andreessen launched Netscape. The daring of youth seemed to outpace age and experience.

The dotcoms' success helped established companies to recognise how much talent they were neglecting. Young people's ideas could be worth billions. Jack Welch, chief executive of General Electric, turned mentoring on its head. Senior GE people had junior people as mentors. In traditional companies the status and influence of youth soared.

At the same time, dotcoms soon realised they needed "grown-ups". Fifty-something executives were suddenly seen as repositories of invaluable business wisdom.

EBricks, a business-to-business marketplace in the Dollars 250bn (Pounds 174bn) market for building materials started by MBAs in the US, realised it had to hire experienced insiders from the industry as a conduit and link to the market. The war for talent in dotcoms became one for "adults" with deep industry experience.

Point of convergence: established companies set out to capture youth's innovative ideas and strategies as never before, just as dotcoms set out to capture older executives' operational expertise.

Stock options versus base salary

The dotcoms set out to dominate their sector. That meant inspiring staff to work around the clock and convincing them of the company's mission. Stock options were seen as the means to instil motivation. Not only were they an incentive - they were cheap as well. They allowed companies to outsource compensation to Wall Street.

As dotcom after dotcom created millionaires, stock options became the perk of choice. They seemed invincible, attracting and retaining talent without locking in big sal-aries. Employees with good base salaries at established companies were jumping ship to become part of the stock option culture.

By contrast, established companies saw talented people leave. They struggled to motivate their employees and their fixed salaries affected their P&L statements. They started rethinking their compensation schemes. So they began making stock options a more important part of remuneration.

In January 2000 Alcatel, the telecommunications equipment maker, became one of the first French companies to issue an American-style share scheme to all employees. SAP, the German enterprise resource planning group, followed suit. Royal Dutch/Shell, the Anglo-Dutch oil and gas company, is making 15 per cent more stock options available to its employees in new ventures.

When stock prices plunged, however, dotcoms woke to find their reliance on options had become a motivational problem.

Employees at Amazon, where base pay is relatively low, started leaving. If instant high pay could not be secured, the question became: why give up your life? Talented people who had jumped ship 12 months earlier to join the dotcom revolution started filing back to established companies in search of security and the new stock options on offer. The stability of base salary became increasingly appreciated.

Point of convergence: both established companies and dotcoms are pushing for a better balance between pay stability and motivation - they are just pushing in opposite directions. Established companies are using options to create a stronger sense of ownership by building in more opportunity for staff to share in prosperity. Dotcoms are starting to shield pay from plunging stock prices by means of compensation such as base salaries, which are less market sensitive.

Virtual versus real assets

When Amazon burst on to the scene, the prevailing notion was that the internet changed everything. A virtual retailer could have limitless inventory without costly storefronts, offer convenience and new tools to empower consumers and enjoy national and global reach - instantly. Then reality set in. Amazon's struggles in meeting shipments drove it to invest Dollars 300m to build five automated warehouses, making e-commerce less and less virtual. In joining forces with Toysrus.com in 2000, Amazon conceded that pure internet retailing was not perfect.

But as dotcoms were becoming more physical, traditional companies were becoming more virtual. The icons of corporate America began to "get it". They started digitising processes that could lead to operational efficiencies.

In 1998 Mr Welch mandated that all GE companies be web-enabled by 2000. On the new materials side, in 2000 GE bought Dollars 6bn worth of goods online. It cut transaction times from two weeks to 24 hours and reduced the average contract cost by 70 per cent. The company made Dollars 11bn of online sales in 2000 and expects to double this in 2001.

Established companies set out to "dotcom" their operations and build compelling customer websites.

Point of convergence: dotcoms spurred traditional companies to make use of the internet to digitise their business processes and become more innovative and efficient. At the same time, dotcoms started adding bricks to honour their customer promises. As companies became more virtual, dotcoms became less so.

Audience versus profits

Monthly unique visitors (registered users), eyeballs (the number of people who see a website) and stickiness (the length of site visit) were what drove dotcom stock prices a year ago. Strategies could be summed up as GBF, "get big fast". Wall Street was convinced. As volume rocketed and millions of consumers jumped online, rising returns would kick in and profitability would go through the roof. The focus was on getting attention and grabbing customers, usually through advertising.

Then the meaning of "just one click away" started to sink in. If the number of online users kept growing, no dotcom could afford to relax. There would have to be continuous, expensive investment in advertising and infrastructure. So when would the economies of scale and increasing returns kick in?

Investors were not happy. Up to 80 per cent of the money invested in some internet companies went to marketing and most dotcoms lost money on every transaction.

Now the battle-cry of dotcoms is to make a profit fast. Yahoo!, for example, is increasingly striving to build its revenues.

Bricks-and-mortar companies understood the importance of profit. They built businesses that produced a gross margin. 

Point of convergence: while dotcoms refocused on the fundamentals so as to build sustainable business models that generated profit, established companies strove to become more innovative and to create new markets so as to turn customers into enthusiasts.

Today, established companies are breathing a sigh of relief - but they are not sitting back. We now know that the new economy is a synthesis of bricks and clicks. The challenge now is to balance entrepreneurial zeal and innovation with time-tested concepts of operational excellence and financial discipline.

Which of the companies that have been created in the past few years are built to endure? The answer depends on who first integrates the lessons both sides taught each other. The stage is set for tomorrow's more innovative, efficient and appealing companies. And that raises a last question: is your company set up for the new synthesis?