The next 6 weeks, we will learn the what, why, when, how and where of e-Business. We will go into the root cause(s) of e-Business success and failure and learn a differentiated approach to formulating e-Strategy. This week we will introduce and discuss e-Business strategy and its impact on business models.
e-Business has captivated us for the last 6 years. It has brought about the largest and longest growth in our economy. Post the 2000 bust, there is skepticism and, in severe cases, a stigma attached to anything or anybody who was connected to e-Business, especially a dot bomb. Lately, there is renewed interest in the topic. Skeptics abound but the believers seem to have been shaken out of their stupor.
- Is e-Business really dead? Should corporations pack up their e-Business departments as many have already done?
- What are the lessons learnt from the rise and fall of e-Business?
- How can e-Business be leveraged to produce results for your company or new venture? Can it make a company efficient and/or effective? How?
- Where is e-Business headed next? What is the next killer app?
What is e-Business?
There is no dearth of definitions of e-Business. Everybody has his or her favorites. One has to put them in context. Personally, I like to think of e-Business as business use of the Internet. The “use” results in a business benefit such as higher revenues, reduced costs or reaching an underserved market. The “internet” includes all technologies and applications enabled by the Internet.
The big picture:
The NASDAQ is hovering around 1,400 points these days. In 2000, it was around 5,000 points! What caused this precipitous drop in technology stocks? Was this just a cyclical thing, which will come back to normal over time? Why did the cycle kick in when it did? Was this restricted to the tech sector?
The Dow was at 8,800 in 2002. In 2000, it was at 11,000. What caused this precipitous drop in the “old economy” index? Is the drop in the two indexes related? Why?
The economy was officially in a recession in 2001. Officially, it is growing now. The fed dropped interest rates a record eleven times over 18 months starting in 2001. Why did these unprecedented low rates not produce a spectacular recovery? Why was there no job growth in a growing economy?
We are not studying economics or finance! For crying out loud, what has all this got to do with e-Business?
Ok, enough with the cryptic questions. Here are some of the possible answers. I wish I or for that matter anyone else really knew what happened.
It is argued that this last meltdown was caused by overcapacity and the resulting inventory buildup. This is exactly the thing e-Business was supposed to prevent!
· Wasn’t e-business supposed to make the organization effective and efficient by linking all key processes?
· Wasn’t it supposed to optimize capacity by accurately forecasting demand?
· Wasn’t it supposed to manage production to demand?
· Wasn’t it supposed to optimize the supply chain?
What went wrong with the promise of e-Business?
In the euphoria of this latest technology wave, people celebrated the technology and forgot why it was important. The “e” in e-Business became all-important.
Entrepreneurs sprang up overnight to pursue this new gold rush. It did not matter what business or management experience they had, as long as they had a killer idea they thought they could do it. Investors did not want to be left out of the game and anyone who could spell “internet” got funding. Old economy companies scrambled overnight to put up websites. There was very little thought put into:
· What is this website supposed to do/deliver?
· Does it change the fundamentals of my business? How?
· How this investment will produce results? How will we measure them?
· How does this website connect to the rest of my organization?
· How will all the pieces of their organization work?
This drove of enthusiasts was supported by an unprecedented infrastructure buildup. When the customers did not materialize for their clients, they folded too.
This is one of the possible explanations. There are many more. The effect of September 11 and the uncertainty in its aftermath have not been fully understood either.
Companies, including the ones you work for, reside in this economy. They are affected by it and what they do, in turn, affects the economy. Next, let us look at e-Business in relation to businesses.
What keeps business leaders awake at night?
Our focus here is on the business related issues only! In survey after survey, CEOs’ list the following as their key issues (not in any order):
· Increase Revenues/Margins/profitability
· Reduce/optimize/control Cost
· Produce more with less, faster
· Increase Speed to market
· Better Risk management
· Better Quality
· Attracting and retaining talent
The order and emphasis varies by the specifics of the industry and business model.
Everything that is done within the business should be to address one or all of these issues, in part or completely. The reason is not because we want to keep the CEO happy but to ensure the success of the business. After all isn’t that what it is mostly about!
Can e-Business help?
First, it was the computer itself. Then, there was the network, followed by the database. Then, came the Personal Computer, which would replace the mainframe. The haloed Client/Server model emerged shortly thereafter. Then came successive waves of Enterprise Resource Planning (ERP), e-Business and Customer Relationship management (CRM). Each of these technology waves were supposed to be the panacea the world had been waiting for. Each confirmed one thing: technology for technology’s sake is dangerous and counterproductive!
How dangerous? How counterproductive? FoxMeyer drugs was a $5B company which went bankrupt implementing an ERP system! Prior to the bankruptcy, it was the fourth largest drug wholesaler with over 9% market share. Its revenues had grown 20% for the prior two years reaching $5B in 1994. That system choked this thriving company as it could not handle the order volume and took twice the originally estimated $15MM and the 18 months to implement!
Before you give up and drop out of this course, let me state emphatically that technology can and does produce spectacular results:
· A large technology company reduced its cycle time to reprise all its products from 5 days to 5 minutes
· An office products company reduced its order to delivery cycle time from 2 weeks to 1 day
· An electronic consumer products company reduced its time to close books from 8 days to 4 days
The Internet is such a technology. If leveraged properly with the business context in mind it is capable of producing spectacular results.
How can e-Business help?
For example, take, my client, the CEO of an insurance Company. Should she approve the implementation of a web-enabled system such as Trilogy, which will cost them $20MM, to manage their producers? Trilogy is widely acclaimed for its cutting edge technology.
To get to the answer, one must understand the CEO’s issues. For the insurance industry, the key issue is of spread – the difference between rate of return and cost of capital and. Currently, it is -15% i.e. it is losing 15% annually because it pays 12% for capital and makes –3% on it!
Our guess is that this CEO would like to reduce this spread! The cost of capital is a longer term and harder thing to fix. Another reasonable assumption is that the current market conditions do not allow for higher investment returns. Consequently, the focus has to be on reducing cost. Our problem has just been translated into the following questions: Can Trilogy help reduce costs? How? By how much? When? How will we measure it? Etc.
If Trilogy simplifies and automates the process associated with interacting with 10,000+ producers, provides timely and accurate and commission statements, it can reduce costs by $5MM/year:
- Reduced headcount to provide service to producers
- Reduced paperwork
- Reduced losses due to inaccurate commission calculations
- Reduced opportunity cost in early commission payments
- Increased producer productivity (and satisfaction!)
Not delving too deep into the exact financial calculations and payback models, this example illustrates how e-Business can further a business objective.
Why does e-Business go so wrong in some cases?
Chipshot.com was started by college freshmen. Nothing wrong with that, after all so was Dell, another Internet enabled company! The reason one crashed and burnt and the other is celebrated is because the former did not have a value proposition and the latter has an enviable (unbeatable?) business model. The former focused on the technology while the latter leveraged technology to further its business model.
· Chipshot.com had a great website, over $40 million in spending money and lots of advertising and public relations. However, what was their business model? Was Chipshot a retailer or a manufacturing? Was it a mass retailer or a custom shop? Was it competing with Calloway while selling their clubs? What would it do when Calloway built their e-retail shop?
· Why does Dell beat its bigger rivals such as IBM, HP and Compaq consistently? Why is it profitable? Why has its market share risen while Compaq and HP had to merge to survive? Dell is not a manufacturing powerhouse. It does not make the components it assembles them. In a traditional sense, it is not a retailing powerhouse either. It is not advantaged in its distribution either as it sells direct. The reason it is successful is because it was the first to understand the huge customer demand for built to order computers and built its business model around it. It continuously innovates around that concept. Dell has a great website. However, it is unbeatable because of its forecasting, production, planning and supply chain processes and supporting systems. The Internet for them is just a distribution channel not the business.
Hence the non-negotiable and everlasting bond between e-Business and business!
This focus on technology for technology’s sake resulted in not understanding the promise of e-Business. How can one deliver what one doesn’t understand? The rest, as they say, is history.
Therein lies our first lesson in e-Business: It’s the business, stupid!
e-Business is the art and science of creating business value through the internet. It is first about business then about the Internet. The rise and apparent demise of the net has left some invaluable lessons for the survivors and the new entrants. e-Business as a distribution channel has enabled some companies, such as Dell, deliver spectacular results. However, that has not been done in isolation. Their business model is the key; Internet enables that model; entire processes are integrated for optimal success. Companies that failed in this space did so because they missed these fundamentals, among others.
Next week, we will explore the specific areas and processes in a business where e-Business can create substantial business value.
Sourabh Hajela is a management consultant and trainer with over 17 years of experience creating shareholder value for his Fortune 50 clients. His consulting practice is focused on IT Strategy – alignment and ROI. For more information, please visit www.StartSmartS.com Please feel free to contact him at Sourabh.Hajela@StartSmartS.com or post your questions at www.StartSmartS.com/forums/index.asp.