BIO Peter S. Cohan is president of Peter S. Cohan & Associates, a management consulting firm. Mr. Cohanšs venture capital business is building a growing portfolio of Internet venture investments. His firm helped finance Andromedia, an Internet software company, which was acquired in December 1999 for $440 million in stock by Macromedia (MACR) and SupplierMarket.com, an online market for industrial products, which was acquired in August 2000 by Ariba (ARBA) for $930 million in stock. His firm also invested in Round1, an online private equity market, Epesi Technologies, an Internet infrastructure firm, and 3PLex.com, a third-party logistics infrastructure firm. Cohan serves on the Advisory Boards of Round1, Epesi Technologies, Lexar Media (LEXR), and 3PLex.com. Cohan is a frequent speaker and TV commentator on high technology. Validea.com calculates a 52% six-month return on his 2000 stock picks. Bigtipper.com recognized Cohan as the Top Tipper of 1998 for the 68% return of his CNBC stock picks. His 1999 stock picks returned 239%. TeamAsia called Cohan "one of the top two or three technology strategists in the world." Singaporešs Institute of Advertising called Cohan "the Peter Drucker of the New Millennium"

1. A lot of companies spun off their e-commerce sites in separate IPOs. What are your thoughts on this topic, and can you comment on the success or failure of this strategy?
— Colby, Salem, Mass.

Almost two years ago, the concept of Internet spin-offs was all the rage. The argument went that in order to create a successful Internet business, traditional companies needed to spin-off a separate subsidiary and free that subsidiary to compete with its parent.

In recent months, the spinout theory has been turned on its head — yielding spin-ins — as more and more companies announce that they are consolidating their Internet divisions.

To wit:
NBC bought back its NBCi spin-off for $65 million CBS's announcement on February 15 that it will roll CBS.com and CBSnews.com back into the television group; CNBC.com's February 15 announcement that it wills layoff 26% of its staff — rolling the dot-com unit back into its broadcasting division; CNN's mid-January announcement that CNN.com would report to the global news network's broadcast division; News Corp.'s January 4 announcement that it would fold its dot-com units, Fox.com and FoxSports.com, back into its broadcast operations; and Drug distributor McKesson HBOC announced in February 2001 that its McKesson unit would be folded back in to the parent's Healthcare Information Technology Business segment. McKesson said that it was no longer advantageous to operate iMcKesson independently.

These spin-ins were foreshadowed in an article published 18 months ago entitled — The Dilemma of The Innovator's Dilemma

As I noted then, the spin-offs — motivated largely by a desire to cash in on the dot-com stock mania — were probably doomed because they were cut off from the parent's resources which would probably be important to perform all the activities needed to offer a superior customer value proposition.

What does the future hold?

I believe that the Internet remains a powerful tool for enhancing business productivity. If used for cutting the cost and improving the quality of the interaction between a company and its stakeholders — e.g., customers, suppliers, employees, and shareholders — investing in Internet-induced business change can yield measurable returns.

2. When do you feel that traditional brick and mortar business, like Wal-Mart and Home Depot, will begin to realize profits from their ecommerce initiatives, and how? Wal-Mart, for example, has really struggled with developing a successful online presence.
— Duncan, Framingham, Mass.

Traditional brick and mortar businesses like Wal-Mart and Home Depot are suffering with their online units for three reasons:

• They operate their online units as separate entities from their parent companies
• They were originally established to make high returns for investors by taking them public during the dot-com boom
• They are not designed to configure activities in a way that creates superior value for customers

To understand what would need to happen in order for Wal-Mart and Home Depot to succeed online, consider an analysis of a partnership between Amazon.com, the online retailer, and Wal-Mart, which was rumored to be under negotiation in March 2001.

Let's start by looking at the things Amazon and Wal-Mart do really well. Wal-Mart's biggest strengths are things that are difficult to notice. Wal-Mart has a very sophisticated procurement system that allows it to manage inventory and get that inventory to the right stores before the shelves empty. As of November, Wal-Mart had 1,722 of its flagship stores in 50 states, plus 868 'superstores' and 472 discount Sam's Clubs. That's 3,062 stores in the U.S. alone - plus another 1,065 internationally.

The 3,062 U.S. stores encompass about 378 million square feet of space - about 13.6 square miles. Wal-Mart sold $193.3 billion of goods last year Wal-Mart has to keep track of all that inventory in all those stores, anticipate runs on items and slow sellers so they can steer the right things to the right stores, and physically get the things from warehouses to the right stores quickly and efficiently.

The size gives it a strength in negotiating prices from vendors. That's why prices are lower at Wal-Mart. Amazon, who calls itself the world's biggest online store, is small in comparison. Last year, they sold $2.67 billion of goods - about 1/72 as much as Wal-Mart. Since there are no real-world stores to deal with, Amazon's handful of distribution centers only have to keep stock of best-selling items. Compared to Wal-Mart, Amazon has a much less sophisticated procurement system. And because of its size, Amazon doesn't have the clout to bargain with suppliers the way Wal-Mart does.

What Amazon does very well, is provide information on the 28 million items it sells. When consumers look at any of those items, the site tells how long it will take to ship, and if you buy something, it follows up with emails along the way. It also has a data base of all of its 29 million customers and everything they bought, which it uses to recommend items to customers. This database has taken programmers years to develop.

Amazon does other things well-it provides great customer service if you have a problem. But things like that are matter of corporate philosophy and not a tangible asset like the software.

Simply put, Amazon's strength is its front end for the user to look at stuff, Wal-Mart a great back end to get the stuff to the right places at the right times, and the size to get it at the right price.

Of course Amazon has procurement and distribution systems, and Wal-Mart has a web site. But neither one can really compete with the other on the other's home turf.

I can't see Amazon ever getting competitive with Wal-Mart in these areas.

Just the sheer scale in the difference in size of the two indicate that Wal-Mart would always have a significant advantage. As for Wal-Mart's walmart.com Web site, it basically appears to not be working that well as evidenced by the recent layoffs at the site.

Because of that, Amazon should get out of the business of dealing in the world of stuff and just refine its skills in the virtual world where it is likely to enjoy an advantage. Specifically, Amazon's survival depends on not needing to make investments in warehouses, inventories, and people who answer phones. So if Wal-Mart can perform these stuff-intensive activities then Amazon can become a profitable provider of consumer e-commerce platforms with far fewer people and lower cash requirements.

In conclusion, Wal-Mart and Home Depot will succeed online when they put together a truly world class collection of capabilities to handle both the virtual and the stuff-intensive world in a way that provides a competitively superior value proposition for consumers. This could mean Wal-Mart replaces its Web site with one operated by Amazon and links that Web site tightly to Wal-Mart's procurement and supply chain capabilities.

3. What is on the horizon for Lucent Technology?
— Bluqe, Islip, NY

Lucent has three options: remain independent, file for bankruptcy or find a buyer. By Fall of 2001, Lucent's management is likely to have made a decision on one of these three options. At the moment, the second option appears most likely.

On June 5 Lucent Technologies Chairman and CEO Henry Schacht indicated that Lucent would show a modest improvement in revenue for the third period over the previous quarter, which ended on Mar. 31. Although Lucent will lose billions of dollars in the quarter, the promise of slight revenue growth was enough to offer slim hope of a turnaround.

Slim is the operant word. Even as Lucent completes the 10,000 layoffs it announced earlier this year, Lucent still needs to sell off its fiber optics unit in order to raise $2.5 billion to satisfy lenders.

It also needs to complete the spin-off of its optical electronics unit, Agere Communications, by September, under the terms of an initial public offering that Agere completed this spring. Schacht also implied on June 5 that Lucent's restructuring efforts will only intensify in the coming weeks. Lucent is also looking for a new CEO to replace Schacht, who is in the post temporarily.

Now that Lucent's proposed $24 billion merger with France's Alcatel has fallen through because of disagreements over whom would run the merged company. Lucent could remain independent, seek a new buyer, or file for Chapter 11 bankruptcy protection. Here's how each of these scenarios might play out:

Remain Independent: In order to develop a strategy to remain independent, Lucent needs a new CEO. Unfortunately, it is difficult to attract a world class CEO into Lucent now because Lucent's financial condition is so precarious.

Should Lucent succeed in attracting a great CEO, that person's first priority will be to get Lucent customers to pay their bills. At the end of March, Lucent had over $6 billion in accounts receivable. Some of those bills might never be paid, because Lucent lent so much to telecom startups that are now facing insolvency. That's one of the reasons Lucent could have trouble paying its debts by September. If Lucent does not manage to do that by selling its fiber-optic unit within a few months, any plan to stay independent might evaporate.

Filing for Bankruptcy: On June 5, Schacht called the sale of Lucent's fiber-optic unit "imminent." But the fiber-optic unit has lost half its value in the past few months — both because it has been on the market so long and because Lucent is selling into a buyer's market. Corning, Alcatel, and Furukawa Electric are rumored to be among the bidders for the unit, which is expected to sell for between $3 billion and $5 billion.

If the sale is not completed, however, Lucent will enter a liquidity crisis that will overwhelm its current problems. On June 12, Lucent slipped into junk bond territory as Standard & Poor's lowered its corporate credit rating Lucent to double-'B'-plus from triple-'B'-minus with negative implications. As a result, filing for Chapter 11 protection is a real possibility — if Lucent's lenders decided to force the issue.

While Schacht would try to avoid bankruptcy, as the resulting public-relations problem would make it even harder for Lucent to sell products, bankruptcy protection could give Schacht some space to consider buyout offers similar to the one from Alcatel.

Finding a Buyer: Of course, finding another buyer soon would be the easiest way to deal with the September deadline for new cash. Potential buyers could again include Alcatel and Swedish telecommunications company Ericsson. In six months, Lucent could be more desperate — and thus settle for any reasonable offer.

Whichever of the three options Lucent takes, Lucent needs revenue growth to recover. Lucent recorded revenues of $33.6 billion in 2000, a figure that is expected to decline 25% in 2001 to $25.7 billion.

Lucent posted earnings from continuing operations of $3.4 billion, or 93 cents per share, in 2000. But in 2001, its loss, based on the estimates 27 analysts surveyed by First Call, will be around $2.3 billion, equal to a loss of $1.05 per share.

Lucent executives will be forced to make a decision by Fall 2001. By then, Lucent's financial position will either have improved significantly — or Lucent will be in heightened crisis mode. The latter outcome appears more likely at the moment.

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