Adam Lashinsky on the State of the Internet
Dan Colarusso on Internet Growth Projections
Katherine Hobson on E-tailers' Push for Profitability
Catherine Valenti on Ailing Internet Funds
Jamie Heller on Using the Net to Track Net Stocks
Tracy Byrnes on the Frenzy Next Time
George Mannes on Self-Hating Dot-Coms
K.C. Swanson on Old Economy Winners
David Gaffen on Measuring the Internet Economy
Ian McDonald on 'Butterfly' Companies
Justin Lahart on Real Net Valuations
Joe Bousquin on Building the Perfect Net Company
A Dan Gross Opinion Piece: Were the Old Guys Right?
TSC Roundtable on Predicting Six-Month Winners
Roland Jones on The Last Days of Daytrading
Eric Gillin on Working for a Dot-Com
The futurists were right, it just took a little while.
The dismal fortunes (for the moment, at least) and 90% stock price declines of many "pure play" Web stocks have been grabbing all the headlines about the Internet crash. But they represent only a small, shrinking slice of the burgeoning Internet economy. The much bigger story -- just beginning to be played out, and the one prophesied by many Internet visionaries way back in the mid-'90s -- involves the huge, profitable, manifestly boring companies that do the heavy lifting in the U.S. economy.
"If 1999 and 2000 was the story of the dot-com, 2001 will be the story of the corporate transformation to totally embrace e-business," says Raphael Amit, who teaches entrepreneurship and management at the
University of Pennsylvania's Wharton School of Business
. "I hear, 'Well, e-business is dead, the financial markets are not responding.' I think this is totally baloney. We haven't seen the beginning yet."
Back when folks were still two-fisting free martinis at the latest Web start-up launches, a lot of smart people in corporate America were trying to figure out how to use the Net to sell more turbo generators or cut costs on wholesale buys of drill bit sets. Some of those staunchly unglamorous companies are just starting to implement Web-based plans to boost productivity. The effect on these Old Economy companies' bottom lines will be felt well into the future.
In other words, unlikely companies such as
may well be at the vanguard of the real Internet revolution.
And the revolution is in the early stages: A recent survey by the
National Association of Manufacturers
found that over two-thirds of U.S. manufacturers do not yet use the Internet for business transactions.
A smart Internet strategy doesn't necessarily correlate with a great stock price. Investors aren't exactly racing out to buy J.C. Penney, for example. It closed Wednesday at $11.25, well off its 52-week high of $27.50. But that may change as companies increasingly report gains in productivity, improved bottom lines and better sales because of the Web.
The most obvious gains of Net-based business may be found in corporate bottom lines. For example,
shaved 6% off the cost of one of its products by using a "reverse auction" on the Web to drive down the cost of its supplies. In a reverse auction, the lowest bidder wins the contract.
Erik Brynjolfsson, co-director for the
Massachusetts Institute for Technology's Center for eBusiness@MIT
, says the most successful Web players will leverage the Internet to offer corporate and individual customers a richer, more complete experience. "You often get quick wins by
cutting costs," he says. "But to look for ways of adding value, you usually have to think of entirely new things."
, the $25 billion industrial conglomerate that's being purchased by
. Honeywell aims to take advantage of both the promotional and efficiency-boosting possibilities of the Internet. On the marketing and sales side, it offers what it calls e-hubs -- sites like
myaircraft.com that act as not only marketplaces, but also resource centers on how to streamline manufacturing operations.
Even Honeywell competitors and consultants can register on the site and offer goods and services for sale. "Our goal is to make sure that e-hubs are as objective as possible for them to be the most effective," spokesman Tom Crane says. Honeywell has also forged Web links to its customers, its suppliers, and even the components makers for its suppliers.
The company says confidentiality concerns among competitors hasn't been a major obstacle, but the big challenge has proven to be responding to reams of new information. Crane says: "You can liken it to drinking from a fire hose. You need to make sure that all your systems and your production is ready for what you're about to turn on."
Eastman Chemical, another Old Economy stalwart, with $4.6 billion in annual sales, claims a distinctly
New Economy portfolio, having taken equity stakes in a raft of e-business start-ups. This year, it plans to connect up to the supply chains of about a dozen major chemicals customers and suppliers.
To sell certain kinds of off-class plastics and polymers (for which there's less demand), Eastman Chemical employees used to have to hunt down buyers by phone or fax. Last fall, the company started selling those items via Web-based auctions. Since then it's held over a hundred auctions, with 90% of them resulting in a transaction. "A lot of people can participate at once. It's much more efficient," says Cherie Porter, Eastman's global organization enablement manager in e-business.
Another unglamorous outfit that's drawn attention for its aggressive Web strategy is W.W. Grainger, which sells maintenance, repair and operating supplies to businesses. It put its catalog online way back in 1996, when many small businesses didn't even have Web access yet. Web sales have been strong: According to a Grainger representative, the majority of its Internet orders are around twice the size of traditional orders at the company's branch stores.
The site also finds hard-to-find stuff for its customers: In one case, Grainger located bear repellent in response to a customer inquiry. Another time, the site turned up a dentist's chair for a hockey team. (They needed the chair to administer quick, midgame patch-up jobs to injured players).
A few old-time players are prevailing in e-tailing, where their brand names have paid off. Pete Fader, who teaches marketing at Wharton, favors the odds of established direct marketers over start-ups such as
that have tried to be all things to all people. "Too many people felt the Internet would be more than just a big billboard, that it would make people buy more," says Fader. Instead, the novelty has worn off -- much like the faded lure of a once-hot new restaurant. "It might change your set of set of options, but you're not going to eat more," he points out.
Fader believes companies with a direct marketing mentality "understand the Internet completely. They know how to run little experiments to figure out what people are willing to pay, what they do and don't want to see." He likes the buying experience at
, and he also cites J.C. Penney, a retail underdog that's surprisingly managed to position itself as an e-tailing contender.
"The interesting thing is, their store sales are drying up," says Fader. "But the Internet is another way of making the catalog buying business more efficient. For them it was a no-brainer in adding the online component. They didn't need to reposition anything."
"Penney has problems with its stores and in the catalog," says Steve Kernkraut, an analyst at Bear Sterns, "but their Net site has gone from nowhere to probably over $300 million this year." That's because Penney's customers are used to making purchases without going to the store, he says. The company claims $4 billion in catalog sales alone.
So, even in the midst of the tech wreck, Internet-fueled innovations continue apace in some of the stodgiest U.S. industries. They may not always move fast. But that's partly because they have a lot more to think through than upstart tech outfits, says Karen Peterson, a supply chain analyst for the
For example, businesses that decide to sell online must avoid offending their retailers in physical stores, she says. Plus, companies have to figure out how their information systems integrate with customers and suppliers. "I can't just change my business and expect everybody else will be in line," says Peterson. "Just because I get religion, doesn't mean they all get religion."