Coffee uber-retailer Starbucks generated advance publicity for a new Web site by promoting its premiere at another site--one it knew was visited by its target customers. As the coffee chain prepared to move its Internet presence from America Online to the Web last summer, Starbucks managers announced the news at a site where they thought their customers would see it: Lilithfair.com. As a 1998 sponsor of the concert event, Starbucks received a glowing write-up and a valuable link on the tour's site. "It let people know when we'd be launching the Web site," says Internet manager Heidi Wells, "and we got some experience in linking." The strategy can work just as well for newly renovated sites. --Susan Greco
Due-diligence dividends
In 1994, Derrick Rowe had a $5-million two-way-radio company that serviced oil rigs in the North Atlantic out of St. John's, Newfoundland. The business was relatively healthy, but Rowe had big ideas. He gave it a new name--Stratos Inc.--and quickly moved to enter a tough-but-growing global market: mobile satellite service.
The problem was capital. Satellite equipment is expensive. Rowe didn't think he could raise enough to start selling satellite time to big corporations. So he devised a strategy that would give him long-term credibility with investors.
Rowe knew that several large communications companies were running unprofitable mobile-satellite divisions. If he could acquire those business units at fire-sale prices, he could get into the business cheaply. But his first moves needed to be smooth if investors were going to fund the rest of his plan.
Rowe's first acquisition target was IDB Mobile Communications, a troubled company co-owned by Worldcom and Teleglobe. IDB wholesaled satellite time to carriers like Sprint and AT&T. Rowe persuaded IDB to let Stratos serve as a distributor for its services--in essence, becoming a retailer to IDB's wholesaler. But his larger mission was to gather intelligence about the company so that he could later make an informed bid.
In return for selling IDB's service, Rowe got a window to the company's soul. He soon decided that the reason IDB had floundered was that the company never tailored its service to customers' needs. "IDB really needed to beef up customer care," Rowe says. "Nobody at IDB was on the front end talking to users."
In 1996, Rowe made a calculated offer and swapped 30% of his own stock for Teleglobe's 50% stake in IDB. The transition to new ownership went very smoothly, since IDB's staff already knew Rowe. "It was welcomed by us because people had been exposed to Derrick and were very impressed with his style," says IDB vice-president Joanne Suppa.
"We went in quickly and built a direct sales force," Rowe says. The following year, Stratos bought Worldcom's stake for $5 million in cash, plus $1.5 million in convertible shares. Today Stratos is where Rowe wanted it to be: it sells hardware and satellite time to communications companies like CNN as well as to the military. It has completed four acquisitions since IDB and had $91 million in sales last year. Rowe says that his hands-on distribution experience has taught him "all the tricks" of the industry for superior due diligence. --M. H.
Big-time IT for small companies
Have you ever dreamed of outsourcing your entire IT burden--cheaply? A few start-ups are teaming up with tech-industry veterans to help small companies rent high-powered software--namely, enterprise-resource-planning (ERP) packages from SAP and PeopleSoft that, until now, only companies with more than $50 million in sales could afford.
The start-ups--dubbed application-service providers (ASPs)--provide a way for ERP makers to target small businesses. "PeopleSoft wanted a partner that could focus just on midmarket and under," says Jim Zemlin, director of marketing for Corio, an ASP in Redwood City, Calif. Corio implements and supports PeopleSoft systems for midsize customers, charging a flat fee of $100,000 to $150,000 and monthly rent of about $850.
"We could not have purchased PeopleSoft all out. It would have been well into the millions," says Alan Fraser, president of Vertical Networks, a Sunnyvale, Calif., start-up that inked a three-year contract with Corio.
As upstarts like Corio, USinternetworking, and FutureLink have led the ASP charge, large players like EDS have begun offering leasing deals with systems makers J.D. Edwards and SAP, respectively. Meredith McCarty, a senior analyst at International Data Corp., predicts this year's spending on enterprise ASPs will be $150 million and forecasts a $2-billion enterprise ASP market by 2003. "It's still emerging. The big hurdle is just the evangelization of the concept," she says.
Not everyone is convinced, though, that this is a good idea. Daniel Maude, CEO of Beacon Application Services, a $14-million consulting firm in Framingham, Mass., believes the cookie-cutter approach of ASPs--in which basic copies of the software are leased by many different clients--won't work for midsize companies, whose size and complexity demand individualized solutions. "If you want something that runs your business, as opposed to just runs a business, you'll stay in-house," he says. --Ilan Mochari
My Biggest Mistake
LILLIAN VERNON
Founder and CEO of the Lillian Vernon Catalogs
There are so many flukes in the catalog industry that you have to constantly assess what your customers want and need. I like to listen to the phone calls we get from people ordering merchandise. I probably spend some time once a month listening in on calls or talking to customers. I encourage my executives to do the same.
That practice helped us a few years ago, when the prices of paper and postage went up. Paper accounts for a huge percentage of the overhead for a catalog company like ours. We cut back the number of pages in each catalog, and we stopped mailing one catalog of sale items entirely. From customers' calls, I realized that our reaction to this setback was all wrong. Neither of our actions was a good decision. I reversed them in short time.
