Articles

Five leading venture capitalists explain that even in today's tough economy, entrepreneurs should search for the 'smart money.' Facilitator: Howard Anderson, founding partner and senior managing director of YankeeTek Ventures of Cambridge, Massachusetts. Participants: Scott Lawin, a founding member and COO of GSVentures in New York City; Vernon Lobo, managing director of Mosaic Venture Partners in Toronto; Craig London, vice president and general manager of Safeguard Scientifics in Palo Alto, California; and Russell Siegelman, general partner at Kleiner Perkins Caufield & ; Byers in Menlo Park, California. Raising capital for new ventures may have suffered a setback when the dot-com bubble burst, but that has not impeded the flow of bright ideas that cry out for funding. A panel of venture-capital experts recently met at MIT -- arguably innovation headquarters of the world -- to discuss venture capital today and to answer questions from an audience of inventors, entrepreneurs and others. The panel discussion offers practical insights not only into what entrepreneurs should look for in a VC firm, but also what venture capitalists seek from startups.

The Internet has created new markets, customers, products and modes of conducting business. But it also has given currency to some dangerous half-truths. Admonishing Internet businesses to “stop grabbing the land and start cultivating it,” Subramanian Rangan and Ron Adner, professors of management and strategy at INSEAD in France, explain why seven popular strategies are not the path to profitable growth. First-mover advantage, for example, gets too much credit for e-business success. Companies believe that they can lock in customers and trigger a winner-take-all dynamic, but there is no guarantee that those benefits will go to first movers. The allure of reach & #8212; increasing the number of customer segments & #8212; causes many companies to ignore fit, the coherence with which their activities reinforce one another. Digital Equipment Corp. paid the price when it sacrificed fit to reach, attempting to make PCs, workstations, minicomputers and mainframes under one roof. Another tempting growth strategy is to provide customer solutions, offering products or services that complement a company’s core offering. But offering solutions can dilute a company’s focus. Targeting the right Internet sector is one way to maintain focus. When companies view the Internet as undifferentiated landscape, they are less able to distinguish the drivers of customer value and performance & #8212; or the metrics to measure them. Some companies see best-of-breed-partner leverage as the secret of profitable growth. But although the Internet makes it easier and cheaper to align activities across company boundaries, it does not do much to align interests & #8212; a requirement for the creation of joint value. Another misconception is the belief that an Internet business will automatically be successful abroad. As MTV, Wal-Mart and Honda discovered, companies first must be successful at home and then move outward in a way that accommodates local differences. The last, and perhaps most dangerous, misconception is managers’ belief that technology can substitute for strategy. Technology and strategy are strong complements. Companies that understand their technology better than they understand their customers and competition won’t succeed in any economy, old or new. The authors provide thoughtful guidelines for avoiding misconceptions and taking a sensible approach to business on the Internet.

Two new studies reveal that successful CRM systems go beyond sales, marketing and customer service.

The trade-off between reliability and customization in goods and services.

What company in a service business has not weighed the advisability of offering products? What manager in a product-oriented business has not thought about growing revenues by adding related services? Expansion often seems to make sense, but if an expanding company limits itself to approaches that work in its old sector, it is likely to find them unsuited to the new sector. The software industry provides instructive examples. Intense competition and the need to maintain a high growth rate have led numerous software service companies to try repackaging the knowledge they have gained creating customized software solutions for clients -- and to sell it as a more generic product. Their attempts to cross the chasm between the service sector and the product sector have met with grim results: Approximately 87% of software service companies' product initiatives from 1995 through 1998 failed. Satish Nambisan, a professor of management at Rensselaer Polytechnic Institute's Lally School of Management and Technology, argues that service companies fail to recognize important differences between the ways the two sectors do business. On five key issues (intellectual property rights, product complementarity, returns from scale, abstracting knowledge and connections with users), service companies and product companies are often at opposite poles. Five case studies show why service companies must modify the service mind-set to suit the product market, but without giving up their unique service-sector insights. His recommendations? When it comes to marketing, focusing on a niche market or linking with an established product are good tactics; packaging generic domain knowledge can be more risky. Companies must encourage knowledge sharing among their employees and cultivate long-term relationships with users. Finally, they must reassess the trade-offs between design flexibility and ease of development and between process flexibility and process efficiency, being sure in both cases not to sacrifice the former for the sake of the latter. The importance of understanding the new sector holds for software companies transitioning in the opposite direction -- as well as for enterprises in other high-tech industries with both a service and a product sector.

Which e-businesses will prevail? New research on e-fulfillment may hold the key. After all, getting a customer’s online order is not enough: E-businesses also must show that they can deliver products quickly and efficiently. Hau L. Lee and Seungjin Whang, professors of operations, information and technology at Stanford University’s Graduate School of Business, have studied a few successful online companies and their innovative ways of applying order-fulfillment strategies. Although the principles are not new, Internet technologies enable them to be applied in new and expanded ways. The two core concepts for improving e-fulfillment efficiency are making more use of information flows instead of physical product flows and capitalizing on existing pipelines and infrastructures. Those concepts underlie five key e-fulfillment strategies: logistics postponement, dematerialization, resource exchange, leveraged shipments and clicks-and-mortar. Whether the strategy expands on time-tested models or is a breakthrough, the trick is to determine the best one for a given situation. A computer company might use logistics postponement. By capturing more-accurate information, it could assemble final goods on demand and thereby save money by postponing delivery decisions until after receiving the final word on what the customer wants. Other companies might use dematerialization, converting physical products into information flows, just as a music CD can be converted to MP3 format or Egreetings.com substitutes digital flows for paper greeting cards sent by regular mail. With resource exchange, an e-company that needs to move a load from Hong Kong to San Francisco might borrow a ship from another company that needs a cost-effective way to return its empty vessel to California. Webvan uses the leveraged-shipment strategy, making the most of existing networks. With its clicks-and-mortar model, CVS covers the last mile by having customers pick up their online orders. Some online purchasers in Japan do the same: 7dream.com utilizes the ubiquitous 7-Eleven stores to enable a group of Japanese companies to do bulk deliveries. Pointing out ways that companies are extending e-fulfillment value beyond cost containment, the authors also demonstrate how secondary opportunities are taking companies beyond the last mile.