What Sank Internet Commerce?

June 2001
By Maryann Lawlor
E-mail About the Author

Dot-com business savvy requires back-to- basics approach.

The economic wave that started out as a Tsunami has lost momentum, and the high tide of World Wide Web surfers as devoted consumers is beginning to ebb. Online start-up company owners who thought they would catch a wave and be sitting on top of the world have been caught in an undertow. Established firms that poured millions of dollars into creating an online presence are discovering that the same tried-and-true business practices that keep traditional business afloat are just as necessary in the cybermarketplace.

Experts agree that the recent market downturn does not mean that the Internet is washed up as a viable sales medium. Instead, it illustrates that the principles that were taught in business schools throughout the past century continue to apply in the fast-paced techno-world. Customers may enjoy being able to purchase products while wearing their pajamas, but they are still looking for reliability, functionality and a good price. Convenience is not enough.

The downward spiral actually began in mid-2000 as dot-coms that appeared to have great potential for success began closing their portals. Investors were disillusioned when it became clear that profits would not be realized for several years—if at all. Stories about twenty-something-year-old millionaires were being replaced by announcements of yet another good idea gone bad.

According to Dr. Ravi Dhar, professor of marketing, Yale School of Management, New Haven, Connecticut, a number of common factors contributed to the limited success established companies experienced with the use of the Internet as well as the demise of dot-coms.

When it became apparent that the Internet was increasing in strength as a sales medium, many existing firms were slow to react in part because these companies do not respond quickly to any changes in the marketplace. Changes require business leaders to address several issues, and in the case of online opportunities, they did not take these on in a timely manner, Dhar says.

For example, because established companies already enjoy success, they are confident in their existing business practices, he explains. “Their attitude is, ‘Our way has been successful, so we’re not stupid because we have all this business. What worked in the past will continue to work.’ In the military, for example, until Desert Storm, military leaders compared battle tactics to those used in the Vietnam War. Then the Gulf War came along, and now they compare everything to the Gulf War,” Dhar offers.

Some companies failed to allocate the right type and amount of resources—people, time and revenue—to the new way of attracting business. Department managers were unwilling to reassign their best people to a new division. While it is unwise to transfer all current funds and employees to a new sales medium, successful leaders create a balance between the old and the new, Dhar says.

This conflict occurred in areas other than resources. Innovative sales approaches also compete with established methods. Dhar points to Toys R Us franchised retailers’ reaction to the introduction of the company’s Web site. Many believed that consumers would purchase through the Internet rather than visit their stores. As a result, they were reluctant to support the effort. Dhar remarks that company leaders must manage this conflict by emphasizing that success with a new sales approach will benefit the entire company. “They must promote the idea of group welfare. This conflict needs to be resolved; otherwise, it makes it difficult to implement changes or new ideas,” he says.

Even when the big companies followed the right path on these issues, another problem developed. Some firms polled their current clients to determine if they wanted new products or services. “Oftentimes, asking the best customers if they are interested in new offerings makes you stay with the status quo,” Dhar points out.

For example, as Internet telephone capabilities emerged as a new technology, telecommunications company officials asked their clients if they would be interested in saving money by moving to this new medium. At the time, the quality of calls was still low, so a majority of customers declined the offer. Consequently, companies did not invest in technology upgrades. However, as quality increases, these same customers look to their providers for the very same service that will not be available because funding was not dedicated to expansion early in the process.

“So, even when you do what marketing tells you to do, you often end up making the wrong decision because customers will tell you what they want now instead of what they’ll want in the future,” Dhar says. To avoid this pitfall, he suggests surveying new users who are on the fringe, are technology savvy and do not require a lot of handholding.

While all firms must address these issues, certain flaws in business planning apply specifically to dot-coms. “In order for a business to make money, it has to have a compelling idea that people care about, and a lot of these businesses didn’t have a compelling solution that people wanted. It’s more than just creating value. The question is how much value can you capture. The only way to succeed is to capture the value of what you put out there. Some created value, but about things people didn’t care about. Others created the value, but they didn’t capture it,” Dhar contends.

For instance, offering news reports on the Internet may be a valuable service. However, if too much competition exists, then one news service cannot capture all the value. This is particularly true if users can obtain the service free of charge.

“It’s like hiring someone. When asking, ‘Why should I hire you instead of the others I’ve interviewed,’ the interviewer is looking for something that you bring to the job that no one else would. If you can distinguish yourself, then you’ll get the job. If there’s no difference, then anyone can do the job,” Dhar offers.

This principle also applies to selling specific products on the Web. In the book selling industry, for instance, Amazon.com and traditional booksellers such as Barnes and Noble opened in cyberspace. In this case, Amazon.com offered services that brick-and-mortar bookstores did not. Not only did they deliver the product to the customer, they also provided reliable services such as order tracking and immediate response to customer e-mail.

Despite differentiating features, companies such as Amazon.com continue to struggle for success. Michael D. Overdorf, chairman and chief executive officer, Innosight LLC, Woburn, Massachusetts, points out that another factor may be at work. Although finding a specific, in-demand book is easier through the Internet, some customers still enjoy the experience of browsing in a bookstore or sipping a cup of coffee while flipping through pages. An Internet bookstore cannot provide the atmosphere these shoppers seek.

Innosight, which was founded by Clayton M. Christensen, a professor at Harvard Business School, Boston, Massachusetts, helps organizations build the capability to identify and manage innovation challenges. Christensen compiled six papers that examine how technology has affected companies. Titled “After the Gold Rush,” the study details patterns that can be found throughout industry.

According to Overdorf, researchers examined the root causes of both success and failure in companies using the Internet. Technology is a disruptive innovation; however, it need not have a negative impact on business, he says. “Even though some of the same types of businesses were going on the Internet, some succeeded and some failed. So, you can’t do a broad stroke evaluation,” he contends.

The key, Overdorf states, is to recognize that the Web is neither a disruptive nor a sustaining factor but simply infrastructure, much like the railroad. The basis of competition still remains in four core elements: functionality, reliability, price and convenience. As a result, the Internet is conducive to selling some products but not others.

Overdorf offers the example of furniture sales. Consumers still want to try it, measure it and look at it prior to purchase. “If you are fundamentally changing my behavior, it won’t work. It’s the same as when the telephone was introduced. Some businesses succeeded, others did not,” he says.

While online sales may not fully support furniture sales, it has been profitable for some clothing manufacturers. Overdorf attributes success in this field to the business model that companies were using prior to the Web. Lands’ End, for example, offered its products through catalogs. The Internet simply presented a new and complementary way for consumers to purchase the items, and the company had the customer service infrastructure in place to support transactions.

At the same time, Boo.com, a high-fashion retailer, had to redesign its site to garner sales. Two factors may have contributed to its restructuring, Overdorf offers. First, because the Web site was graphics-intensive, shoppers had to have high-end connections or wait several minutes for the site to download. This was a technological factor that played a part in designing the company’s new site, which it touted as being easier to use. Despite this change, the company’s product line is still not as well known as more established clothing stores. Consumers are not as comfortable buying high-fashion clothing without being able to try it on as they are with purchasing items such as sweaters, hats and sweatshirts, Overdorf suggests.

Also, branding is a very important factor in online sales success, he points out. Because consumers are making purchases without the benefit of testing the product, they must be confident that it is both functional and reliable. Newcomers to the marketplace did not always provide this assurance. Established firms have an advantage in this area because they offer well-known brands, Overdorf says.

Dhar believes that some dot-coms failed because they thought “bigger is better.” They grew quickly, assuming that if they sold products in volume, they would realize a lot of revenue. However, he points out that this is not necessarily true even in the traditional marketplace. For instance, car manufacturers that produce average-priced automobiles are experiencing slower sales, while those that specialize in high-end cars such as Porsche and BMW continue to enjoy strong profits.

Other business decisions also contributed to the low return on investment in cyberspace sales. Although some traditional companies were slow to react to the new sales medium, others rushed into it. In certain cases, both dot-com and brick-and-mortar companies failed because they raced into the field. Dhar suggests that many of these firms thought that being first would give them an advantage. Although speed to market is important, it is not enough to sustain a business. Unless the business model is strong in all areas, another company can emerge and take the market, he offers.

While the Internet may not be the panacea for successful business, Dhar and Overdorf agree it will continue to offer opportunities for both new ventures and established firms.

Dhar believes that the Web will play the original role for which it was intended—spreading information. “The Internet will affect businesses. It is certainly a cheaper way of doing certain things. But the key is using the Internet as a cheap way of distributing information. If a business has something to do with distributing information—and most do in one way or another—then it will succeed. So, that’s going to happen between customers and the firm and consumer to consumer. With anything that can be digitized, the Internet will have a huge impact. But if you’re selling jet engines, it will have an impact, but not as large,” Dhar says.

Overdorf suggests that the Internet opens another window for success. If companies use the Web to enable less-skilled people to do something independently that they previously could not do, a new market emerges. Empowerment excites consumers, so they are more likely to buy into a company’s product or service. However, he warns, this factor alone does not guarantee success.

Innosight’s concept of disruptive and sustaining innovations and how they affect industry can be applied to the military as well, Overdorf offers. “There are a lot of similarities. We’ve met with people in the government and military arenas. Is warfare going to be different in the future? Yes. So, the way we fight battles in the future is also going to be different. Leaders have to ask, ‘What do we need to know about how the game is played?’ … They have to spot a disruption and decide what to do with it just like in the private sector,” he explains.

The demise of many dot-coms and the revenue shortfalls of established companies also will affect the military, Overdorf predicts. To minimize the impact, he recommends that the services conduct the same due-diligence investigations as they do with any purchase. “Understand the company’s business model. Ignore the technology for a minute. How is this company going to do? Ask lots of questions about the business model. Do they just have an early start on a technology or is there an advantage to going with them now?” he states.

Dhar predicts that certain compelling ideas, such as eBay, will continue to succeed on the Internet. “The question is do you need 500 eBays or is one or two enough? It’s the same case as with brick-and-mortar establishments. The dot-coms thought they had changed the whole game, but they didn’t. Football is not baseball. These companies were not strong on the same things that made companies strong in the brick-and-mortar world, and they needed to be to succeed,” Dhar offers.