For senior management, electronic commerce is yet another of those double-edged swords. On the one hand it can yield great efficiencies, open up new markets at minimal cost, and enhance customer service. On the other, it can disrupt existing channels, damage employee relations, and generate confusion inside and outside the organization.
Based on a number of recent e-commerce assignments, we offer these observations.
For too many businesses, electronic commerce only means on-line sales. However, those who think more broadly and creatively about using the Internet are finding many sources of comparative advantage in business functions from product conception and design, to prospecting, to customer retention. Also, it is often a mistake to simply tack on some element of EC without looking at its impact on the rest of the operation. With all the new options e-commerce offers businesses, now may be an opportune time to update your business model by thoroughly integrating EC technologies with your existing methods.
Increase the Value of Intermediaries
In this new economy, companies are redefining their relationships with intermediaries – dealers, reps, wholesalers and retailers – and vice versa. For example, in the hypercompetitive PC industry, both manufacturers and intermediaries are morphing their traditional business models. As Apple, IBM, and Compaq follow Dell into direct selling, several distributors are offering assembly capabilities to manufacturers.
Forward-thinking companies are enjoying success by treating intermediaries (and suppliers) as real business partners, rather than just friction. We recently worked with an information technology giant to develop an on-line system that enabled distributors to access current and detailed product information. This makes it much easier and faster for distributors to put together competitive bids. The new system has created an information advantage for all connected parties, providing strategic advantages to product developers, production schedulers, sales managers, and those responsible for marketing and pricing.
A growing number of manufacturers, such as Harley-Davidson, provide extensive dealer information on their Web sites, including hot links to the nearest dealer. W.W. Grainger’s Web site has around-the-clock ordering capability linked to the closest distributor for speed and economy of delivery.
Focus on Value Building
Many companies find that Internet sales and service make the existing counterparts more valuable. They use the Internet for routine matters, allowing experienced employees to concentrate on exception items and/or incremental sales. Moreover, sales and service yield per employee goes up while costs go down (see Figure 1). A good example of this is Cisco Systems, the network infrastructure supplier that does billions of dollars in EC. Their on-line sales, service, and technical support systems lower operating expenses by $500 million a year. They also contributed to a productivity increase for account executives and sales engineers of 15% in the last fiscal year.
With the Internet, value-creation opportunities may be possible at nearly every link in the value chain. Don’t ask the broad question, “How can we take advantage of the Internet?” This often leads to a myopic focus on direct selling alone. The better question to ask is “Where along our value chain can the Internet improve business processes and strengthen our competitive position in a unique way?” Value results from the internal and external networks you create. And intermediaries can become, or continue to be, an integral part of these networks.
Network Usage Rates Make the Difference
All companies are likely to see first-order gains arising from electronic commerce initiatives. The real key to improving competitive advantage in the new economy is how heavily a company uses the new EC networks it creates. When intermediaries are wisely used and the overlapping leverage of network efficiencies comes into play, companies find that the benefits can be exponential, as more business moves through the new model.
|Electronic Commerce Value Creation
|Large corporations save 30% (includes 10% price reductions) of total procurement cost by purchasing office supplies electronically.
|Manufacturer offers free “educational” software via Internet; Distributor provides chat room, product tips, and safety data sheets; EC allows more efficient over-the-phone diagnostics.
|Product/service differentiation; existing channel support
|Apparel maker links suppliers to inventory monitors; Airlines market under-subscribed flights through their Web sites.
|Lower costs; market data capture
|Manufacturers’ host co-op informational Web sites, with links to US dealer locations; Provide “customized” Web pages for dealers.
|Higher level of service; current channel enhancement
|OEM offers Internet-based maintenance training to increase mean time between repair of installed equipment.
|Higher level of service; HR productivity increases
Value creation can be built at many links in the value chain.
Innovative firms are already pursuing this concept aggressively with dramatic results. Cisco distributes 90% of its software electronically and 70% of its technical support is on-line. Nearly two-thirds of Schwab’s trades take place on their Web site. In both cases, profit growth has accelerated since the introduction of electronic commerce. And the use of EC shows no sign of slowing. Dell, for example, expects fully 50% of its revenues to come from on-line orders by the year 2000.
The new economy presents serious challenges for almost all businesses. It also promises tremendous opportunities for companies that understand how the new economy differs from the old – and adapt accordingly.
Copyright © 2003,
Easton Consultants. All rights reserved.
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