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However, businesses that start cutting before devising a fundamental strategy for growth in the new climate are bound to end up in trouble. Companies in it for the long haul should instead figure out what they have to do strategically to make themselves stand out. "In terms of adjustments, the mistake companies are still making is acting blindly without thinking out the consequences," says Rashi Glazer, professor of marketing at the Haas School of Business at the University of California at Berkeley. "They are tacking too far in the other direction without asking themselves: 'What is my strategy? How can I really be different in my space?' " That's basic strategy -- but difficult to get right. Companies need to grow, not just limp along. To do that, they have to take a hard, analytical look at the revenue streams or expertise that will give them the most bang for the buck. That will take creative thinking -- and perhaps new managers, people who have been through such tricky times before. "DOOM LOOP." Companies that don't go through this process will be facing even greater risks. Startups that rely solely on cutting could head into a downward spiral if revenue doesn't increase enough to offset low margins. That could lead to a whole new round of cost-cutting, or what Goldman Sachs analyst Anthony Noto calls a "doom loop." He expects this syndrome to begin hitting dot-coms soon. A case in point, according to some management experts: Furniture.com. The online home-furnishings company epitomizes the reversal of fortune many dot-coms are experiencing. It went from filing for a public offering in January to pulling its IPO in June and talking with bankruptcy lawyers. Furniture.com was eventually able to raise $27 million in venture funding, but at a lower valuation than it had gotten the last time it raised money. In a bid for survival, Furniture.com has been furiously slashing costs. The company, which used to offer free shipping for delivery and returns, has begun charging a $95 delivery charge. Last month it laid off 41% of its staff. But some management experts question whether the cost-cutting at Furniture.com addresses the fundamental challenge: Is there a way to sell furniture over the Web and ship it cost-effectively when you don't have a nationwide network of stores? EXPLOITING ASSETS. It's these kinds of tough questions that need to be asked. Many e-tailers built their ambitious strategies on the ability to experiment at will and lose a lot of money for three or four years. If Furniture.com could still play by those old rules, it might be able to wait for customers to get more comfortable with buying big items over the Net. Or it might be able to buy or build its own distribution network. Forget those field-of-dreams scenarios now. If companies can't figure out how to deal with the underlying problems, they should sell themselves, not just try to cut back spending on an iffy model. There are plenty of ways companies can differentiate themselves. For instance, some e-tailers are using assets they've already invested in to create revenue streams they hadn't considered before. PlanetOutdoors.com, an outdoor-gear e-tailer, is using it's existing infrastructure of warehouses and call centers to handle online sales for other e-tailers and content sites. The Boulder (Colo.) startup, which launched in October, expects that 40% of its revenue will come from those kinds of deals during the next two years. It wasn't until PlanetOutdoors.com had worked out these plans that it started cutting marketing budgets and staff. Despite the need to show a path to profitability, companies shouldn't shy away from losing money. After all, it's still true that building a big business takes time. It's not that companies have to be profitable from the get-go. What companies have to do is prove that they have the insight to make themselves stand out, rather than just be skeletons of their former selves. They have to do that now, or pack it in. Green covers the Internet for Business Week in New York. Have a question or a comment? Let her know at heather_green@ebiz.businessweek.com. |
