E-tailers and Space Invaders

Some thought Internet startups would wipe out whole sectors of traditional bricks-and-mortar firms. But old-economy companies are carving out their own presence, and some may become the biggest winners on the Web.

Of course, as with all commercial revolutions, the battle for cyberspace will ultimately come down to customers. And that’s why some industry watchers are now placing their bets on the hybrid. “I fundamentally believe that the clicks-and-mortar companies will win this war. It will be the model that will dominate,” insists Boston Consulting’s Vogtle. “Quite simply, it’s just a better customer experience.”

Randy Myers is a contributor at CFO.

Turning Japanese

If the current strategy for most dot-coms sounds vaguely familiar — concentrate on market share more than return on capital, partner with dozens of companies, and obtain plentiful funding — you’re on to something. The truth is, the business plans for many Internet startups read like a chapter straight out of the recent history of Japan Inc.

Granted, it would be an oversimplification to say that a single-minded quest for market share was solely responsible for the Japanese economic miracle following World War II. Companies like Sony, Matsushita, and Toshiba also raised quality control to new heights and were masterful at bringing products to market quickly. But capturing market share — almost to the exclusion of profitability — was a crucial component in the success of many Japanese companies. In fact, in the 1980s managers at a number of US corporations complained bitterly that Japanese automakers and electronics companies were unfairly dumping products in countries to gain market share.

These days, pursuing market share is practically the national pastime of e-America. The question is: Will the relentless drive for market share by Internet businesses help fuel an economic miracle like the one Japan enjoyed from the 1950s through the 1980s? Or will it lead to the sort of upheaval that eventually struck Japan in the 1990s?

According to Yoshinori Ando, vice president and managing director for management consulting firm A.T. Kearney in Japan, there are important differences between post World War II Japan and E-commerce at the onset of the third millennium. “Companies in Japan were supported by the Japanese banking system, which provided them with consistent and stable financing to go and chase market share,” Ando notes. “As long as those companies were at least marginally profitable, the banks continued to provide that financing.”

Conversely, funding for US Internet companies is being supplied by the capital markets, which tend to be volatile. “Right now, the capital markets are willing to let Internet companies continue to make these high investments,” Ando says. “But whether they will continue to do so indefinitely is a question yet to be answered. And I’m not very optimistic about that.”

Certainly, investors have begun to question the exalted status bestowed on any retailer whose name ends with .com. As of press time, the eTailDEX index of E-commerce stocks tracked by investment bank Robertson Stephens was down 37 percent from its 52-week high, even after gaining 51 percent since last August. Share prices of Internet technology stocks, meanwhile, have continued to rise.

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