The examples of Schwab and Amazon suggest that it may be far easier for online businesses to add physical capabilities than vice versa. It is organizationally cleaner to build a physical infrastructure from scratch than to shrink it down from something preexisting. Small, dedicated physical systems may actually be better than large, unfocused legacies. And certainly it’s cheaper to build warehouses with Internet capital than to use money that expects a quarterly profit.
For traditional incumbents, so far the negative synergies seem to have outweighed the positive ones. Recall how Toys “R” Us crippled its online offering because the company couldn’t bring itself to sanction an attack on its politically and financially dominant physical incarnation. Barnes & Noble effectively abandoned synergies between its physical stores and the Web and spun off its Internet bookstore.
The challenge for incumbents is to think about where to find valuable synergies. The smartest incumbents have stopped trying to redeem the legacy business and started deconstructing it. They look at each function or value-added step separately. They consider synergies piece by piece. They cast a cold eye on the outsourcing alternatives. Then they set up the minimal organization needed to support only those synergies that are really compelling.
This suggests a broader pattern. The defining characteristic of the Web is universal connectivity based on information standards. This rich connectivity blows up the need for closed information channels. It weakens the need for vertical or horizontal integration of any kind. Coordination that is supported internally by an intranet can be supported externally by an extranet since, after all, they’re the same thing.
Before too long, we’re likely to see the best online competitors teaming up with the best providers of physical services: Webvan handling returns for e-retailers; grocery stores taking small-business cash deposits for Internet banks; or Midas doing the warranty service on a dealerfree Ford.
Collaboration may still be easier within organizations than across them. So where alliances are not enough we will see restructuring. VerticalNet and Grainger could combine to build the Amazon of industrial procurement. Wal-Mart and Amazon could together build the mother of all retailers.