As executives of existing Asian companies race to launch their new online businesses, many will make a fundamental error that is likely to put their whole strategy at risk. By neglecting the changes in the off-line business that are also essential, they will fail to question the legacy mindset of their existing business - and that will inevitably undermine the online effort.
Large Asian companies face a threefold organizational challenge in e-commerce. They must build an effective new e-commerce organization. They must also leverage their traditional business to create advantage. And they must aggressively manage the inevitable tensions between these two goals.
Even in the new economy, legacy assets can be extremely valuable. For example, many online businesses would benefit from access to an existing sales force or distribution network, and incumbents already possess such priceless assets. Pure plays must build such infrastructure from scratch with no guarantee of success.
Paradoxically, these incumbent advantages, the very assets the new online business can leverage in the short term, are also the ones it will destroy in the long term. Indeed, the more effectively the online business exploits these existing assets, the more quickly it is likely to render them obsolete.
Most executives facing this dilemma will hesitate. They shouldn't. The value of these legacy assets will never be greater than now, and that value will only diminish as the online business matures, as pure plays expand, and as non-Asian players enter the markets. Executives must move fast to exploit their existing assets, and there are at least four tactics to change traditional thinking and achieve this momentum.
A sense of urgency
First, set a fast pace of change. Given the importance of speed, establishing urgency in both your online and the off-line organizations is essential. The signals senior management send are crucial. For instance, Jack Welch's act of creating a "destroy-your-business-dot-com" initiative in every GE business unit has quickly focused the organization on moving fast and considering the previously unthinkable. And in Asian companies, the CEO's visible endorsement is especially important when long cherished beliefs must be overturned quickly.
Also, have your e-commerce initiative leader report to a powerful senior executive - ideally the CEO. A rule of thumb is 'the rule of level plus two': a reporting relationship at least two levels higher than would ordinarily be expected for such a position. This makes the role highly visible and gives the e-commerce leader a place to turn when he or she inevitably encounters obstacles.
Second, internalize an outside perspective - and make it stick. A highly effective way of challenging the legacy mindset is to incorporate fresh perspectives. Many established companies are placing external hires in key positions for their online initiatives, and about half of the Fortune 100 companies in the U.S. have hired their e-commerce leaders from outside the business. Increasingly, companies are also including outsiders - venture capitalists or high tech executives - on the governing boards of their e-commerce businesses. Asian executives should consider following suit.
But we all know new perspectives are of little value if they only cause the core business to reject the transplant of those new ideas. Therefore, it is also essential to fill some important positions in the online business with veterans who know the traditional business and have the networks to get things done. These 'guerrilla networkers' are an all-important bridge between your new and old businesses. Create incentives for your managers who stay in the traditional business. For example, some companies are giving core-business managers equity in their new online ventures.
Third, design "e-commerce-ready" management processes. For example, the typical online opportunity requires massive up-front investments, although the short-term outcome of these is often highly uncertain. This is likely to have an immediate negative impact on the profits of your businesses. Therefore, as long as businesses use traditional metrics, they are likely to under-invest and neglect important strategic bets.
In short, executives must develop new approaches, better suited to the competitive economics of e-commerce, such as options-based planning and blended funding, in which the corporate center supplements business unit investments. The planning and budgeting process needs to be equally flexible. Many executives, for instance, are adopting 90-day rolling budgets that are continually readjusted as the environment changes.
Managing partnerships
Equally important is managing your e-commerce partners. Partnerships are crucial for you to lock up relationships with non-Asian players. But executives often misunderstand the value their own companies bring to partnerships, and so risk squandering that value. One major Asian corporation was close to signing a major software-licensing contract with a US e-commerce start-up. Fortunately, prior to signing, the manager in the negotiation realized the US start-up would gain enormously at the expense of his own company. He negotiated an equity stake in the start-up, which is now valued at hundreds of millions of dollars. Given the potential value of such partnerships, many established companies are centralizing partnership management to ensure such value is not lost.
Four, strengthen the role of the center. As the foregoing steps suggest, the center has an important role to play in organizing for e-commerce. Companies need a small but powerful central unit led by a senior executive who can balance conflicting needs and remove obstacles quickly. This executive must also be ready to champion the changes needed for e-commerce.
Asian executives who use the center effectively, have processes designed for e-commerce, promote change from the outside, and move fast will have a much greater chance of e-commerce success. They will prevent their traditional business from undermining their online initiative, and better leverage the core to create new value online.
David Michael is a vice president and director of The Boston Consulting Group based in Hong Kong. He is a leader of BCG's electronic commerce and high technology practices in Asia.
