Brick Slayers

On the Internet, archcompetitors have become strategic partners. Suppliers, perennial outsiders, are now invited - even commanded - to come inside the company and learn its deepest secrets. Planning and executing have merged into a single "launch and learn" continuum. Even uncontrolled financial bleeding no longer indicates a company's imminent demise, as has proved, a company whose market cap is in the tens of billions (at last count, $US15.7 billion) but whose balance sheet shows a net loss.

Internet startups like are insinuating themselves into such well-established industries as bookselling. But that practice alone doesn't account for the Internet's real threat, which involves more than simply a new way of selling things.'s B2B cousins - the intermediaries and aggregators - are the ones that are cannibalising traditional industries, robbing them of their valuable processes of manufacturing and supplying goods and services to customers.

Here, on the home pages of companies like (which mediates sales between chemical manufacturers and buyers) or (which offers the financial services traditionally supplied by banks and brokerage houses) is where the real threat of the Internet lies for Fortune 500 executives. In an environment with no clear paths nor absolutes, business leaders must single out the competitive forces of Internet startups and intermediaries that are encroaching on their businesses and find ways to attenuate the risks. To help them, WebBusiness asked seven high-powered executives to share their insights on surviving in the new economy. During this roundtable, they voiced their predictions about the tumultuous Internet business world over the next two years.

WebBusiness: Startup online intermediaries such as that insert themselves into value chains, insisting they bring more value to end customers, have already entered most industries. What effect are they having on your business and your industry, and how do you know whether they're friend or foe?

Ralph Szygenda: We assumed barbarians were coming in 1996 and 1997. We didn't know who the barbarians were at the time, but we knew somebody was trying to take away pieces of our business or pieces of how we run our business and how we interact with our customers. We identified each of the competitive forces (only one was in the automotive industry) and strategised about whether to form alliances or to compete with these portals, infrastructure companies or Net buying services. Examining potential alliances or equity partners in the automotive industry or across industries is now a major issue for the senior management committee at General Motors.

Alan Hughes: We're starting to see aggregation sites from outside the financial-services industry enter our industry and become middlemen between financial-services providers [us] and their customers. The aggregators are spending huge amounts of money to [gain and] maintain their footholds.

It's questionable in my mind what value these portals are adding other than the perception of choice. Joining them puts us in a commodity position where we're differentiated based on the price of our money versus the price of, let's say, Transamerica's.

One of our strategies for mitigating the effect of portals is to understand the choices that customers think they're getting from those portals that perhaps we're not providing, and to add those enhancements to our site. We do feel that it is incumbent upon us to re-think our product delivery and to determine whether we're providing enough choice.

James McGee: We like to start by getting a clear picture of the end customer's viewpoint and then working in from what the customer wants as opposed to working out from our assumptions about a particular industry or the way we've always done things.

Jeffrey Peterson: Exchange and auction markets are taking advantage of inefficiencies in the value chain today. They offer very specific, vertical-market solutions to facilitate very efficient transactions. In the process, they're unbundling the physical product from the services and knowledge that has typically surrounded it.

We've spent a lot of time trying to understand how they [exchange and auction sites] unbundle our products and the value proposition that they offer customers. Then we choose either to partner with an exchange that may have a dominant stake in a particular area or to partner with an external company that would actually create a space for us. In some cases, you'll befriend a particular set of companies. That same set of companies may be a foe in a different vertical [market] or segment area. It's pretty tough for small dotcoms to compete against the resources of a large company like us once we understand what they're providing the customer that we aren't.

Evan Grossman: I'd like some good examples of big companies that have successfully outrun a dotcom. I assure you, in 1995, Barnes & Noble was looking at and saying, "Great. Once we figure out how to sell books on the Web, we'll just take over. We're so much bigger. We have so much more money and better management that it will be an easy win." Probably some auctioneers thought the same thing about eBay. What do BMG and others think about CD Now?

Elizabeth Rose: One of the biggest issues facing CD Now is that it must turn a profit [to survive]. Its operating margins can't support the marketing it needs to continue building its brand.

Somewhere along the line, these dotcoms will have to incorporate a number of traditional business disciplines. The executive mentality of, "We're going to create a brand regardless of profits," requires different executive skills from [the mentality], "We're going to operate this business for profit."

These [Internet] companies need to develop or hire people with operational skills and discipline, or they'll be overtaken by an existing company that already has those skills and has learned the Internet side. comes to mind as having real potential to blow out a number of dotcom competitors because if anybody knows how to make money on narrow margins, it's Wal-Mart.

Philip Anderson: SportsLine attempted to beat ESPN out of the sports business with no success. Similarly, the site that received the most traffic for the March Madness brackets happened to be and not the million college basketball startups that have come along.

Grossman: [ESPN and] were out there early and didn't wait to play catch-up. I don't know whether these established companies actually [needed to overtake new entries] the way that Barnes & Noble thought it could overtake

Hughes: It's not yet clear that Barnes & Noble hasn't overtaken, [that is] if were held to the same earnings expectations as Barnes & Noble is held to in the capital markets. Some of these companies are being given this forgiveness that obviously won't last forever.

Melanie Alshab: As the capital markets try to value different business models, it's fair to say that it will be a much more complicated task than it used to be, particularly if these brick-and-mortar businesses integrate old-line businesses with new-line Web businesses. The capital markets are just now beginning to deal with that. The point is, we're at the beginning, and to say that anybody has won or lost is premature. But you have to play the game to win.

Peterson: I'm not sure it is a win or lose situation. I think it's a consolidation game that's going to come up within the next 12 to 24 months.

Anderson: Another example of a company that has fended off dotcom competition is Ticketmaster.

Rose: They have a monopoly on the venues to which they sell tickets.

Anderson: Every unfair advantage you have counts. ©The Strategists:

Melanie Alshab -- former CIO, Simon Property Group and former president and founder, ClixnmortarPhilip Anderson -- associate professor of business administration, Tuck School of Business, Dartmouth CollegeEvan Grossman -- senior vice president, HookmediaAlan Hughes -- executive vice president and CIO, Deutsche Financial Services James McGee -- founding partner, Diamond Technology Partners Jeffrey Peterson -- vice president of e-business, EI du Pont de Nemours Elizabeth Rose -- vice president of strategic planning and e-commerce, BMG Direct Ralph Szygenda -- group vice president of Information Systems and Services and CIO, General Motors

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