Giant Steps

SAN FRANCISCO (08/31/2000) - In my last column, I discussed the difficulties of sustaining a competitive advantage on the Internet, where business models can easily be replicated or rendered obsolete. Instead of searching for enduring advantages, I argued, you need to seek "leverageable" advantages - privileged market positions that can be used as stepping stones to other privileged positions. Shifting from one business model to another is tough. But companies like Edu.com, Aveo and Inktomi are doing it adeptly. In this column, I review four practical lessons to be learned from their experiences.

THINK CREATIVELY Even the most fleeting advantage can carry the seeds of new advantages, but you have to look hard to see them. Three areas to concentrate on are your customer relationships, your technologies and any networks that have formed around your product or site. Satisfied customers provide a ready-made market for an entirely new offering. Flexible Internet technologies can provide a platform for a new business. And a network of users can be turned into a valuable marketing or communications channel.

Look at Edu.com. Last year, it was an e-retailer for college students, but now, Edu.com's shifting to a new model. It realized that its heavy student traffic could become a sales channel for other companies eager to reach the youth market. The company saw that it could make more money by renting out the eyeballs of its visitors than by selling products to them.

STAY LEAN Physical assets, complex processes and big workforces used to be sources of sustainable advantage. But in the fast-moving Internet Economy, they're more likely to be disadvantages - dead weights that hold your company in place. To leverage your advantages, you need to stay lean and flexible. That means relying on partners to provide many of your functions, even those that are central to your existing model. In making investment decisions, remember that you may need to abandon your current business at a moment's notice.

KEEP QUIET As you build a leverageable advantage, it's a good idea to keep quiet about your next move. For one thing, you don't want to make your customers nervous (particularly if you're going to end up competing with them). For another, you want to keep copycats at bay.

Aveo has done a good job of keeping its plans under wraps. The company is known as a provider of software that helps PC owners troubleshoot problems. Users download the Aveo program for free, and it's automatically updated when they go onto the Web. But Aveo's real goal is to be a marketing platform. Its position as a trusted distributor of messages to computer users will help it become a valuable channel for marketing content. By keeping quiet about its intentions, Aveo is able to distribute its software widely without alerting potential competitors.

BUT DON'T KEEP TOO QUIET Inktomi has been a master of shape-shifting. It started as a provider of search services to portals. But it knew that it would be easy for new search engines with better technology or lower prices to enter the market. So Inktomi used its leverageable advantages - relationships with big site operators and distinctive storage technologies - to become a leading provider of caching services.

Now it faces another challenge: educating the markets about its new model. Though search services provide a shrinking fraction of the company's revenues, Inktomi's stock got hammered when Yahoo announced it was dumping the Inktomi search engine. As that shows, one of the dangers of jumping between business models is that you confuse investors and customers. When you make your move, you better have an aggressive program to get the word out.

And then, of course, it's time to start scouting out your next leap.

(Nicholas G. Carr is an executive editor of the Harvard Business Review.)

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