“The Internet is turning business upside down and inside out. It is fundamentally changing the way companies operate, whether in high-tech or metal bashing. This goes far beyond buying and selling over the Internet, or e-commerce, and deep into the processes and culture of an enterprise.” The Economist, June, 1999
While it is easy to overstate the effect of the online economy, evidence continues to build that the Economist’s view of the impact of the Internet is coming true. E-commerce purchases may gain as much as 5% of retail sales in 2000. The NYSE stock exchange is under pressure to adopt a 24-hour trading network. Ford recently announced its intention to manage its entire supply chain on the Web. Even education is not immune. Distance learning continues to attract thousands of students and, some of the best-known business schools are teaming up with for-profit technology companies to deliver entire degrees through “virtual” classes that incorporate the latest in web design, graphics, interactivity, and access to huge databases of information. This article will examine the roots of this e-business movement and the key challenges it creates for managers who must move rapidly to adapt to the new competitive forces of the network era.
E-business is an evolutionary step in the convergence of the business process redesign movement of the late 20th century and the continuing innovation and investment in communication and information systems. Driven by an increasingly competitive global environment, good management teams have begun to recognize the opportunities in thinking beyond the boundaries of their own internal processes to envision how a “virtual value chain” could improve their sales and lower costs. This concept, described in a seminal article in 1995 by Rayport and Sviokla , sees this value creation resulting from integrating information technology with traditional processes. Fed-Ex was an early mover in implementing this concept when it initiated the service that allowed customers to track their packages on the Web. Frito-Lay’s linkage of retail data directly to their manufacturing plants was another early example of the power of this concept. By linking retail data directly to the manufacturing site, they were able to manufacture the amount required for restocking as needed, lowering inventory costs and eliminating the risk of stale products on the retailers’ shelves.
The subsequent skyrocketing growth of Internet users from a few thousand in late 1995 to over one hundred million today has added a new element and propelled a dramatic shift in marketing strategy. The Web now provides a new channel of distribution that allows producers who formerly had to go through retailers to reach the end user directly. This marketing shift also led to the creation of totally new kinds of retailers such as Amazon that avoided traditional barriers to entry by building cyberstores.
These new online stores have, in turn, increased demand and the number of users, putting pressure on traditional retailers to create an e-commerce presence as well. Suppliers have had to adapt their delivery systems to this new model as well.
Not only cyberstores, but manufacturers and more traditional bricks-and-mortar retailers are sharing information with producers in order to streamline the supply relationship – leading to the current growth of the “business-to-business” movement in which the Web becomes the platform for all transactions.
Effective e-business design and implementation requires that management focus on four major issues:
- Developing a corporate climate for adapting to the network era.
- Understanding customer expectations.
- Analyzing the firm’s ability to manage information technology.
- Recognizing the time frame in which these changes must be made
Adapting to the Network Era
This initiative is the most challenging. It requires implementing an organizational structure which can respond to a virtual community of buyers and suppliers “anytime, anywhere;” a willingness to implement new policies to resolve channel conflict between current resellers and direct Web customers; intensive research into new product opportunities for niche markets enabled by the growth of on-line special interest communities; and a reallocation of financial resources to meet these new objectives.
For those seeking to sell directly online, there are also new pragmatic issues to address. Marketing is still critical, but the challenges are different. Providing security for the customer is crucial, but so is the ability of the business to determine if the sale is legitimate. Fraud is higher in cyberspace than in traditional retail and harder to detect. New businesses are springing up to address these problems, but that means being able to understand their proposed solutions and evaluate them without their having a long track record. While there is currently a moratorium on sales taxes for Web retail, it is by no means certain that will be extended after this year. (For a discussion of this policy issue, read the analysis by students of Pepperdine University’s School of Public Policy in the Spring and Summer 1999 issues of GBR.)
Critical to the success of converting organizational structure to this new challenge is the ability of top management to champion the change. To put this into perspective, many of today’s top managers were halfway up the corporate ladder when the personal computer was invented, circa 1982. Obviously, the creation and growth of the World Wide Web came long after their formative development years. If they try applying traditional management techniques to the new web strategic paradigm, then successful adaptation is unlikely.
Another way to approach management issues is to use the distinction MIT’s Nicholas Negroponte used when he categorized products as “bits” or “atoms.” Bit, or digital, products such as music, publications and even education face major changes in production and sales since they may be supplied directly on the Web, while atom products, such as cement mixers and basketballs, benefit largely from seamless supply chains minimizing inventory and reducing lead times for order fulfillment. In the “atoms’ world, the founder of Dell Computer attributes his firm’s remarkable success to using the Web to streamline the supply chain. By linking suppliers and customers in one information system, Dell can fulfill orders immediately and reduce the costly overhead associated with many coordinating functions. The traditional intermediary, the computer reseller function, is no longer necessary. The Web marketing success did, however, necessitate modifications in Dell’s production system to support the “real-time” delivery of product.
Bit products will also change business in many ways. As one example, the Net is giving rise to numerous “infomediaries” – some of whom play the role of “information broker” or “market maker” and others who perform information-handling tasks. For example, online auctions such as those offered by eBay bring efficiencies to the buyer and seller unavailable in the traditional newspaper classified ad model. eWallet acts as an information-handler by providing online purchasers a way to automatically provide their information to any vendor.
Management needs to understand how these new entries alter the business environment and whether they can be helpful or are primarily competitors. Ironically, almost all E-business success stories are characterized by new ventures whose founders recognized the vulnerability of going concerns that were not adapting to these opportunities.
While we may be in the midst of an enormous shift in commerce, the answer for going concerns may be to ask, “What business are we in?” and then to view answers through the lens of the Internet. Often, the very organizational structure that needs adapting is the thing that gets in the way of those trying to make it happen, whereas new ventures do not have such limitations.
The Web is creating a tougher customer. E-commerce continues to expand consumer choice by providing the tools for them to switch suppliers instantaneously, including the ability to quickly and easily make price comparisons. In many cases, suppliers are dealing with end users for the first time, having previously been shielded by their resellers. Management strategies must consider this ultimate customer for whom access to the Internet presents substitute sources for the form of their traditional offerings as well as opportunities for information.
There are potential benefits as well as concerns. For example, textbook publishers may finally know who reads their books but, more importantly, will be able to deliver selected content online. On the other hand, their authors may find it possible to bypass the publisher by establishing personal Web sites and selling collateral material or future publications directly to their readers.
Customers may not even realize the breadth of the virtual supply chain in which they are participating. The interface through which the customer now deals is on the Web, and he or she may choose among various sites for the same or comparable product. On the other hand, it is likely that much of the supply chain supporting that purchase is one and the same. That is, there may only be a few major players performing the other functions in the chain, and the web “retailer” is the only unique participant.
The concept of “order qualifier” also takes on new meaning when the only interaction with the customer is via the web interface. While price comparisons are obviously easier, other qualifiers such as quality, service, or market appeal become uniquely delivered. How a traditional organization adapts to deal with this new model significantly affects the likelihood of success.
Assessing IT Skills
Web technology is characterized by rapid breakthroughs in software and hardware. This factor has given rise to a new group of firms called application solution providers (ASPs) who offer an opportunity for firms to outsource their IT management. The network becomes the computer. These services are provided for a subscription fee assuring that latest versions of hardware and software are available to the ASP’s client. More importantly, back-up communications and servers provide “always on” operation. The client also avoids the costly process of hiring and retaining scarce talent.
Other benefits include the option of developing a number of applications concurrently instead of being limited to in-house resources. In-house resources tend to be micro-focused and work sequentially through projects. In addition, development is limited to the capability of the in-house resource. The availability of specifically skilled ASPs is a critical advantage in meeting the time constraints and the variety of needs of the Web economy. However, management must make the ASP an integral part of its planning and operation to gain the full benefits of the relationship. For traditional organizations, allowing ASPs access to the “inner circle” of data and information can be a daunting prospect, yet it is a necessary one if a firm is going to achieve success in this venue.
One overriding attribute of the past five years’ experience with Internet initiatives has been the urgency to develop and implement competitive Web strategies. One of the most visible and oft-cited examples is that of Dell overtaking Compaq’s leadership in the PC market. While Compaq had built a successful franchise through dealer channels, Dell recognized the customers’ willingness to buy directly from the manufacturer and to do so online. This strategy allowed them to build on-demand, minimizing inventories and configuring machines for individual needs. Similarly, Barnes and Noble took a “wait and see attitude” toward Amazon and now finds itself having great difficulty in increasing its market share of Web sales.
The strategic time compression created by the Internet may be the single largest contributor to the number of small, upstart competitors on the Web. There are two main reasons that this gives them an advantage. First, the cost barrier to entry in the web market is virtually zero and, second, small new companies do not have a formal infrastructure through which strategic ideas get squandered. By the time a large firm has approved a capital budget to implement a strategic web idea, some small group of idea people backed by a venture capitalist has already implemented it.
Business is still in the early stages of experiencing the full impact of the e-business phenomenon. The Internet not only provides a valuable e-commerce retail venue, it provides a dynamic and economical platform to virtually integrate a firm’s value chain. The management task is to leverage these opportunities quickly to sustain or enhance competitive advantage.