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Non-Tech : E*Trade (NYSE:ET) -- Ignore unavailable to you. Want to Upgrade?

To: Spytrdr who wrote (6988)	6/8/1999 8:16:00 AM
From: ecommerceman	Respond to of 13953

Interesting article posted at RB EGRP on the challenges faced by Merrill... "Aaargh! That's the sound of yet another industry--Wall Street, this time--running headlong into the Innovator's Dilemma, the problem first described by Clayton M. Christensen, a Harvard business school professor, in his best-selling 1997 book of the same name. Christensen's argument is simple: When successful companies are faced with a big technological leap that transforms their markets, all choices are bad ones. Doing nothing is not an option, as Merrill Lynch & Co. and other established outfits have learned. Facing a major innovation like the Internet with a head-in-the-sand strategy can maintain profits in the short run. Long-term, however, market share and profits are going to be eaten away by low-cost upstarts. RISKY BETS. And all the alternatives have their problems. Competing with the startups by adopting their technology forces an established company to behave like a startup itself. That means making big bets on unproven technologies and markets that never may be capable of producing decent earnings. Of course, venture capitalists make such risky bets all the time, since they are prepared to accept big losses in exchange for the chance of a big gain. But at most established companies, managers, workers, and stockholders are not ready to take such enormous risks. Or Merrill could try and take a middle path--as it is already doing. Its latest plan calls for offering low-cost online trading, while still using its existing brokers to provide high-margin financial planning services. Such a fence-sitting strategy may mean getting the worst of both worlds, since it keeps the high cost structure of the established company while simultaneously incurring the enormous new expenses of setting up large-volume online trading. Indeed, Christensen's conclusion is that it is very difficult for an existing successful company to take full advantage of a technological breakthrough such as the Internet--what he calls a ''disruptive innovation.'' Instead, he argues that the best way to cope is to set up a completely separate organization that can function as a startup. Despite his depressing message, Christensen's book is drawing enormous attention these days from top managers. In part, it's because he does not blame the problems of established companies on stupid decisions by executives. Rather, he explains how the habits that led to success make it tough to deal with new technologies. For example, successful companies are usually very good at listening to what their customers ask for and then delivering it. But a disruptive new technology changes the customer base. In Merrill's case, online trading will bring in new customers with different needs and requirements than those of its existing full-service customers. What's more, under traditional planning processes, it's impossible to justify enormous investments to compete in small, yet-to-be profitable markets. Christensen writes: ''Investing aggressively in disruptive technologies is not a rational financial decision for [established companies] to make.'' The trouble is that by the time the new markets are large and profitable enough to justify the investment, they are already occupied by entrenched competitors. Merrill, for instance, is offering its retail customers low-cost online trading only after Charles Schwab & Co. and E*Trade Group Inc. established themselves. Unfortunately, there is no guarantee as to when a new market or a new innovation will be profitable--or whether it will make money at all. ''Not only are the market applications for disruptive technologies unknown at the time of their development, they are unknowable,'' notes Christensen. To be sure, a well-run established company can still survive a wave of disruptive innovations, and perhaps even prosper. But if Christensen is right, the spoils of the New Economy will go to the companies and people who are willing to think like venture capitalists. That's not an easy thing to ask of managers who have succeeded by taking prudent risks with their shareholders' money and following the wishes of their faithful customers. It's a dilemma. By Michael J. Mandel