Hyperwars

11 Strategies For Survival and Profit In the Era of Online Business

Kate Kelly, Bruce Judson

• Publisher: Scribner
• Year: 1999
• ISBN:
  9780684867717
• Topic: Business
• Subtopic: Business General
• Index: Business

The effects of the online revolution are being felt far beyond Silicon Valley, and now all businesses -- from start-ups to established companies -- face "survival of the fittest." A company or product can be an industry leader one moment and obsolete six months later. Entire industries, ranging from computer sales to stock trading, are being thrown into chaos as consumers and businesses shift buying patterns to take advantage of the convenience and cost savings that are available over the Web.
For companies, this pressing need to continually create new, different, better products to stay one step ahead of the competition defines the new reality of business today, the world of "HyperWars." To stay afloat, business managers need practical guidance, and they need it fast. Drawing on extensive research and his pioneering experience in e-commerce, industry innovator Bruce Judson outlines eleven practical strategies for thriving in this hypercompetitive environment. Including "Use the Internet as the World's Most Sophisticated Telephone" and "The Magic in 'Free, '" these visionary strategies are illustrated with hundreds of examples of Internet initiatives real companies -- from pool suppliers to major businesses like Cisco and Chrysler -- are implementing today. Not just for companies selling products over the Web, HyperWars explains how the Internet can and must be incorporated into all of a business's operations, to do everything from cutting procurement, marketing, and communication costs to deepening customer relationships.
Both a wide-ranging analysis of the massive changes the Web is bringing to all industries and a crucial, groundbreaking redefinition of business strategies, HyperWars provides readers with the essential tools they need to survive and profit in the new competitive era.

PART I
THE NEW COMPETITIVE REALITY

Chapter 1
The Emergence of HyperWars

This is not a book about the future. It is a book about what is happening now. In a short space of time, the World Wide Web as a tool for businesses has moved from an experimental start-up phase to an established part of the business environment.

All of this development has happened at an extraordinarily rapid pace. Only a short time ago, mainstream businesspeople were still asking whether the Internet would, in fact, turn out to be the CB radio of the 1990s. Today, we are more likely to agree that the Internet will, like the telephone, ultimately make its way into all offices, homes, and schools.

As Internet growth spreads, the way business is conducted is being profoundly altered. As a result, we have a new field of winners and losers. Formerly profitable businesses are obsolete, new classes of businesses compete with established entities, and successful businesses stay successful governed by a new set of rules.

Just as the telephone and the computer spawned entirely new business practices, the Internet is similarly transforming the way successful businesses must operate. Now executives at companies large and small are looking up from their spreadsheets and saying, “What happened to the great, profitable business I used to have? Why doesn’t anyone need my products or services anymore?”

The pressing need to continually create innovative, better products to stay one step ahead of the competition defines business today, the world of HyperWars, where any business of any size in any industry must constantly be “at the ready” to do battle to maintain its turf.

The rise of the Internet has occurred at such a breakneck pace that few of us have had a chance to fully understand the magnitude of the change that has created the new world in which we now do business. It’s worth noting that before the rise of the Internet, car buying through dealers fundamentally had not changed since the 1950s. Now there’s a general belief that online car buying will account for 25 percent or more of all new auto purchases in the year 2000. In effect, the Internet has brought about more change in the auto industry during the past three years than has occurred in the previous forty. For manufacturers and car dealers, an entirely new sales environment is emerging. This is particularly significant both because automobiles represent a large chunk of our gross domestic product and because they have always had a strong symbolic meaning. At one time, it was said that “what’s good for GM is good for America.” In the space of a few years, GM and all other facets of the car industry have moved online. So, too, will the rest of the country.

Another way to put the rapid growth of the Internet into perspective is to compare it to other media. It took television thirteen years to reach 50 million domestic viewers, while it will take the Internet only four years to reach this number of people.

The reactions of several companies to the onset of HyperWars provide a snapshot of what is happening on a daily basis throughout today’s economy:

The Brokerage Industry

Is Caught Asleep At The Switch

All brick-and-mortar companies that think “the Net won’t hurt them” should listen to the story of how a virtual David (E*TRADE) has successfully challenged a mighty Goliath (the brokerage industry).

The entire history of change in the brokerage business has been shaped by the application of technology in order to lower costs (and thus prices) and to find ways to give the customer more control over his or her trading. In the eighties, discount brokers such as Schwab, Fidelity, and Quick & Reilly emerged at the expense of traditional brokers. They were successful because of their ability to provide low-cost trade executions. They proved that many customers preferred a lower commission, even if it meant they got less in terms of advice.

It was therefore absolutely predictable that with online stock quotes and growing consumer access to the Net, low-cost, Web-based brokerage services would develop. However, the giants in the industry didn’t wake up to the new reality.

In the meantime, start-up competitors such as E*TRADE and Ameritrade entered the market and offered low-priced stock-trading opportunities to consumers. They gained market share, and as the Internet grew, traditional brick-and-mortar businesses began to realize they had made a significant mistake. Schwab, Fidelity, and a host of other established industry participants were forced to offer Internet-based trading with commissions cut to compete with those established by the online upstarts. This new, unbridled competition has led the value of the average online commission to drop by more than 50 percent in one year (from $47 to $21), and further decreases are likely. In fact, the competition is now so intense that respected analysts anticipate that some online brokerages will offer commissionless trades, with these companies drawing revenues from behind-the-scenes activities such as order flow, uninvested funds, and margin balances.

In the second round of this battle, Schwab used its resources to capture over 30 percent of the nation’s online trades; yet, it is still locked in a fierce and expensive struggle. And competitive pressures have forced Fidelity to change its online pricing structure three times in less than a year.

In addition, intense competition is an expensive game. As we go to press, the industry is expected to spend a minimum of $150 million on advertising in the last quarter of 1998 alone. Moreover, the cost of acquiring new customers has soared. Brokerages can expect to acquire one new customer for every $300 spent on advertising and marketing.

For brokerages, Internet-based trading quickly became a critical component of the business. Today close to 30 percent of all stock trades by individuals are entered over the Internet—this statistic is particularly shocking when you consider that only four years ago this segment didn’t exist. Analysts expect that over time this number will grow to exceed 50 percent.

Had the traditional businesses been first, and had they been willing to adjust their rates according to the lower cost of doing business through the Internet, new entrants could never have gained a foothold.

The New York Times and

the Newspaper Industry Proactively

Defend Their Turf

Faster? Cheaper? Better? These are the questions each company must ask itself when evaluating whether or not its business is threatened by HyperWars.

At the dawn of the online age, most experts expected that one of the first virtual businesses would be online real estate ads. Why? Because reading ads online would be faster, cheaper, and better (because it’s easier): Potential buyers could specify price range, community, number of bedrooms, special features (such as a pool), and instantly search databases of available listings. One or more pictures of each home could also be accessed; something not usually afforded by the paper.

Classified ads, including real estate, car, and job listings, account for one-third of newspaper revenues, so experts who noted the coming phenomenon of online classifieds also predicted the demise of the newspaper industry. Yet, the industry is healthy, and online listing companies have not supplanted newspapers as the primary source of classified information. Why? Because, unlike the brokerage business, the newspaper industry has behaved proactively. Major newspapers such as The New York Times recognized the threat early and began posting their real estate listings in consumer-friendly, searchable databases. By being first, The New York Times and other newspapers have held on to their franchise and have thus far blocked potential competitors from stealing it.

Several newspapers also had the foresight to realize that even broader change was necessary, and they’ve spent the past year or two reinventing the way they do business. Since the online world destroys geographic boundaries, several realized they might mutually profit by banding together. In order to hold on to revenues from job listings, six major newspapers, including The Washington Post and The New York Times, launched the Career Path site. This Web site now receives more than 1 million visitors a month and may well be a model for changes yet to come.

In fact, a consortium of newspapers is working to re-create the success of Career Path with the launch of Classified Ventures, an online listings firm designed to keep other classified revenues such as apartments, real estate, and automotive listings “in the newspaper fold” and to take advantage of newspapers’ already existing relationships with local buyers.

That said, The New York Times, The Washington Post, and the rest of the industry must continue to keep looking over their shoulders. Although these companies may have won the first round, a raft of competitors, including AOL, Yahoo!, Realty.com (which is affiliated with the National Realtors Association), as well as the most powerful competitor of all—mighty Microsoft—are entering into the business of online real estate information.

To try to unseat the long-established dominant players is a costly challenge that would daunt all but the most robust, so this next round will be worth watching. Although the outcome can’t be predicted, one matter can: The competition will be intense and the battles will be hard-fought.

Virtual Auto Services Reinvent Car Buying

You live in New Jersey but had a new car delivered to you from a Vermont dealer who sold it to you for less than you could have paid in your area—and you didn’t have to negotiate with a salesman? Now this is the way to buy a car!

Industry polls have shown that car buyers want only a few simple things: convenient shopping, a good price for the car with the features they want, and the pleasure of not having to deal with a car salesman.

However, anyone who has bought a car by traditional means knows that it isn’t easy to put those elements together: If car buyers want “convenience,” they will often have to pay a higher price for the car because they talk only to their local dealer; if they want “best price,” it will usually require the time-consuming process of going from dealer to dealer throughout a region and haggling over price with a pushy salesperson.

But now Auto-By-Tel and a number of similar services have turned the car industry on its ear by rethinking the way cars are sold and making the customer king. Auto-By-Tel operates as a virtual clearinghouse for a limited group of car dealers who have signed on with the company to do what they can to protect their turf. An online customer provides Auto-By-Tel with the specifications on the car he or she wants, and Auto-By-Tel essentially locates the dealer with the best price. If desired, Auto-By-Tel will also take care of loan arrangements and insurance, totally removing the “hassle” factor from car buying.

As a result of this online sales explosion, Auto-By-Tel has, to date, provided over 1.5 million consumers with quotes. Chrysler anticipates that 25 percent of all vehicle sales will come via the Internet by the year 2000, and I anticipate an even higher percentage.

However, stay tuned. This industry, too, will continue to change at a blistering pace. General Motors has been particularly active in developing innovative Web sites with the potential to play a central role in the selling process. Through its CarPoint site, Microsoft is also making a bid for this business.

At the same time, the growth of online car sales will inevitably have a significant impact on new car dealers, who are primarily local businesspeople. Many observers believe that the dealers’ role in the sales process will change and that their numbers will inevitably shrink.

Whatever changes are coming, one thing is certain: The way people buy cars is going through a fundamental change; we can expect everything to shuffle around again, and only the nimble will survive.

Intuit Devises a New Strategy

to Avoid Becoming a Casualty Of The Net

Intuit discovered firsthand that owning a market niche (in this case, by selling the most popular personal finance software, Quicken) isn’t necessarily valuable when new technology comes along. Already threatened by the software package Microsoft Money, the company actively addressed what Fortune magazine called “an even greater threat to Intuit . . . the explosive growth of the Internet.”

New personal finance tools, developed by online content providers with specialties such as banking and real estate, are now being distributed piecemeal via the Net. As these products evolve, customers will pick and choose the pieces they need, and they’ll no longer spend hours and hours entering figures; the new tools will have active links to market updates, bank account information, and other data. The proliferation of these new tools has the potential to make Quicken’s shrink-wrapped software obsolete. These factors prompted Fortune in August of 1997 to question the company’s future with an article entitled “Is Intuit Headed for a Meltdown?”

Aware of approaching calamity, Intuit set out to redefine its strategy. Building on the value of the Quicken brand name, the company decided to become a central hub for Internet financial activities of all types, and subsequently launched Quicken.com, which offers access to mortgages, insurance, small business loans, and other services. Its goals: (1) to become the place that consumers go when making important buying decisions related to financial products and (2) to then offer consumers choices among the best of the best. Intuit expects to create revenue by selling ads that surround the content of the site, and the company will take a fee for the business it feeds to financial institutions participating in its “mall.”

Intuit was able to recognize the need to change its culture and adapt to an environment where speed was critical to success. As Fortune wrote in a follow-up article on Intuit just eight months later in April of 1998: “On the Web . . . you are either fast or last. There is no time for the intricacies of twelve-month product cycles and telephone-book-thick product specifications typical in the software industry.”

To date, Intuit appears to have successfully steered a new course that embraces the Web. Nonetheless, the company is likely to face fierce competition on two fronts: As banks and brokerages move online, they are likely to expand the services they offer and similarly attempt to be the consumer’s gateway. In addition (as detailed in chapter 2), the proliferation of product comparison sites and software agents that seek out products available on the Web will threaten Intuit’s business model.

A STATE OF HYPERWARS

The examples above span a range of industries and involve different types of businesses. There are, however, certain common themes that illustrate the significance of what is happening in the business world today.

Fundamental change is the key reason we’ve entered a new era of business competition, that of hypercompetition. The Net, which seamlessly connects businesses to business and businesses to individuals and individuals to individuals in a new way, has the power to wreak havoc on everything in its wake. And while major innovations such as electricity and the phone for the most part made the world easier, changes wrought by the Internet often force companies to prepare to do battle. Consider these developments, only a few of the many I’ll point out to you throughout the book, but ones which I consider to be particularly significant:

Geographic Boundaries Are Becoming Irrelevant,

and Virtual Businesses Are Threatening Smaller,

Brick-and-Mortar Businesses

Using the Internet, both business and personal customers can now literally “shop the world” in their search for the best price.

Five years ago, if local retailers were asked to list their major competition, the local bookstore would mention great concern about the chain superstore being built in a nearby mall; the car dealer would tell you tales of how the dealer down the street snatches customers away from him; and the funeral director might scratch his head when asked about competition on casket sales, and then he might mention the one or two other funeral homes in town. The same was true of many financial services: Local banks were the primary sources of mortgages in each town, and local insurance agents competed among each other.

Many businesses have thrived in part because of geographic protection. Customers—even corporate ones—have always liked doing business face-to-face with people they know, and if a product is involved, the consumer is always happy if he or she can walk out with the exact item desired.

To a large extent, the Web shifts these dynamics, simply because it offers benefits in the form of substantial time and cost savings that often make customers willing to give up the face-to-face, personal interaction of doing business locally. Online businesses can take advantage of automation and other large economies of scale to provide offerings that local businesses can’t match. Lean operations, the creative use of automated systems, the absence of costs associated with physical brick-and-mortar outlets, and economies of scale resulting from a single processing center make it possible for online companies to offer products that are often superior to those offered by local competitors. As far as the customer is concerned, if the Web can deliver the same product or service faster, better, or cheaper, then that’s too good a buying opportunity to give up—thereby creating a serious threat to established local businesses.

These dynamics are at work in the mortgage industry. Until recently, mortgages were essentially a local busin...