Business Opportunities: On-Line Articles - Managing the Transition from Bricks to Clicks

Managing the Transition from Bricks to Clicks
By Michael J. McDermott

The U.S. economy is undergoing a fundamental transformation at the start of the 21st century, one that raises both challenges and opportunities for most companies. According to the Progressive Policy Institute's Technology, Innovation and New Economy Project, some of the most, obvious outward signs of change are, in fact, among the root causes of it: revolutionary technological advances, including powerful personal computers, high speed telecommunications and the Internet.

"Most firms, not just the ones actually producing technology, are organizing work around it."

However, this New Economy is about more than high technology and the frenetic action at the cutting edge, says Robert D. Atkinson, director of the PPI project. "Most firms, not just the ones actually producing technology, are organizing work around it. It is also as much about new organizational models as it is about new technologies."

Whether you are a new entrepreneur hoping to grow your company over time or a mom-and-pop operator content to remain a small business, there is no getting away from the fact that you are going to be affected by the New Economy-like it or not. By paying attention to what the heads of some leading large companies are doing 'to prepare for this change, you can pick up some valuable tips on how to get your. own business ready. That's what this article is all about.

Many business leaders argue that differentiating between the New Economy and the Old Economy is virtually meaningless. Eaton Corp. chairman Stephen R. Hardis, who was scheduled to retire in July, points out that as Old Economy companies increasingly rely on technology to grow their businesses and New Economy firms confront the realities of such traditional requirements as turning a profit, differentiating between them becomes pointless.

Embracing technology and capitalizing on the benefits it has to offer is a challenge and an opportunity that virtually all CEOs are facing. The analogy -of "bricks to clicks" has frequently been used to describe this transition, but it's not really accurate. "Bricks and clicks" is more to the point, because New Economy technology is going to enhance, not supplant, Old Economy values.

As chief executives manage the transition to the New Economy in their own companies, they can expect to face challenges in several areas. One of the most important is providing the vision their companies need to succeed in a world now doing business on Internet time.

Corporate culture is still a top down-driven phenomenon at most companies. In making the transition to the New Economy, managers and employees are going to look to the chief executive. In fact, a new study by Mercer Management Consulting Inc. concludes that overhauling a company's culture is the No. 1 requirement for implementing a successful internet strategy, and it's a charge that must be led by the CEO.

To implement a successful internet strategy, a company's culture must first be overhauled.

David S. Pottruck, co-CEO of Charles Schwab Corp., has a strong grasp of that concept. Schwab has been an acknowledged leader in the bricks-to-clicks transition in the financial services industry. Over the past four years it has transformed itself into an Internet company-it manages more than 40% of total online assets, more than double that of its closest rival-with a bricks-and-mortar base of more than 350 branches. Yet, even in that environment, there has been resistance to change within the company.

Pottruck chose a dramatic gesture to overcome that resistance. Gathering almost 100 of Schwab's senior managers at one end of San Francisco's Golden Gate Bridge, he gave them all jackets embroidered with "Crossing the Chasm" and led them on a march to the other side. He refers to the symbolic event as "the beginning of the reinvention of our company."

Of course, leading a bricks-and mortar company's transition to the New Economy is not without personal risk for the CEO involved. Julie Wainwright, CEO of Pets.com, has also been CEO of a bricks-and-mortar company. She points out that taking such a company to the Web is "a gutsy move" because CEOs must not only adapt to a new culture, they risk competing with stores and distributors and antagonizing analysts. She adds, however, that good CEOs realize they will always look worse before they look better whenever there is a major shift in their business.

A new Forrester Research report projects that B2B e-commerce will hit $1.8 trillion in 2003.

Fine-tuning the vision can be equally challenging. Technology and e-commerce hold out a 'wide variety of opportunities, from providing new channels for the distribution of goods and services to improving communication internally and externally to removing inefficiencies from transaction processes. Making the call on which opportunities to pursue falls to the CEO.

Last year, George Colony, founder and CEO of Forrester Research described the early Internet economy as "only a small vibration of the changes we will see." The real impact, he predicted, will be seen in companies such as General Electric and General Motors as they "harmonize their channels."

Some of that impact will come on the consumer side, but a greater percentage will take place in the business-to-business (B2B) sector. A new Forrester Research report projects that 13213 e-commerce will hit $1.8 trillion in 2003, versus $144 billion for B2C. At the same time, Internet-enabled technologies hold out the promise of cutting many 13213 transaction costs by 40% or more.

One of the most important issues facing CEOs as they position their companies for the New Economy is making sure they place the right bets on technology. "The road to success is littered with the carcasses of companies that made bad technology decisions," says Thomas H. Sinton, founder, president and CEO of ProBusiness Services Inc., which provides out sourced payroll and human resources services for about 1.2 million employees. "We spend a lot of time aligning our technology direction with the market."

In order to make the right technology choices, CEOs need to have a certain comfort level with new technology, says Jeffrey M. Conklin, founder and chief executive officer of Trade access, a technology company that uses the Internet to facilitate complex negotiations.

"They need to be personally comfortable with the technology choices they are making," he says. "The frameworks and the terminology cannot be foreign to them. Technology is easier to use and understand than ever before, so there is no reason why anyone can't become comfortable with just a little bit of work."

In some cases, the right technology choice is not to invest in a specific technology at all, Sinton argues. "The cost of implementing all the technology required to become efficient at certain processes is astronomical," he says. In those cases, it makes more sense to leverage an outsider's investment in technology, although he adds that approach should never be taken for processes that are a strategic driver or core competency for a company.

In the area of human resources, for example, research suggests that a very large, efficient company spends about $1,500 per employee per year. "About half of that is strategic spending in areas such as issue resolution and employee development and training," Sinton says. The other half is spent on routine transaction processes, many of which ProBusiness has automated through Internet technologies. Sinton estimates that ultimately the Internet can reduce employee related administrative costs by another 20% to 30%.

The most successful B2B exchanges have been those run by buyers to connect with trading partners.

CEOs have to be particularly careful in the area of 13213 technology. According to "eMarketplace Hype, Apps Reality," a report from Forrester Research, many 13213 exchanges run on inferior software that fails to support the procurement processes required to make such exchanges truly paperless or hands-free for purchasers or sellers. The most successful 13213 exchanges so far have been those run by buyers to connect themselves with their primary trading partners, and they are mostly private.

That has prompted the Big Three U.S. auto makers and several foreign car companies to join forces in building their own electronic marketplace for buying auto parts. Leading Old Economy companies in industries ranging from chemicals to aviation to consumer products are pursuing similar initiatives. However, the Federal Trade Commission is taking a close look at the auto industry plan with an eye out for anti-competitive overtones, an issue that will likely shadow all such private B2B exchanges for some time to come.

One problem virtually all CEOs managing a transition to technology enabled commerce face is finding, hiring and retaining qualified personnel. According to a new survey from human resources consulting firm Hewitt Associates LLC, nearly two-thirds of traditional companies believe their e-business activities trail those of their nontraditional competitors, such as dot.coms and startups. They cite people issues as one of the main reasons why.

Sixty-one percent of those surveyed in the Hewitt study singled out people issues such as attracting talent, motivating employees and managing people as among their top challenges to achieving e-business success. "It's not just about technology and speed to market," says Bob Gandossy, global practice leader at Hewitt. "Companies are finding that people are a key element to achieving success in today's eworld."

While it takes many things to attract and keep the best talent in the New Economy, Jim Kelly, CEO of United Parcel Service Inc., says that the message emanating from top management is an important and often overlooked factor.

"We have to provide our employees with a challenging and exciting environment, a sense of purpose, a sense of what we as a company are trying to achieve and how they are involved in that effort," Kelly says. "We are very fortunate in that we have very little turnover, and the consistency of our message is one reason why."

UPS has taken one of the largest blue collar work forces in the United. States and transformed it into a technology enabled New Economy powerhouse, with surprisingly little resistance. Forbes magazine said of that transition, "UPS used to be a trucking company with technology. Now it's a technology company with trucks." Equipped with a wireless computerized clipboard called a DIAD (delivery information acquisition vehicle), UPS drivers are playing a key role in the company's New Economy strategy.

Choosing the wrong partner in the New Economy can be more damaging than choosing none at all.

Kelly credits the company's corporate culture, which has always emphasized promotion from within, for much of its success in the transition. "How do we maximize human performance in that environment? In lots of ways, including extensive training," he says. "But our drivers are part of our DNA. I heard someone asked a UPS driver that question recently, and she said, 'You get it from each other.' That is a concept and philosophy that is not only effective in the New Economy, it is exportable."

Managing the transition to the New Economy involves making choices about partners, as well. William Nussey, CEO of iXL, an Atlanta-based strategic Internet services firm that advises companies making the transition from bricks to clicks, says that the distribution of power and control is no longer clear in the New Economy. As a result, a CEO's ability to build trust and relationships is a distinguishing competitive advantage.

However, choosing the wrong partner can be even more damaging than choosing none at all. A case in point is the recent fall from grace of Toysmart.com Inc., a one-time high-flyer in crowded and competitive online toy market.

Toysmart had partnered with Walt Disney Co., which invested $50 million and took a 60% stake in the toy retailer. Given Disney's strong position in the U.S. family consumer market-Toys mart's prime target-it seemed a match made in heaven. It turned out to be anything but.

Although the deal was reached in May 1999, it was not announced and Toysmart did not get any cash from its new partner until August. Toysmart had to delay its marketing spending, which meant losing its chance to convert customers in the pre-Christmas buying season, Toysmart CEO David Lord said at an IT industry event in June of this year. Disney also did not approve Toysmart's sale of key products such as Disney books and baby items until after the crucial holiday selling season had ended.

Analysts finger a culture clash between the two companies as the major culprit behind the failed partnership. They say Disney took longer to make decisions and operated much more bureaucratically than its dot-com partner. Toysmart, for its part, was not as focused on issues of major concern to traditional retailers, such as profits and inventory turns. And they expect to see more such culture clashes in the future.