Round two: Dotcoms fight back

Boo Hoo – a dotcom story, provides an insider’s version of events at one of the most celebrated dotcom failures. Penned by Ernst Malmsten, one the founders of, this is a gushing history of corporate excess on a gargantuan scale made all the more interesting by an apparent absence of any suggestion of fiscal reality. was not alone. In the late 1990s, greed and marketing hype lured many a venture capitalist into encouraging substantial investments based on little more than back of fag packet business plans.

Those were the gold rush days where, if a business had dotcom in its moniker, the purse strings were not just loosened – the entire bag of loot was thrown onto the table. And while it is easy to think of the dotcom era as an aberration, the legacy of those heady days has been to change management thinking about how retail business is conducted along new but as yet largely uncharted waters.

Although it remains fashionable to hurl ridicule at those who believed, invested and were burned by dotcom mania, their entry onto the commercial landscape had an effect on many industries. From a retail perspective the dotcom theory was simple.

Low infrastructure costs
Low infrastructure costs lowered the cost of getting goods into the hands of consumers, allowing dotcom ventures to offer exciting and differentiated services to the traditional high street retailer. Success depended on a speedy grab of customers’ wallets to the point where in many cases market-associated costs were the biggest item in the P&L account.

But there were four problems. The business models were untested, building brands took time the dotcomers didn’t have and most failed to understand what it takes to deliver goods to the customer’s doorstep. Finally, a lack of fiscal probity at the top often meant that cash burn rates were too high to be sustainable, even in a bullish market.While dotcom mania raged, the traditional bricks and mortar-based retailing world didn’t stand still. Tesco, Sainsbury’s and others developed their own dotcom ‘versions’ where the emphasis was on providing customers with a differentiated shopping experience while maintaining their brand recognition. But these organisations were – and largely remain – faced with complex business issues.

Economic guru Paul Strassmann estimates that 35% of the cost of getting goods to a customer is tied up in general, sales and administrative costs. A significant part is the cost of moving goods from manufacturer to warehouse, distribution centre and retail store. Slapping a dotcom face on the business doesn’t solve the problem because the goods still have to be sourced and delivered. It’s an expensive proposition to establish a logistics system for a single retail channel.

Getting to the customer discovered this early on when its attempts to bypass the distribution element of the value chain by looking to the manufacturer for distribution foundered. Today, like many other retailers, Amazon owns considerable warehousing resources. But the effect the dotcomers had of highlighting the potential for carving out cost carried through into IT investments. Today, the emphasis is on creating value in supply chain by automating the supply process. Inventories for example have been reduced in the high technology sector by the use of demand planning capability of the kind developed by i2, Manugistics and EXE.

In addition, companies like GE eXchange Services (GEXS) have developed information delivery mechanisms that increase the velocity at which transactions can be conducted. In manufacturing the arrival of virtual showrooms got the main players to look at the way they represent themselves to customers and the way they sell.

For example Renault V.I. substantially reduced the cost of manufacturing a truck to customer specifications by allowing customers to visualise a truck online, complete with specifications and options.

The crucial difference with these initiatives is the emphasis on creating value before the customer becomes involved.

Following eBay’s lead
Elsewhere, eBay, pioneer of the online auction, has seen its ideas taken and modified for use in many industries. As Charles Swain, head of enterprise technologies at Andersen Business Consulting says: ‘Where an item has become commoditized, reverse auctioning serves a useful purpose.’ The British Standards Institute recently reported savings of 17% on services and 13% on capital goods at its first online auction. But the use of such technologies is not without risk. Reverse auctioning – a euphemism for a Dutch auction – has been successful for buyers but a nightmare for sellers. One aerospace parts vendor comments: ‘In a two-hour auction, little or nothing happens until the final few moments and then all hell breaks loose. We ended up bidding below cost and winning – we were not pleased.’ The problem lies in the dynamics surrounding auction activity.

Anyone who has bid at a traditional auction will know that it takes a special skill to succeed without paying too much. An online reverse auction operates the same dynamic tensions. To add a bit of spice, operators will add on time at the end if it looks as though prices will continue to fall. It appears that this technique is unlikely to be successful in the long term because it is almost entirely price driven – an anathema to strategic suppliers.

This brings us neatly to globalisation.

The dotcom era smashed the last vestiges of belief that geographical boundaries to trade offer protection from predators. Despite attempts by certain governments to thwart the proliferation of online retailing, eBay, and others continue to spread their reach.

Adopting technologies in the dotcom boom
In the business-to-business world, success in a global economy is dependent on an enterprise’s ability to adopt technologies developed in the dotcom boom. What’s more, the few dotcom successes have challenged traditional retailing ideas. has brought significant change in the markets for the distribution of books, CDs and videos. Chateau Online, the European online wine merchant has opened up a new world for those that want to source an elusive vintage. eBay made Christies and Sothebys sit up and think – but not to the extent where one would habitually bid for works of art without at least viewing the pieces. After all, the pleasure of seeing something beautiful at first hand cannot be mimicked by the virtual world – yet.

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