Dialogue: Online strategy must mix old with new

Digital technology is changing the way business is done but it takes human enterprise to exploit it fully, says HAMISH McRAE.

The new economy is over. That's the view of Michael Porter, the American business guru, who writes in the Harvard Business Review that the phrases "new economy" and "old economy" are rapidly losing their relevance.

The nub of his argument is that while the new communications technologies have a big effect on businesses, they do not rewrite the rules. Companies have to produce goods and services that people want to buy, and make a profit from that.

The great fear of many intermediary businesses such as travel agents and specialist retailers - that the internet would force them out of business - is unfounded.

And the most effective way of using the new communications technologies is to build them into your existing business rather than try to create a new business.

This is an important contribution to our understanding of the internet. Professor Porter deserves to be taken seriously, for he is both a best-selling author of business books and a respected academic specialising in competitive strategy.

Few would quarrel with his core observation that the internet needs to be the central part of a business strategy rather than bolted onto the side of it.

But that does not help businesses trying to figure out how best to integrate the internet into their activities and get the best out of it.

How do you figure out which bits of the business will be transformed by the internet and those that won't.

Here are some ideas:

New technologies have most effect where they reinforce a trend. You can already see many examples of this.

Take airline ticket sales. The companies that have been most successful at selling tickets online have been the low-cost carriers. But you would expect that, partly because they are selling on price rather than convenience and partly because they run their entire business by obtaining a series of modest savings that cumulatively give them a completely different cost base from regular airlines.

A more general example would be the trend towards outsourcing. That has been running for 20 years. It can achieve large savings but sometimes the loss of control offsets them.

One effect of the internet is to make it much easier to control what suppliers are doing and integrate them more closely into your business needs.

Perhaps the most important general example is the way the internet reinforces the growing importance to businesses of human capital relative to other forms of capital, such as financial and physical. The internet, used properly, enables a business to know much more about the stock of human capital it has at its disposal: who the most clever people are, why are they so useful and what is going on in their heads.

But crucially, it also enables the flat structures of modern businesses to run more effectively. Most people now accept that the key competencies in a business lie in the middle, rather than at the top.

Sure, every company needs good leadership and good governance, yet in a funny way it is easier to hire it than build up the solid competence most companies rely upon. But flat structures need people at the same level to communicate with each other, and these people may well be in different places, even countries.

The internet also makes it much easier to create informal links between employees without the line management needing to know about them. In a top-down organisation you do not need the internet to communicate; in a flat one, where ideas need to cut across normal reporting boundaries, it is vital.

If these are examples of the structural significance of the internet, here is a cyclical one: it will help firms to cope with a recession.

You can see this already. The new communications media save costs in many ways. An obvious one is procurement. Better communications allow a much wider range of suppliers and quicken the ordering and delivery of supplies.

Eliminating internal paperwork is another way of cutting costs. Substituting electronic communication for travel also helps.

In a growth market, none of this matters much, for companies can get away with higher-than-needed costs.

But in a recession things are different. Companies are hunting for ways to squeeze costs. So from a purely cyclical point of view e-competence is more important than ever. In a way this supports Michael Porter's point that there is no such thing as a separate "new economy." But it also means that integrating the techniques developed by new economy companies into old economy ones will be more important than ever.

The central point is that we are still in the very early stages of learning how to use the internet.

Its commercial applications are only really seven years old, with seven years of continuous growth. There has never been a recession during the internet age.

On the other hand, we do have a lot of experience of the ways in which all new technologies take a long time to become fully employed by the business community. Earlier examples include the telegraph, electricity, the telephone and computer.

Telephone banking was only developed in the 1980s, more than 100 years after the phone's invention.

In another 100 years I suspect our great-grandchildren will still be figuring out new ways of using the internet.

- INDEPENDENT