For the past five weeks we have introduced and discussed key aspects of an e-Business, including, business models, infrastructure, marketing and operations. Last week we discussed financial planning, legal and regulatory issues pertaining to e-Business.
This week we will introduce and discuss some real world applications of e-Business. We will discuss some of e-Business’ noteworthy successes and failures. Additionally, we will discuss the changing role of functional managers in an e-Business.
- What constitutes success or failure in e-Business?
- What are some real world examples of e-Business successes?
- What are some real world examples of e-Business failures?
- How has e-Business changed functional management roles, including, responsibilities, scope, methods and skill sets?
The big picture:
In a chronological sense, the internet is young. But, in this short duration, it has matured us all as business people. When we focus on the learning from the past decade, sometimes, we forget that the key lessons learnt were not in e-Business but in innovation and its adoption. The innovation spanned geographies, industries and business settings. In the process we learnt a whole lot about “how to do business” and hopefully, will be ready when the next innovation appears on the horizon.
Some have argued that the Internet has fundamentally changed the way we do business and we operate in a “new economy”. I am convinced that more than anything, it has reinforced the old laws of business. We just experienced them in a new context.
The equation is the same, the parameters have changed. Business models, strategy, processes etc. are all still important. Value proposition and differentiation still something to strive for. Profitability and shareholder value are still generated in the same way. Sure, some values have changed and we have modified others but the fundamentals have remained the same. Most importantly, perhaps for the first time, we have learnt to look at the entire equation.
No matter which side of the aisle you are on. One thing is for sure, in the least, we have a new channel with unprecedented reach and a new set of tools with great power. Combined with the learning, we have more than made up for the billions spent on the “dot bombs”.
Most importantly, the best is yet to come. In every field, from engineering to medicine, personal security to national defense, non-profit to shamelessly, unconscionably for-profit and “tree-hugging” to deforestation the internet continues to provide unprecedented value. But the best part is the promise of better things to come.
As we proceed, let us beware of the challenges. Much is still unknown. Why did this engine come to a halt? How did this bubble burst? Is there something inherently unstable about “high speed” innovations? How do we better monitor and manage this in the future?
There are other significant problems introduced by the net. Terrorists are using the net to attack us. Asymmetrical warriors are using it to bring us to our knees. Malcontents are using it to attack our computers. Anti socials are using it to invade our privacy. Crooks of all denomination are using it to rob us. Sociopaths are using it to harm our children. The internet has opened a new door to opportunities. However, if this door is left wide open, unwelcome guests can walk in. Security is a critical challenge in this new world. But let us not delude ourselves. These threats may have been exacerbated by the net but they were as real before and might always be. Arguably, security is, sometimes, more in the way we live and behave not in the firewalls we erect.
The challenge, once again, is not in understanding e-Business but the nature of innovations and their interaction with the world around them. The “big picture” includes not only industry, customer, partners and competitors but also the economy, history, society, politics and government policy. Those who forget that are condemned to repeat the same mistakes they take every opportunity to deride.
We have harped on the failures in our past too long. It is time to celebrate the future.
To learn, sometimes, one must dissect. But beware, for every thing one learns there are many that still remain a mystery. Moreover, a confluence of unique factors brings about success or failure. Beyond a certain point, any attempt to generalize or read too much can prove detrimental to one’s own success. Most importantly, one must not let the risk of failure scare them from trying. Some of the most celebrated successes have come after the nth attempt. Some of the biggest flameouts have come after roaring starts.
Webvan.com is perhaps one of the most significant failures in e-Business. This online grocer declared bankruptcy in July, 2001 after burning $1B in just 18 months.
It had all the ingredients of success. A maverick idea to provide convenience to shoppers; products everybody uses; a celebrated CEO in George Shaheen and financial backing to die for.
What went wrong? In a sentence, they learnt, the hard way, that the fundamental laws of business still apply in this “new economy”.
An innovation takes time to adopt. As the customers are learning, so are you. In the interim, give yourself time to adapt and make provisions for your financial survival. If one is the first shipbuilder, sometimes, building a dingy is the best thing to do as that is adequate for the few passengers one gets initially. It also gives one the first hand experience that can make the critical difference between success and failure. The big ship can then be built on a solid foundation and just in time for the big crowds.
· A website does not a business make: You still need warehouses and operations that cost money. The website can be up and about quickly; operations take time to build. The expense and risk is not in creating the website but the business.
· Slow and steady wins the race: Right off the gates, Webvan.com started operations nationwide. This ambitious expansion resulted in enormous debt in which they eventually drowned.
· First mover can also be first loser: The much vaunted first mover advantage has some enormous pitfalls. Creating a market takes a long time and lots of money. Are you going to be there when, finally, the customers come?
· Learn and do: No company can build core competencies in every facet of a business. Moreover, core competencies are not built overnight. For a new business moving at the speed of light and expanding across a vast nation, what was their expertise in that business? They did not make provisions to adapt and learn from their experience in real operations versus vaporware.
· It’s still the profitability, stupid: Admittedly, a business model without the costs for retail space is very attractive. However, what one saves in retail space might be lost in customer acquisition costs. Webvan.com spent enormous amount of money to quickly acquire customers only to be beaten by the innovation bell curve. When revenues do not outpace costs over an extended period, bad things happen.
· Teams win not stars: One of the key reasons for exorbitant costs was the astronomical salaries paid to attract “talent” such as George Shaheen. Ignoring the fact that Mr. Shaheen had never run an online or offline grocery store before one has to marvel at the logic of trying to win a game on a star. If Michael Jordan could win games then why did he need the rest of the team! Any team needs time to adapt to each other. Moving fast when this is happening is asking for trouble.
· The last mile: One of the telecom industries least kept secrets is the disproportionate cost of covering the last mile i.e. the distance from a hub to the customer. That is where economies of scale are lost. This was powerful enough for AT&T, at the time of its divestiture, to get out of the local business and let the baby bells keep it. Grocery and similarly priced items are fundamentally disadvantaged because of this reason. Unless a grocer has critical mass in a market the last mile to the customer might indeed be the last one that you walk.
Peapod.com’s revival is in part because of its tie up with on-ground retailers. Their deep pockets, the last mile and operations are a great complement to Peapod’s online channel.
My own experience with VirtualPrimeVendor.com was similar. We did not have the pleasure of burning $1Billion of other people’s money but our failure had much to do with first-mover disadvantage and not understanding the customer acquisition costs. What was left was taken away by the crash of 2000 when it became near impossible to raise additional funding.
eBay.com is perhaps the most spectacular e-Business success.
· Used by 50 million people worldwide who spend $41 million every day
· Customers range from NASA to Joe Bloe in Timbuktu
· Products range from beanie babies to homes
· Sellers range from IBM to Mary Jane in Spokane
· 150,000 people make their living from stores on the site
And profits? They were up 70% in the three months preceding, Oct, 2002. Pierre Omidyar, who started eBay as a hobby in 1995, is now worth $4.5 Billion.
Why is this juggernaut rolling on unabated? eBay.com has a business model that cannot be duplicated in the on-ground world. Their first mover advantage in the online space makes them virtually unbeatable. They continually gain a larger share of their customer’s wallet by introducing new products and services. Their customer service is exceptional and track record enviable.
Another stellar example is University of Phoenix. It is the largest private university in the world with over 140,000 students, 22,000+ employees of whom, 11,000 are faculty. In 2002, online revenues were $250MM, with a staggering 38% increase over the previous year.
Capella University’s $35MM in revenues and 16.7% growth are impressive but pale in comparison. Why is the competition not even in the same ballpark?
One of the first movers in the distance learning industry, it was quick to catch on to the education market dynamic. The student of today and the future is no longer the 18-22 year old of yesteryears. Predominantly, the students are in their late twenties and thirties, working, and with families. They want education but cannot afford the luxury of an on-campus, full time education. Determining this trend and understanding their customer and market has much to do with UoP’s success. Another factor is a quality operation and pervasive marketing.
Functional management roles:
The internet mania brought with it a lot of challenges for functional management roles. Companies are still trying to adapt. Some created brand new e-Business organizations as they thought this was a “new business”. What we know now is that it affects all parts of a business.
Because of the unique confluence of skills that currently reside in different departments, there is a lot of confusion about its location on the organization chart. In some companies, e-Business started in the IT Organization and in others in the marketing departments. After changing many times it is still not consistently located across organizations.
At a major insurance industry client, e-Business started both in the marketing department and the IT department; strategy and planning skills in the former and implementation in the latter, with steering committees thrown in to bring coherence and consistency of thought and purpose. What about procurement? What about HR? Eventually, there is an attempt to create a separate e-Business organization that services the entire corporation.
Some companies are confusing the need for new skills and competencies with the need for new departments. Combined with an outdated and counterproductive concept such as departmental silos this could be quite a potent cocktail.
E-Business skills span the spectrum from strategy to implementation. However, it is strategy that factors in a new channel not e-Strategy and it is Java programming not e-Implementation. Companies will have to get used to the fact that they need to align markets with channels, process and roles. Synergies and economies of scale will come from creating a matrixed organization around this concept.
What lies ahead?
I believe that the promise of e-Business is yet to be realized. What we have seen will pale in comparison to what lies ahead. Let us take a look at what is emerging:
- Remote surgery: Gall bladder operation is a routine thing. However, the patient in Paris and the doctors in New York! Can you imagine the possibilities for emergency care?
- Internet based voting: Switzerland recently experimented with this. Darn, no more dimple chads?
- Movies on Demand: The holy grail of entertainment, this has been tried and failed a couple of times before. The pipes were not thick enough. However, some efforts afoot give new capabilities. Stay tuned.
- Intelligent Homes: On vacation in another town, who is watching the house? Now you can, on the internet. Starting from work, want to get home and straight to a warm bath? No problem, remotely control all appliances in your house.
- Personal Safety: Going trekking in a remote area? No problem, if you are lost your wireless location and condition system will help rescuers locate you quickly. These systems are also helping keep tabs on our senior citizen relatives who might want to stay by themselves. Commercial applications abound.
- Voice over IP: Ten years ago, it used to cost $2-$3/minute to make a long distance call to India. It is 10c/minute today. Better yet, one can voice chat with anyone in the world for free. Communications costs, an overhead, if reduced, leave more for business investment or profits. In either case it is good for long term growth of businesses and the economy. What about AT&T and other long distance carriers? They better figure out a way to extract efficiencies from the net or they are history!
We started this series by asking: “Is e-Business dead”? Well, it does not need articulation but we will do it for the sake of completion. e-Business is well and alive. In fact it is thriving. Online retail sales in 2002 topped $74 billion. Over the next decade, they are projected to be in trillions. B2B sales are far in excess. Intranets have provided unprecedented efficiencies. Extranets have enabled spectacular value creation.
In the wake of its failures, the net has left us with invaluable lessons in business. The wise will capitalize on them to create unprecedented value for themselves and the society.
It is the internet that will help us recover from the slowdown that has affected us for much of this century. In fact, the next wave belongs to the net. Be there!