For many companies, electronic commerce is a nightmare. Customer behavior is hard to predict. Prices may be under pressure. Competitors appear from unlikely places. Organizations react sluggishly even when executives try to goad them into action. And it's not always clear where the profits are.

I'm sympathetic. As the chief executive of a publicly traded company, I know the pressure of making your numbers each quarter in a turbulent environment. Through the consulting work we do at Diamond, I've also seen how hard it is for even extremely sophisticated companies to figure out the Internet.

Still, I'd like to venture some answers—or at least some good, tough questions that have helped clients figure out how to thrive in the new business environment and that each of us needs to try to answer. The questions are:

WHAT IS YOUR NEW INDUSTRY STRUCTURE? You likely will find yourself dealing with powerful new intermediaries. A client in the travel industry, for instance, says just 25% of its customers book rooms through travel agents. But the popularity of Internet travel services will boost that percentage and cut into our client's direct relationship with customers.

You'll also find yourself facing competition from outside your industry. Some newcomers, like the omnivorous Microsoft, will be able to spend heavily to enter your market. Others will be nimble companies that aren't burdened by traditional ways of doing business. Intuit, for instance, is using its popular Quicken software to offer numerous banking services without being regulated as a bank.

The key to dealing with new structures is relatively straightforward: Stay on the lookout, even if it costs you money to figure out whether some newcomer is a real threat or a false alarm. You should also build "lobster traps"—finding incentives for customers to stay loyal to you despite the new competition.

WHAT ARE THE NEW ECONOMICS? While skeptics note that Internet stars such as Amazon.com aren't profitable, they miss a crucial point. Even if Amazon never earns a penny, its discounting and its range of titles have transformed the book-selling business forever. The Amazons of other industries are depressing margins across the board. Their effect will last even if they don't.

So you will likely need to find new ways to make money. That may mean setting up buying clubs, like Cendant's NetMarket, which collects upfront membership fees in return for guaranteeing the lowest price on products. That may mean becoming a broker, like Edmund's. It was long in the business of selling information on auto prices to car buyers but has now become a successful broker by steering on-line readers to car dealers and auto insurers. That may mean looking for a host of new revenue sources based on service and customization.

WHAT IS THE NEW CUSTOMER BEHAVIOR? A customer told an executive at a heavy-equipment maker, "I pay Federal Express $7 to send a package, and it can tell me when the package will arrive, give or take two hours. I pay you $300,000 for a piece of equipment, and you can't tell me to within three months when you'll deliver it." This executive had stumbled across a huge change. Your customers' expectations are being set by the best of breed in any industry, not just yours.

Perhaps the biggest change is that businesses like Edmund's are giving your customers detailed information on your costs, providing them much more leverage over you. Doctors have already found that patients may know more than they do about their diseases, because the patients have researched their conditions so thoroughly on the Internet; salesmen may soon find themselves outgunned by customers on product information.

Unhappy customers can vent their frustrations oh-so-publicly, as United Airlines frequent flyers do at www.untied.com. Customers can also get together on-line and force you to sell to them at low, bulk rates.

Changes in customer behavior are, by the way, happening far faster than even the Internet optimists predicted. Just look at how much commerce was done on-line over the holiday season.

The only response is to roll with the punches. Don't be the one who says, I shouldn't invest too much in on-line commerce because it's still such a small percentage of my sales. The growth rate for e-commerce is exponential, so it'll soon be a huge percentage. Merrill Lynch pooh-poohed on-line trading. Now, Charles Schwab, which moved on-line early, has a market value that exceeds its much larger competitor's.

HOW DO I REORGANIZE MY BUSINESS? Alan Kay, who was one of the principal developers of the personal computer and who is now a Diamond Fellow, says that "in a rational world there would never be a successful start-up." The reason is that big companies have many times as much money to invest in new ideas as venture capitalists do. But many big companies can't seem to get out of their own way.

I've never witnessed, first hand, a company grow a successful on-line business as part of its normal operations. The right answer seems to be to get into new businesses through acquisition or through "intrapreneurial" ventures that are kept separate from the main business.

HOW DO I IMPLEMENT THE NECESSARY CHANGES? The implementation is complicated, detailed work, so I'll have to limit myself to two brief observations. Because an on-line business requires so much change from a physical business, the chief executive must drive it personally. You also need to make sure that your people have the right incentives to make the new business work, rather than smother it. Schwab succeeded because Charles Schwab himself forced the change and because he compensates executives based on share-of-customer wallet. The compensation program encouraged managers of his brokerage offices to develop the new, on-line channel rather than view it as a threat to their individual profitability goals.

WHERE IS THE VALUE? Some of the value in moving on-line is defensive. You have to do it or risk losing your business. During a technology transition in the early 1990s, Encyclopedia Britannica hesitated to move to CD-ROM technology because it already had a lucrative print-based business. It's now a minor player in a business it once dominated.

On the positive side, if you can understand your new environment well enough and move fast, we could all end up reading stories in which executives say they want to shake up their industries in the same way that you shook up yours. At the moment, small companies are getting the big jumps in stock-market valuation from the Internet, but it doesn't have to always be that way.