Every important invention, from the refrigerator to the
railroad, has caused economic pain for some. The refrigerator
decimated an entire industry built around harvesting ice from the
Northern states; the railroad spelled the end for many lake
transportation companies. The late economist Joseph Schumpeter
pointed to the inevitable "creative destruction" left in
the wake of these revolutionary inventions.
As the next millennium approaches, yet another groundbreaking
invention has left some businesses startlingly vulnerable: the
Internet. With the Web dominating the future of commerce,
traditional businesses will need to struggle to adapt, transform
and compete against their swift-footed Internet competitors -- or
possibly face their death.
"The biggest challenge facing small businesses in the new
digital age is not technology but a combination of inertia and a
lack of marketing clout," says Geoffrey Ramsey, a statistics
analyst at eMarketer, a New York City company that tracks Internet
marketing trends, research news and statistics online.
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"Small businesses, defined as those with fewer than 100
employees, represent 98 percent of all business enterprises. Yet
small businesses are way behind when it comes to getting online and
setting up a cybershop," Ramsey says.
This inertia, coupled with the relative ease with which firms
can go global simply by building a Web site, may spell the end for
some traditional businesses, which typically tie up financial
capital in floor inventories, storefronts on expensive real estate
and complicated delivery systems. The difference in overhead costs
between traditional businesses and pared-down Net-based enterprises
is one of the areas that online firms seek to exploit.
But it's not just the difference in costs that gives online
firms an advantage. Many also save time--the most precious resource
to today's consumers. According to a recent AC Nielson survey,
Americans average 159 shopping trips per year, which translates to
about 60 hours of travel time according to eMarketer. "Given
the time pressures of balancing work, household duties, child care
and social activities, it's not hard to see why the Internet,
with its convenience advantages, will increasingly become the smart
way to shop," Ramsey notes. Understanding how people choose to
balance their time and money is critical for small businesses
seeking to understand the impact of the Net on their companies in
the coming years.
Even if your company is one of the rare businesses that
doesn't need a Web site, you still must assess your
vulnerabilities to Web-based competition if you want an accurate
prognosis for your business's long-term survival. Here are the
compelling statistics:
- According to the National Retail Federation, 26 percent of
retailers had an Internet site in 1998, up from 20 percent in 1997
and only 8 percent in 1996.
- EMarketer predicts a continuing explosion in the number of
Internet users worldwide: They will nearly quintuple over the next
five years, from 44.4 million in 1997 to 228 million in 2002. This
represents an average annual growth rate of 103 percent. In the
United States alone, Ramsey sees the number of Internet users
growing from 28 million in 1997 to 85 million in 2002, a 61 percent
average annual growth rate.
- Consumer purchases over the Internet will rise from $4.5
billion in 1998 to $35.3 billion by 2002, according to
eMarketer.
Clearly, this is the direction markets are going. It all boils
down to one indisputable fact: Your competition is everywhere. Yes,
everywhere. From sleek Web-based enterprises to smart
traditional businesses that have built a strong presence on the
Net, from businesses down the street to companies across the globe,
competitors are eyeing your customers like never before.
To determine whether your company is likely to face aggressive
competition from online firms in the coming millennium, consider
the following questions and tips on how to shield yourself from
competitors and provide more opportunities for your business by
rethinking your Web-site strategies.
1. Is your company giving away a lot of free information
that must be covered by overhead expenses? Can other companies
"piggyback" on your investment?
Some traditional stores have showroom floors where customers can
see and experience what they're buying. A stereo store is a
good example. Customers can gain a lot of "free"
information by sitting in a plushly built sound room and listening
to dozens of different stereo speakers. But part of the
speakers' price must cover the overhead expense of the
showroom. Ironically, then, this information is free to the
customer only if the customer decides not to buy the
speakers. Other examples include sporting-goods stores, furniture
stores and photography stores. The customer can swing a golf club,
sit in an armchair or look through a camera at a nearby mall--and
then order the identical goods at a lower price over the
Internet.
Internet suppliers' lower overhead costs and typically slim
margins mean businesses can pass the savings on to the buyer. The
only edges that traditional stores have are convenience, lack of
shipping expenses, the promise of better service and, perhaps,
customer loyalty.
"Commodities are the products most at risk here,
particularly when the customer feels little or no loyalty toward
the store [selling them]," says Maria LaTour Kadison, a senior
analyst at Forrester Research in Cambridge, Massachusetts. Expect
customers' loyalty to fade in direct proportion to the savings
they can get by shopping on the Web.
The challenge for businesses selling these types of products is
to find a way to get customers to pay for information or services.
One solution that may come of age in the next century is to charge
individuals for the information they now get for free. For example,
if traditional stereo stores collapse, sound room centers might
become a viable business of the future, allowing people to learn
about and fully appreciate the products they want before buying
them over the Internet. That way, the cost of the information is
paid for by the people who benefit from it.
Kadison offers an option that is more practical in today's
environment. "Traditional firms can meet the challenge by
improving and emphasizing friendly customer service and
hand-holding where necessary to create customer loyalty," she
says. "The Internet, by nature, is much more impersonal, and
traditional firms can capitalize on this."
2. Will customers wait for your product?
Part of the Internet's attraction is that companies can be
located in rural, low-rent areas to cut their products' prices.
But remember, the Internet doesn't always save people
time. For consumers who need an item quickly, this method of buying
poses a serious risk: shipping delays. This, in addition to the
idea of shipping costs (even if the product itself is lower-priced)
can drive people to the store rather than to the computer. If you
have a splitting headache at 3 a.m., it's a no-brainer to
decide whether to order aspirin over the Web for 30 percent in
savings or to drive to the nearest convenience store. In addition,
Kadison points out, companies that sell perishables, such as
fresh-baked goods, or other items that don't ship well
shouldn't be afraid of Internet competitors.
So immediate gratification does play a role. Saving time is
relatively more important for inexpensive products, while saving
money is relatively more important for expensive ones. Thus, stores
with high-priced commodity items are most at risk, particularly
those selling products that customers are willing to wait a few
days for.
3. Does it somehow enhance a product's value to be
sold through your business, and does this extra value exceed the
savings from shopping on the Internet?
A firm that sells a product with no identifying personal stamp
on it is deeply threatened by Internet competition. Travel agencies
clearly face this challenge, as do insurance companies and banks.
The commodities they sell--plane tickets, insurance plans and
checking accounts--are typically offered in packages identical to
those available from other agents or sellers; the consumer is most
concerned with price and will switch from one seller to another to
save money.
"What traditional travel agencies need to do is establish a
niche market and compete on things other than price," Kadison
says. "The Internet will force companies to focus on creating
more value."
For example, it will no longer be enough for travel agencies to
sell tickets over the phone. Increasingly, they'll be called on
to handle complicated transactions or create bookings that require
advance planning, or knowledge of the carriers or sponsoring
hotels.
Anne Baskett, owner of Daly Travel Services Inc. in San
Francisco, has already seen a change in her business. "During
the last six months, simple ticketing for airline fares through our
agency has dropped by 3 to 4 percent," she says. Baskett
suspects her company is losing individuals who don't fly
frequently and who haven't built up relationships with travel
agents. "The whole process of buying tickets through the
Internet has become more robotic, but more user-friendly,"
Baskett says. "By the millennium, I think we'll be out of
simple ticketing altogether and only doing service
transactions."
Baskett is upbeat about the future, though. "We have to
change with the times, and that means becoming more technical and
more customer-friendly," she says. "At the same time, we
need to [help simplify] complicated transactions and think more
about savings for the customer."
Some businesses already have a strong personal stamp, and these
will succeed in spite of Internet competitors. Artists, specialty
shops selling hard-to-find items, and skilled carpenters have
little to fear, because their products aren't standardized and
are strongly identified with the businesses' owners.
Here's another key point that might make you nervous: Your
Web competitor might steal away your customers by selling a product
you don't even consider a substitute. Take coffee shops, for
example. Most coffee shop owners think about their competition on
terms of neighboring coffee shops. But remember the product being
sold: coffee. The reason customers pay $2.50 for a cup of coffee is
for the value added by the shop, which typically includes the
ambiance and friendly conversation. But some people might trade off
that experience for price, say, if they could make that same cup of
coffee in their homes for 20 cents.
Adam Teitelbaum, 39, owner of Adam's Organic Coffees in San
Francisco, sells his specialty coffees by advertising over the
Internet and is rated one of the "top coffee Web sites"
by Infoseek, an Internet search engine. "E-commerce is here to
stay," Teitelbaum says, although he admits, "It will
probably never completely replace the ritual of going out for
coffee." The relatively low cost of displaying information on
the Web gives Teitelbaum a chance to educate customers about the
advantages of organic coffees, something he says would be too
expensive to do at a retail outlet. Currently, the company does
about 5 to 7 percent of its sales over the Internet, Teitelbaum
estimates, but he's convinced that sales will continue to grow.
"I'm now investing in a secure server that will allow
people to directly order my coffee through the Web site," he
adds.
The bottom line is that human behavior changes when costs
change--remember how we thought watching tapes on the VCR could
never replace going out to the movies?--and the value that your
business adds to the product must beat the savings that can be had
from ordering online. Competitors that you never dreamed would
affect your business are now a potential threat.
4. Is your product information itself? If so, how easily can
it be guarded or replicated?
Some companies used to make money by selling information that
consumers had difficulty accessing. That's quickly changing.
For example, in the past, few people had access to the wealth of
financial information that is now available to anyone over the
Internet, and stockbrokers were able to capitalize on that. Now, a
growing number of individual investors are buying and selling
stocks over the Internet, using companies such as Ameritrade, and
bypassing their brokers altogether.
It's not enough anymore for a broker to pass along
information; the information must be analyzed and distilled so it
saves consumers the time required to do it themselves. Companies
whose stock in trade is information that's simple to acquire
and understand are in serious trouble.
On the other hand, some products are difficult to understand or
use without a business's on-site help. Ordering an automobile
muffler from an Internet firm might save some money, but most
customers don't want to learn how to install it, or do it
themselves. Those companies that deal with products that involve
specialized help and information are better protected from Web
competitors.
Craig Richardson has published articles in The Wall
Street Journal and other economics journals, and is an assistant
professor of economics at Salem College in Winston-Salem, North
Carolina.
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