What does not change in New Economy

INTERNET STRATEGY

Strategy is more important in the internet age and not less "" as some failed dotcom companies have learnt to their chagrin. At the same time, firms (both old and new economy ones) that do not recognise the potential of the internet do so at their own peril. Indeed, I would suggest that the internet explodes the range and depth of decisions that a firm has to take, making old-fashioned strategy issues evermore important.

The world is in rapid flux with the old rules of competition being rewritten constantly and the internet is driving a large part of that change. Until a few years ago the internet was primarily used by select scientists and researchers who wanted to share academic findings. But over the last decade its use and application have exploded.

Indeed, IDC predicts that over the next few years we will have over a billion people, much like you and me, customers, business folk, buyers and sellers from all over the world online. This is a faster adoption rate than any other technology platform in the history of mankind. What then are the implications for businesses and their strategies?

The first wave of firms that entered the net economy did so by believing that strategy was dead and only execution, operational efficiency and speed were critical to winning. Post the bloodbath over the past 12 months, most firms have moved away from the net as they believe that there can be no strategy for the internet. Unfortunately, both outcomes are woefully misguided.

The truth is that the old rules of winning in business will not change. Indeed, the internet does not replace good strategy. Firms that have strong customer focus and a clear understanding of competition tactics will continue to do well.

The fact is that operational efficiency or "strategy by working harder" is just not a sufficient condition for winning. This is not the time to work hard for its own sake. Many firms that I know of have succeeded by out-working the competition. But never in our lives will it be more important than now to work smarter rather than harder. We need to constantly ask ourselves, "Am I spending my time on the right things? Am I focusing on customer needs and competitor's moves?"

Indeed, firms that have designed their entire operations (products, prices, people, suppliers, etc.) around their strategy of meeting an unmet customer need will be disproportionately rewarded regardless of their overall industry and economic conditions. Conversely, firms that ignore strategy will find themselves competing on price alone "" a sure race to the bottom as profit margins erode with every passing year.

Indeed, Indian firms recognise the need for focusing on strategic issues: we conducted a survey of 350 Indian business people and asked them what their key business challenges were and they overwhelmingly choose 'customer and competitor' understanding.

So what exactly is strategy? Essentially, strategy means making an integrated set of choices or tradeoffs, which positions a firm to create sustainable advantage relative to competition and provide superior financial returns. Good strategy implies that firms make these tradeoffs in an informed manner (with real and appropriate data) and follow it up with actions that are timely.

Traditional old economy choices revolved around the choice of product, customer and pricing. You could either sell a very sophisticated product like software to a few customers or sell a simple product like coffee to many. There was an inevitable tradeoff between richness and reach "" that was their dilemma.

However, the internet dissolves these constraints at one shot. The three primary advantages of the internet over the traditional ways of doing business are:

The net creates new opportunities: Whether it is based in Tokyo or Tahiti, today every firm has the opportunity to cater to a global market. Customers too, are warming up to the increasing levels of convenience and the choice the online market has to offer. The very nature of the web is such that it has spawned completely new business models like reverse auctions and online trading to name a few.

Among the companies that have used this to advantage are Nike, which allows customers (especially high-end athletes) to customise shoes for themselves online. Dell Computer, not the largest offline seller by any means, cracked the market online by turning this opportunity to dovetail in line with their basic business model of offering a made-to-order computer using non-traditional retail channels.

Many Indian NRI sites, which take orders from Indians living abroad (for gifts, etc) and deliver them to their relatives in India, have created an entirely new business based on the net. These sites do an amazing amount of business during the festival season.

The net eliminates barriers: No man is an island. And neither should his business be one. The internet makes it possible for firms to break into new markets and expand their customer base regardless of geographical constraints. Information bottlenecks are reduced, if not removed as separate links in the value chain "" suppliers, manufacturers, distributors and customers "" become part of an integrated network. Earlier, critical information related to competition and regulation was tedious to obtain; now it is just two clicks away.

Air Sahara, for example, has an online auction product on the Indiatimes portal that allows you to bid online for an air ticket. You can actually get the ticket at significant discounts (up to half the price) provided you book 15 days in advance. Since airline tickets are a perishable commodity, this allows them to maximise capacity utilisation. It's a great idea, and worth trying because it works!

The net promotes greater efficiency: As traditional barriers of time and distance dissolve, product and service delivery become more streamlined. All firms, old and new, can leverage the net to increase the efficiency of normal business processes like sourcing, selling, inventory maintenance, etc. Easier access to information automatically translates into increased transparency of operations.

However, in the internet age, the rise in opportunities has been accompanied with an explosion of both the range and depth of strategic choices a firm needs to make. The traditional tradeoff seems simple in comparison.

Moreover, creditors, suppliers, investors and especially customers reward value quicker in the internet age but also punish losers faster than ever before. It clearly then is survival of firms with the best strategy.

In my opinion, the following three elements should form the very crux of any strategy in the internet age:

Customers: Don't try and be everything to everybody. The fact is that you can't serve all of one billion customers, so choose them well, segment them right and serve them profitably. Innumerable horizontal portals, including indya.com (others being indiainfo, go4i etc) tried to be everything and failed. To be fair to them, the fact is these companies also collapsed because they believed in the ad revenue model. This didn't work out.

Positioning: The net allows you to make middlemen superfluous and get as close to the end customer as you want. But avoid the tempting knee-jerk reaction of trying to be everywhere on the value chain for you will end up nowhere. Not all parts of the chain offer profit opportunities, so carefully select the parts that make most sense for your business.

Companies like Webvan tried to integrate backward unsuccessfully by owning a fleet of vans to deliver goods to customers' houses. And even the evangelical Amazon is opening brick and mortar bookshops and distribution point at a great cost. In our opinion it is not necessary for companies to be present all through the value chain to be successful.

Choice of scale: Strike the right partnerships and you will strike the right notes with your customers. Therefore, while strategy is paramount, don't ignore operational efficiency issues. Without processes like supplier networks, CRM solutions, deliveries and logistics in place, no strategy is going to work. Amazon.com learnt this the hard way when it had to eat crow and sell thousands of books for free to customers all over Europe. The reason: failure to meet promised delivery schedules soon after its launch on the continent.

So no matter how dazzling the fireworks of the internet revolution, nothing replaces good strategy. The edicts of caring for the customer and keeping an eye on the competitor are even more relevant today in the face of the many challenges that new economy presents. If Asian firms are able to identify profitable customer needs and build organisations that are centred around to meeting them, and efficiently leverage the internet, this century will abound with true Asian winners.

(This article appeared in the July 2002 issue of Indian Management magazine)