In his forthcoming book How to Survive the E-business Downturn, Cranfield School of Management's Colin Barrow puts the emphasis firmly on "survive" rather than "downturn", as Julia Vowler explains

Colin Barrow firmly believes that, "the Internet is here to stay". However, he suggests that it will co-exist with the offline economy rather than replace it.

Barrow feels that the Internet will make money, but only if a dotcom follows the same rules of trading as every other business, which are: sell for more than it costs you and keep on doing that.

In the dotcom economy a company can bomb as well as soar.

But if it soars, that may not be because it follows principles familiar to any business: namely, a sound business model or strategy, sound financial, risk and people management?

Differences

Does that mean that the dotcom economy is exactly the same as the old economy?

"There really are some big differences between Internet firms and other types of business," concedes Barrow. First of all, time runs faster - Internet time is faster.

"In a few short years [e-businesses]go through all the stages of growth, and decline that an old economy firm takes decades to experience," says Barrow.

"E-businesses may get bigger, but often they don't grow up," he warns.

Second, spending it all, and coming back for more to spend, is dangerous stuff. Investors have a nasty habit of wanting a return on their investment at some point.

One day, Barrow predicts, even Amazon.com "will have to make money for the people that have given them money".

The luxury, and the problem, for dotcoms is that theyare denied the discipline of having investors look for profits as proof of their sound investment strategy.

A dotcom's value, points out Barrow, "is based on multiples of whatever high number they can think of" including subscribers, site hits, sales and even cash consumption. Applying numerology to the founder's name would probably be as accurate an indicator of potential profitability.

The third difference from old-economy start-ups is that, as the downside of all that "free money" lavished upon them, a dotcom is expected to grow and grow. But growth costs.

Bigger companies spend more, even if economies of scale can be applied to make that spending more cost-effective.

Spending

For dotcoms, Barrow points out, growth puts them into a particularly vicious cycle of ever-increasing spending. And one of the biggest bills they have to pay is for IT.

"Old-economy companies," says Barrow, "might spend 3%-5% of sales income on newtechnology eachyear. In Internet companies the spend in this area will be severaltimes greater. For thesefirms, Web site technologies do not remain stable as a percentage of sales, they vary massively."

Growth fuels massive demands for extra capacity - and for a dotcom this is measured not in square feet of factories and warehouses, or the number of units coming off a manufacturing line, but in processing power and communications bandwidth plus the people to run them.

This is where dotcoms are capital-intensive.

"Servers, software licences and staff all have to upgrade to the next level of capacity at much more frequent intervals than in other firms," he asserts.

This is both driven by, and drives, the growth treadmill. "Typically, the technology infrastructure of Internet companies will always be upgraded to take account of anticipated demand. This creates a temporary excess capacity, so the company has to scramble for more customers, and more products and services to sell to them. This pushes up marketing costs: product development and technology costs all spiral upwards together," he points out.

Costs

And it doesn't stop there. "This pattern of costs will generate losses in the short run, and perhaps even in the long run."

That's because new entrants hit the market, necessitating new bursts in technology investment to claw ahead again.

"As with any business with high fixed costs," says Barrow, applying some good, old economy business rules, "the pressure to grow sales to cover fixed costs is enormous."

Add the pressure from investors for "growth at almost any cost" and, he warns, "you end up with a highly volatile cocktail. The whole edifice can only be supported by growth in sales.

"It is like playing pontoon for ever higher stakes. If you don't raise your bid, you can't stay in the game."

If that's the bad news, the good news, according to Barrow, is that a good dollop of old-economy business practice can save the day.

There are three basic ingredients he recommends:

  • Attention to delivery and customer care

  • Good management (no e-heroes required) and,

  • A sound business model is most important of all.

    Basically, are you selling to enough people, what they want, in a way they want to buy. And are you doing it better than your rivals, be they old or new economy?

  • How to Survive the E-business Downturn by Colin Barrow (ISBN 0-471-49831-9) is published by John Wiley and is due out next month. Tel: 01243-779777.

    Dotcoms must spend, spend, spend on IT

    eBay

    "Its cost of technology varied between 15% and 35% of sales up to 1999, and this is despite the sharp fall in cost of some areas of computer hardware"

    Amazon

    "Spent $61m out of revenues of $401m on 'technology and content' in the fourth quarter of 1999, which equates to 15%"

    Schwab

    Built its own system in-house "in three months for less than $1m, as opposed to the 12 months and $2m outsourcers had asked. Rapid growth forced Schwab's systems staff to add servers on a daily basis, going from three in April 1996 to 50 in May 1998. By May 1999, Schwab had five mainframes in its primary datacentre and more than 150 IBM RS/6000 Web servers."

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    This was first published in September 2000

     

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