The Problem With Purity

For a while there, denizens of Silicon Valley spent a lot of time snickering about how traditional brick-and-mortar companies didn't get the Net. But managers of established businesses who feel overmatched and outmaneuvered by the dot-coms should take heart: They still have huge advantages. And these are going to be more of a factor than many had expected.

Admittedly, the success of the dot-com is impressive. More than 1,500 Net companies grew from $25 billion in total venture funding, with some 200 going public in 1999 alone - creating upward of $500 billion in market value. But the next Internet wave will see the established giants striking back, dwarfing most of the dot-coms in sales, profits and market value.

The next online wave will encompass three things: realizing the estimated $1.2 trillion in efficiency gains the Net enables, creating lasting loyalty with customers and attaining a sustainable, profitable business model. Who better to lead this charge than traditional companies, which already have enormous resources, extensive industry knowledge and years of experience building customer loyalty and profitable businesses?

Traditional companies have some disadvantages vs. the pure Net plays. The newcomers tend to be more nimble, less encumbered by bureaucracy and more in tune with wired consumers. But the slumbering giants are waking up, and they're looking to make the dot-coms look like "fireflies before the storm,"in the words of IBM chief Lou Gerstner. This storm is now brewing, and some old-school firms have made significant countermoves. Here's what they're doing.

* Creating separate Web units. Separate business structures allow corporate dot-coms to escape the bureaucracy and risk-averse culture of traditional firms, and to quickly develop online skills the parent may lack.

Barnesandnoble.com was one of the first; General Motors recently unveiled e-GM, an e-commerce unit that houses all of its Internet activities. BancOne took it one step further, creating a separately branded online bank, WingspanBank.com.

* Buying and allying. Some traditional companies, unable to quickly develop a quality online presence, are buying and/or allying with Net firms. CVS initially sat on the sidelines as online drugstores popped up all over the Web.

But its recent purchase of Soma.com for $30 million made it a powerhouse overnight. And American Greetings' partnership with America Online gives it an exclusive position in online greeting cards.

* Using their deep pockets. In the dot-com capital market hype, the vast resources of traditional players have often been overlooked. But these investments won't evaporate when the Net stock market bubble bursts. Microsoft, for one, has invested tens of billions of dollars in the Net. Macy's, Sears, Wal-Mart and others have laid out big investment commitments in their sites.

* Creating click-and-mortar companies. Traditional firms are finding that the click-and-mortar approach can provide sizable advantages. Wal-Mart, for instance, redesigned its Web site, and now has the potential to almost single-handedly shift the balance of power back to traditional retailers.

Wal-Mart has enormous brand awareness and customer loyalty - 100 million people shop at its stores each week. Also, its stores offer a natural way to handle exchanges and returns.

Click-and-mortar companies have other advantages over pure plays. Bain & Co. research shows that more than 40 percent of the visitors to established company sites came because of an offline affiliation. This provides a huge cost advantage over Net-only retailers, which must acquire customers solely online.

And, because click-and-mortar companies can generate substantial revenues within days of launch, they tend to turn a profit far more quickly than pure plays.

Net companies' agility, smarts and aggressive style have netted remarkable successes. But as the next phase of the Internet turns to efficiency gains and customer loyalty, managers of traditional businesses should remember that they - not the dot-coms - are in the best position to capitalize on online opportunities.

- David Sanderson heads the e-commerce practice at Bain & Co. in Los Angeles.

Chris Zook is a director in Bain's Boston office.

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