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Q&A with Mel Bergstein March 18, 1999 Devising a "Digital Strategy" Diamond Technology's CEO: Decide what your "worst nightmare could be...and plan as if that's going to happen" In the age of the Internet, every company needs a survival plan -- a way of reinventing themselves to succeed in a vastly different business environment. At Diamond Technology Partners Inc., a consulting firm based in Chicago, this process requires devising a "digital strategy." CEO Mel Bergstein talked to Business Week Correspondent Roger O. Crockett about the challenges facing businesses today and how best to come up with an Information Age game plan. Here are excerpts of their conversation: Q: Many issues confront CEOs in the digital era. What should be top-of-mind? A: A CEO needs to answer the question: How is my industry's structure changing? For example, in the lodging industry, 25% of the reservations come through travel agents. If you're in the lodging industry, what is the impact of all these new online travel agents? Are they going to encroach on the lodging industry and take more of it? You've got America Online's Preview Travel, Microsoft's Expedia, American Airlines has an online site. So you have to know how they will impact what you're doing. Q: How do you identify that shift in industry structure before it happens to you? A: Yeah, like Barnes & Noble woke up and there's Amazon.com on their front porch. You have to have an extraordinary sense of radar, and really keep your eyes open. The places these companies come from are not the places you usually look. Amazon.com didn't come from a traditional [bookstore]. It came out of the blue. Most lodging companies don't think they're going to be competing with Microsoft. It's harder. You have to have some people that are aware. And you have to do some sort of scenario planning about what your worst nightmare could be and plan as if that's going to happen. At some point, the worst nightmare is going to develop. It's just a question of who's going to initiate it -- a traditional industry player or someone else. Q: Why do you see startups leading the way in the Internet Age? A: For traditional industry leaders, the press of innovation is becoming extraordinary. There is an enormous amount of private equity available today. Billions of dollars. It's huge. Capital markets will accept companies at earlier stages than they ever did before. What that is doing is creating an enormous push for large companies to innovate. Why? Because you have all these little companies coming to market that are innovating and coming into these markets that have been typically dominated by traditional companies. Q: Don't the traditional companies get it? A: The ways that industry leaders have traditionally innovated is through acquisition. The problem today is that the market caps of young companies are so high, and the industry leaders are still working with the old market caps that are a fraction of the new ones. So the industry leaders can't buy the upstart companies anymore. They're too expensive. So they're stuck with having to innovate themselves in a market where there are new entrants all the time. It's a much more difficult problem than we've ever seen before. Q: Why don't they adapt? A: It's not something these companies are used to doing. They're used to optimizing their businesses. The best ones, they're used to running tight P&Ls. They understand who their customers are. And all of a sudden they have new competitors coming out of nowhere. So these guys are left slackjawed. Q: Can you give me some examples? A: It's telecom companies. It's information companies. For media companies when Yahoo! shows up with monster multiples, what are you going to do? You're not going to buy it. Merrill Lynch is not buying E*Trade. It's too expensive. Take drugstores. You have drugstore.com and PlanetRx. These [online companies] are going to have huge market caps. If you're Walgreens, you're not going to get to buy those. Any retailer, actually, is all of sudden seeing retailers out there they can't afford to buy. So they have to do it on their own. Q: So what does the traditional company have to do differently? A: The one thing we know is that businesses that are used to a particular way of doing business kill foreign bodies -- anything new and dffernt they'll kill. Why? Because they're focused on a customer set that they know and love, a product set that they understand. Since they're so focused on that, they reject new ideas until it's too late. You have to start investing in doing things outside the traditional structure. You have to create an intra-preneurial situation. The right response is to set up a venture, an intra-venture started up outside the organization. Some are concerned that that might cannibalize their business. Well yeah, but you might as well get eaten by family than someone esle. Q: If you're a CEO, how do you do start these intra-ventures? A: It's very hard to do. You get a group of people from outside and inside and you fund a venture and hope like hell that it's going to take root. The real issue is not to have one, but to have a portfolio. The fact is these are options. No one is sure what's going to work. So you need to take options on the future. If you go to Allstate, they have an internal venture firm where they actually make investments. Microsoft does this. Dell does this. The issue is to aid the innovation of the company, and it's very hard to do within the structure. Q: How do you get a traditional company to think outside the box? A: We have them break into teams and design their fiercest competitor. You tell them to think of themselves as someone else. Otherwise they think of ways their company can't do something -- like start an Internet company. So they think of designing what another company would do to enter this market in the most ferocious way. You can't be constrained by the current way of thinking about things. When they come back with ideas, the management team says: There isn't any barrier to letting this happen. It's just a question of who does it. It's got to be us. Q: What advantages do E-businesses have? A: Most middle-aged people grew up in a world that was supply-constrained. So the notion of customer service is not good. Amazon comes with a customer orientation that overwhelems other experiences. That becomes a lobster trap. You go in there -- you're not coming out. The customer service is superb, so you say, I'm not going back to a bookstore. Once somebody gets wired, it's hard to compete with that. You can create retail experience for me that I might want to go to. For example, if I have a grandson, I might go to Disney World because that's an experience he wants to have. But the bit world can be much more friendly for customers than the atoms world. One thing I have to do in the atoms world is carry my sorry ass wherever it is I've got to go, whereas I can sit at my desk and do the bit world thing. Q: Is that an argument for it being a must to have an extranet for customers? A: You have to have a bit-based channel for customers, and it better be good. The argument is that the Internet channel is a very small part of our approach to the market. That's true, but look at Christmas. [Consumers' individual online spending increased as much as 191% over the 1997 season, according to Zona Research in Redwood City, Calif. About 26% of families' holiday buying was done online in 1998, and some 58% of them had spent nothing online in 1997.] If they're not on the Internet now, companies better be there in the next year. Q: Well the ultimate question: Can companies make money on the Internet? A: There is money in it. Online traders are making money. Yahoo! is making money. It's a differnt revenue model, a different cost structure. It's not the traditional stuff. You really have to be inventive. The fact is you don't have a choice. That's where the markets are going -- online. Even if the economics don't look good today, you can't let the customers get away. The economics will look good -- they're just different. Money is coming from advertising, subscriptions, transactions, or partnerships. The customers are going to be there, so you've got to figure it out. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					PREVIOUS Q&As Motorola's Les Shroyer Amazon.com's Jeff Bezos Author Clayton Christensen Venture capitalist John Doerr