Anywhere managers turned to read about e-commerce during 2000, they encountered a new vocabulary dedicated to sorting out the complexities arising at the intersection of traditional business and the New Economy. Beneath the flurry of new terms and buzzwords lay a single fundamental question: How could enterprises organized around conventional goods and services capitalize on a new Internet economy based upon the availability of information? While many of these new terms haven’t endured, two of them that perfectly capture this contrast of old vs. new certainly have: “bricks” and “clicks.“ If “bricks” represent the traditional physical resources on which businesses have depended for years (actual storefronts, for example), “clicks” represent the new opportunities that the Internet brings to all of an organization’s basic functions, from sales & marketing to customer service to corporate strategy.

To explore the direction that “bricks” and “clicks” may take in 2001, Quisic recently spoke with leading e-commerce authority Ranjay Gulati, the Nemmers Distinguished Associate Professor of Technology and E-commerce at the Kellogg Graduate School of Management. In his conversation with Quisic, Gulati addressed what has and hasn’t changed for e-commerce as it enters a new, more realistic era.

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Quisic: The first half of 2000 brought a new awareness of the interrelationships between Internet strategies and conventional business models--between the so-called “bricks and clicks.” But the second half of the year saw a broad shakeout. What basic things have changed for Internet businesses since the first half of 2000?

Ranjay Gulati: I think that initially, there was an awareness that said: “OK, we have to have a link between these two things--the bricks and the clicks.” Any link at all was seen as a kind of synergy. Now, I think people are becoming much more specific about what these synergies really might be. If you look in the B2C realm, these synergies reflect questions like “Should we have in-store returns?” or “Should we have in-store Internet kiosks?” Or other questions: How do we price to the Internet channel when we might not even have harmonized pricing across our stores? Do we segment our customer base by treating online customers and offline customers as fundamentally different? How do we harmonize the brand? 

Quisic: Do you tend to still see bricks-and-clicks strategies as classifiable in terms of decisions about brand, management, operations, and equity?

RG:  I think the four are still important. It’s hard to say that any one is becoming more important, but it really is becoming sector-specific. 

Let me give you an example in business-to-business commerce. Looking at B2B commerce, you have companies like Grainger--which is an MRO materials distributor here in the Midwest, one of the largest--which has Grainger.com. They decided to take their entire catalog, which is almost six inches thick, and put it on the Net. But once they did this, they discovered that they could expand their customer base, and so they created OrderZone.com. Then they decided to create an auction site. They’ve put in half a dozen different Web initiatives by now, each going after a different segment. The basic recognition is that the Net might allow you to enlarge your customer base in creative ways and not just think about existing customers.

It’s not just thinking what you have offline and putting it online. Instead, it’s a more creative approach. I think that this is part of a larger trend of the empire striking back, you know. You have the waking up of the “bricks,” who finally have understood they need to unlock their assets and really use them more on the Net. And they are discussing it and finding sort of new and innovative ways to do so.

RG: I think that’s so. And I think that some of the setbacks are directly linked to the market downturn. I'll give an example in what happened with KB Toys and KBKids.com. Here’s a company with a Web effort that conceptually made a lot of sense and everything seemed to be in place. They filed their S1 to go public in January 2000 and they were going to go public some time in the March-April time frame. Mind you, they were prepared to keep burning up money with the intent that they were going to have an influx of cash coming sometime in March or April. But as we know, the whole thing dried out. Boom, they hit a brick wall and suddenly, they’ve got a parent company left holding the bag saying, wait a minute, I'm not going to put in $25, 30 million just because you got some problems.

Quisic: Are there any general trends on the B2C side? 

RG: As for B2C, I really see it as going into two broad domains. One is that you'll see the brick-and-click players, like the Walmarts and the Kmarts and the other players of the world coming on board. And you'll see, the pure-plays will really have to become niche players.

Amazon may or may not make it but, beyond that, you know, I think the large-scale mass-market merchandiser on the Net is really not going to work as a pure-play. I mean, that viability is very, very restricted. Pure-plays are very niche-oriented things. 

RG:  Well, in a curious way, in the first wave, when the large companies just “didn't get it,” there was more of a need for them to have a partner to acquire technology. They’d basically say: “Let me find a dot-com player who has figured it out. I don't know what this is, so let’s find somebody else who can figure it out for me.“ That was fine at a time when Internet technology wasn't widely understood, when marketing and branding issues were not so well articulated. Now, there's far less of a need for that.

As the understanding of the Internet becomes more mature, large players are saying, “I can do this myself.” Simultaneously, you also have a cottage industry of consulting firms. And people building specialized practiced targeted to large companies saying, “We can help you. We can make you self-sufficient.”

Quisic:  What issues do these changes raise inside organizations?

RG:  For one, I think internal venturing becomes more significant. Along with acquisitions where, as we know, you can pick up a dot-com for a song right now. Partnering becomes less important and acquisition and/or internal venturing grows. But that raises a whole set of issues around the organization of how the Internet effort is to be treated and integrated with the rest of the company. 

Once again, there aren't right or wrong answers here. In a way, the whole issue is similar to the classic centralization versus decentralization debate. It’s like what I've seen in some companies: Some companies say: “Oh, I got to make it a central function, a corporate function.“ And others will say, “No, I want to have it as decentralized function.” The proper answer, of course, depends on how much similarity there is across the divisions of the company, if it's a multidivisional organization. If there are sufficient commonalities and sufficient synergies to be gained across divisions then companies tend to say, “Well, we need to centralize this activity.” If they're involved in very, very disparate and different activities requiring unique efforts, operating through unique channels, utilizing the Internet in very distinctive ways, then they say, ”No, we need to push it down to the divisional level.“ So, there are issues around sort of centralization and decentralization that are important.

Quisic: Beyond structure, what other kinds of organizational issues arise?

RG: There are issues around staffing and, and recruitment that are problematic. These have become less of a constraint perhaps. Six, seven months ago, big bricks-and-mortar companies couldn't find anybody for their Internet initiatives, you know, because they didn't have stock options to give. But now people have discovered that x percent of zero is zero, and a salary sounds like a good deal. So labor market issues also come into play here, and the internal venture becomes a more viable avenue.

Quisic: What about general integration problems when there’s a good rationale for trying to isolate Internet ventures within a company?

RG: Well, this is something we began to address in the HBR article. There's always a dilemma of trading off integration with separation. Let's take one example, Walmart.com. Walmart decided they didn't “get it,” so they decided to have a venture capitalist from Accel Partners in Palo Alto find a way to do it for them. So Accel hired a CEO; Accel hired the CTO; Accel hired the entire team; Accel also found them real estate--housed them in Menlo Park, or somewhere nearby in the Bay Area. The result is that it all has very little to do with anybody from Arkansas.

They did a wonderful job: They tried to rethink the fundamentals of merchandising and of what it means to be a shopping mall or department store on the Net. It's not the same as being one online. They created the whole thing, but now you’ve got to find a way to link it to the parent operation. How do you link it? What do you with in-store returns? How are you going to handle that inventory process? What prices are you going to use? Or take Grainger.com. Grainger has its online process of buying and selling of MRO materials, but they also have these warehouses where businesses can actually go to pick up stuff and buy it. Questions about linking the bricks and the clicks become very challenging.

Quisic: Do those issues extend into the “soft side” of organizational issues too? For instance, what happens if you end up with two different kinds of culture within an organization?

RG: Oh, absolutely. How do you hire people? How do you compensate people? I've been working with a company recently that is actually trying to transition from bricks to clicks. And there are several issues in play over here. Number one is cannibalization--the fear of cannibalizing your own business. When you're still rewarded for clearance sales as a manager, and you're trying to create a new model of activity that will cannibalize your existing base, you will be very reticent to do that.

Second is simply the skill sets. In a lot of companies, people don't have the comprehension of what the Internet is exactly, how it works, how businesses are created and so forth. And that refers not just to skill sets about the Internet but also about business building. A lot of companies don't have a history of entrepreneurial--or intrapreneurial--behavior. They’ve never had that.

Quisic: How do you build those skill sets in an organization then?

RG: That’s the thing. I think it's like any sort of transformation process in an organization. There has to be leadership. There has to be coalition building around a core team. There has to be a mandate for change. It has to happen bottom-up with top-down support, and top-down with bottom-up support, all trying to thrust this forward. So, it's going to have to go initiative by initiative. It can't be mandated across the company over night.