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Start-ups enter an awkward adolescence

Barely four years into the Web revolution, some of the "older" Internet companies (the portals, Amazon.com) are entering their adolescent years. This transition may prove as awkward for companies as it is for many teenagers.

Barely four years into the Web revolution, some of the "older" Internet companies (the portals, Amazon.com) are entering their adolescent years. This transition may prove as awkward for companies as it is for many teenagers.

Firms in their adolescence will no longer enjoy a world that views them with unbridled optimism and the expectation that they can grow up to be anything. The expectations will be higher and the penalties for failure more severe.

In addition to the world viewing them with a sharper eye, the companies themselves will face growing pains. How these companies adapt and learn new strategies as their businesses and industries grow will determine how successful they can become as mature companies.

To prepare for this next stage of development and those that come afterward, companies must ensure that they continue to adapt, either through internal learning or by observation of others' successful efforts. Strategies that were successful in a firm's early years may be unsuccessful or even detrimental as a firm matures.

Early strategies that might have focused on identifying a market opportunity, establishing a brand, and attracting potential customers to the site must give way to the nuts and bolts of execution. Optimizing merchandising, distribution, and fulfillment, as well as developing world-class technology that is both scalable and reliable, are significant challenges that often require a skill set different than what was required in a firm's early years.

Organizational structures also typically change during this period. Web start-ups tend to be nonbureaucratic, loosely organized groups of people focused on pursuing a specific opportunity, which may change week to week. The agility that allows start-ups to adapt quickly to opportunities and recover quickly from mistakes is difficult to maintain and arguably not the best strategy for larger organizations that require greater structure and internal and external coordination to operate efficiently. This stage of evolution will likely require firms to recruit skilled management from traditional companies for certain positions.

Remaining competitive as the firm grows requires a delicate balance between exploration, or "learning by doing," and exploitation. As organizations mature and by necessity become somewhat more rigid, it is important that a structure is put in place to enable constant learning.

Organizations that can remain shrewd learners as they mature will adopt successful strategies earlier on when they are more profitable and the capital costs of incremental change are less. Exploitation, which becomes the easier path to learning as organizations get larger, involves observing and copying the successful strategies implemented by others. In doing this, companies can avoid some of the mistakes made by others.

Many of the early Internet leaders are entering a critical new stage of development in which operational issues become increasingly important. Successful navigation of this adolescent stage will require new skills, greater organizational structure, and perhaps some key, experienced hires.

Just as we've seen few traditional companies experience success in the early days of the Internet, not all Internet start-ups will successfully pass through this next stage of evolution. Those that do will have found that delicate balance between exploration and exploitation.