What to Expect
e-Business is changing businesses, jobs, and lives. The tricky part is figuring out which changes matter. Successful managers anticipate the impact of recent economic and technical trends on their current business models and accompanying business practices. These managers act before the economic ground shifts beneath them. By staking out opportunity and capitalizing, they beat out their competitors, whose superficial focus keeps them unaware of the changing business patterns beneath the world of business-as-usual.
As a result, many CEOs are asking themselves, Under what business models does my company and industry operate? How do we conceive a new model to ensure our future success? Many of the CEOs we have met over the years are overwhelmed by these questions. To answer them, CEOs enlist the help of strategy-consulting firms, academics, and other business gurus—advisers who seem to generate new theories every few months, often creating their own form of chaos. For the practicing manager, cutting through this cacophony of advice can be daunting. What's to be done?
What are the first steps toward creating and implementing an e-business model that meets the company's future needs?
The journey toward creating new digital strategies starts by answering the following questions.
• Which business models are taking hold in my industry and why? Do I clearly see the business model changes behind the apparent chaos in my industry?
• Which set of strategic moves puts me in the best position? Is my organization capable of adapting to the required business model changes?
In this chapter, we highlight several emerging e-business patterns: e-channels, click and brick, e- portals, e-market makers, and pure-e. As you read the chapter, ask yourself with which of these emerging business patterns your company is attempting to compete. Reflect on the pattern's busi- ness requirements and whether it is a good fit for your firm. Answering these questions will help you get started with assessing your company's digital strategy.
• Could America Online have become more powerful as an independent service provider? What made AOL want to merge with Time Warner? Did AOL see before anyone else the potential impact of high-speed cable modems and broadband DSL connections on the business dynamics of online entertainment and competition?
• Would Amazon.com have been more profitable if it had remained a pure-play e-company selling books? Why did it have to transform into a click-and-brick firm by building warehouses? Did Amazon realize before others that successful e-retailers need to have both an online portal and a physical fulfillment infrastructure to distribute and warehouse their products? However, does Amazon have the management skills to manage bricks?
• Would Yahoo! have been more successful as just a search engine? Why did Yahoo! choose to acquire other firms and transform itself into an online media network? Did Yahoo! realize that in order for its advertising-based business model to succeed it needed more sticky portals, such as GeoCities and Broadcast.com? Is the next move for Yahoo! to merge with CBS or Disney?
• Could Disney have become a top online brand with the same durability, versatility, and magic that its offline brand carries? Is this why Disney created the infamous Go.com portal with the InfoSeek acquisition? Does Disney have the integration skills to fuse click-and-brick brands?
• Could Chemdex have become more successful if it had remained a pure business-to-business (B2B) exchange in the life sciences market? Why did it become Ventro, a holding company servicing multiple vertical markets? Did Chemdex realize that the size of the initial market was too small and the margins too tight? Would it have been better off merging with an old-line distributor?
e-Business Patterns: The Structural Foundation
Market turbulence makes understanding, let alone predicting, strategic movements very difficult.
Practicing managers, consultants, investors, and students all face the problems associated with analyzing a dynamic market environment. For the manager, market volatility makes it more difficult to see the forest from the trees. As the environment changes, managers need to ask the following questions.
• Are we investing in the right business opportunities?
• Are these opportunities ever going to be profitable?
• Are we using the right business model to attack these opportunities?
In today's environment, more than ever, managers of old-economy companies need the right tools to support and to improve their effectiveness when making major strategic moves, allocating scarce resources, and managing risk. Why? Because the large old-economy companies—from consumer products to industrial manufacturing—have begun to see relatively small pieces of their markets taken away by new, Web-enabled firms. As a result, those companies are waking up to the e- business threat and have started to push toward more efficient digital strategies based on optimizing the customer's experiences, integrating their value chains, and accelerating information flow.
But choosing a target strategy is complex. For instance, as large brick-and-mortar corporations move online, they often choose one of two options: (1) swallow a start-up and take advantage of its domain knowledge, brand awareness, experienced staff, and established fulfillment services; or (2) go it alone. But what is the right approach? Take, for instance, Kodak, which is adopting a hybrid approach, both competing and collaborating with digital companies. Kodak made an equity invest- ment in Snapfish, an online photo-processing company but also launched its own photo-finishing service: PrintAtKodak. Simultaneously, Kodak unveiled a vendor-supplier relationship with Shut- terfly, whereby Kodak will process prints for Shutterfly. Kodak is clearly hedging and attempting to reduce risk by pursuing multiple strategies at the same time.[1]Is your company adopting a strategy similar to Kodak's?
As the focus shifts from physical assets to digital assets, managers should monitor macroeconomic and customer trends to trigger new e-business structural designs. The resulting new business mod- els, in turn, are the genesis for the next generation of corporate strategic planning. However, many companies still don't take the digital world seriously. As America Online president Bob Pittman no- ted, some of the retailers he meets have "500 people devoted to new store openings and two college kids working on the Web site."[2]
Clearly, we are in the early stages of a revolution that is changing the business landscape. As with any revolution, there will be moments of extreme optimism, when the potential reveals itself; there will also be moments of extreme pessimism, when skepticism rules. However, one thing is certain:
e-Business is creating new opportunities for companies willing to adapt. For other companies, this
Digitizing the Business: e-Business Patterns 47
same revolution represents a destabilizing threat to the status quo of business-as-usual. When all is said and done, we'll find a few big corporate winners joining the ranks of the premier companies in the world. In this chapter, we help identify these winners, discussing the characteristics leading to their success. We also analyze several discernable e-business patterns in hopes of bringing a better understanding at a time when the revolution is loud and the din of shifting paradigms is ev- erywhere.
Going Digital
e-Business is tricky business. The first step in identifying an e-business leader is looking at which companies are asking the innovative questions that are transforming the rules of today's business game. When innovative companies change the types of strategic questions they ask themselves, the result is a revolution in business. By changing the questions asked, the innovators changed the rules of the game for everybody else.
For example, the auto industry changed radically when the Japanese changed the rules in the 1970s by asking a series of powerful questions: Instead of manufacturing gas-guzzlers, how do we create a fuel-efficient car? Instead of cars that break down frequently, how can we create a high-quality car with few manufacturing defects? Instead of creating huge stockpiles of "just-in-case" inventory, how can we create a just-in-time inventory process?
Prior to the 1970s, the auto business pattern of the 1950s and 1960s was relatively simple. The large auto companies would design and produce what you, the consumer, were going to buy next year; they would build it and you would buy it. As the car aged, the same companies would sell you the parts and service needed to maintain it. By questioning the industry's most basic assumptions, the Japanese automakers changed the rules of the game worldwide.
The old auto industry business pattern—you buy what we produce—became unsustainable be- cause the new entrants to the market focused on "quality." The Japanese quality program revolu- tionized manufacturing by defining quality largely in terms of customer, not industry, requirements.
The result was smaller, more fuel-efficient, reliable automobiles radically different from those man- ufactured by the Big Three automakers, which stood transfixed by a tidal wave of imports from the Japanese and whose failure to react quickly resulted in a 30 percent loss in market share. The entire U.S. auto industry had to change from a business model based on low-cost mass production and standardization to one focused on quality and greater product differentiation. It took the industry two decades to adjust to this change in the rules of the game. It was not until the 1990s that the quality of U.S. auto companies' products could stand up against the best produced by Asian and European firms.
However, another major auto industry change has taken place in the past few years. The emergence of e-commerce technology, customer choice, and product and service customization is threatening the industry again. People can access more information and choose from more options than ever before. Automobile consumers expect automakers to "build to order," delivering custom vehicles to their doorsteps within a few days of order placement. Clearly, the automakers are about to be blind- sided again by another change brought on by process and technological innovation. This time, the U.S. auto industry doesn't have two decades to respond.
During the mid 1980s, many businesses reevaluated their operations for key processes by asking the basic question: What business are we in? The leadership at Wal-Mart asked a different question:
What business should we be in? In answering it, Wal-Mart changed the rules of the game by digi- tizing its logistics network. By installing sophisticated satellite networks to provide real-time sales and ordering information, Wal-Mart moved from being a retailer into being a supply chain expert.
As a result, the company outperformed its competitors by offering the right product mix at the right store, cutting costs, integrating its operations with its suppliers, and capturing valuable information about its customers. Over the past few years, innovations in logistics technology have led to Wal-
Mart's implementing scan-based trading (SBT), a supply chain innovation gaining momentum in the distribution industry. SBT sounds like the answer to every retailer's prayers: to pay for product only when it is sold at the point of sale. No more inventory management headaches and carrying costs:
that's the supplier's problem!
In the early 1990s, with the process revolution booming, managers and consultants focused on reengineering processes asked, What are our core competencies, those activities critical to the nature and success of our business? What cross-functional processes support these competen- cies? Every noncore process or activity was considered fair game for elimination or outsourcing.
Business process reengineering (BPR) was driven by the simple awareness that overlaying newly improved or best-practice processes on the existing processes does not work. Enterprise-wide, not function- specific, change initiatives offer the greatest benefit to firms seeking to revolutionize how they do business.
In the mid 1990s, the focus shifted from process analysis and reengineering toward assessing the business model and a more precise understanding of customer needs and characteristics. The emergence of widespread entrepreneurial risk taking, coupled with a free flow of venture capital funds and the blurring of boundaries between companies and industries, prompted this change.
Business analysts raised new questions: What is our company's business model? Who is our cus- tomer? Who is our competitor?
Using business models based on recent technological, marketing, and organizational innovations, new entrants have risen to challenge almost every leading company. America Online reinvented the business model for interactive services—to the dismay of CompuServe and Prodigy. Dell rein- vented the personal computer build-to-order model—to the dismay of Compaq and IBM. EMC re- invented the business model for terabyte data storage—to the dismay of IBM and StorageTek. Sun Microsystems re invented the business model for dot-com servers—to the dismay of Hewlett-Pack- ard and Silicon Graphics. New players raised the standards for bold and innovative strategy. In almost every instance, new models produced cost advantages of 15 percent to 20 percent for the innovators.
In the 2000s, the focus of change will be the speed with which a firm implements the e-business solutions powered by recent innovations. The questions for today's business leader will be: How fully digital can you make your customers' experience? Your supply chain? Your internal operations and processes? Take, for instance, Intuit, whose business model responsible for the company's success in the stand-alone PC era was starting to drag it down with the emergence of the Internet.
The market share and profit margins for the company's flagship products—Quicken, TurboTax, and QuickBooks—began to shrink, and it appeared that their growth potential would be limited. To sur- vive, Intuit transformed itself into an online financial services portal. By taking advantage of e-busi- ness, Intuit found new ways to retain customers. Intuit started with a terrific strategic position, charted an economically logical next opportunity, and then moved laterally into a new market space signif- icantly larger in both size and opportunity.
Start-up firms continue to shape the direction of today's business by taking advantage of recent technological innovations, such as Web commerce or mobile e-commerce, to create new digital processes. Conceived correctly and done well, digitizing your business processes can change the way your company interacts with its customers, communicates, sells, purchases, manufactures, and even how it develops products. Whether it's the reengineering movement of the early 1990s or the customer-first mantra of recent years, asking a new question not only produces new answers but also reinvents the game. The result is a cost advantage that's not 10 percent better than your competitor's but rather many times better.
Digitizing the Business: e-Business Patterns 49
Analyzing the Environment
"Going digital" is not a luxury but a necessity. It's not a means of ensuring subtle increments in operating margin. At such companies as GE, learning to become digital and at the same time en- suring high levels of quality are matters of survival for managers. However, digitizing the business requires systematic actions.
The first step is to analyze this changing environment, looking beneath its surface activity and chaos for the emerging e-business patterns, models, and designs on which the companies of the future will be built. Figure 3.1 captures the distinction among e-business patterns, models, and designs.
Patterns set the rules of the game. In chess, for example, the object is to checkmate your opponent's king: the game's basic rule and strategic objective. The other rules in chess govern how this basic rule, or end goal, is achieved. In business, the object is to establish a dominant position that is highly profitable.
Figure 3.1. Digitize Your Business
The first step in identifying a pattern is finding either disruptive technologies or recurring inefficien- cies in existing models. Finding disruptive technology can be a tricky endeavor. High-tech industries continuously create new market patterns. These new market sectors achieve varying degrees of legitimacy; the products and services they offer range from the truly beneficial, such as the browser and the Web, to good prospects, such as wireless Web and digital products, to the flashes in the high-tech pan, such as pen computing or push technology. But the basic rule underlining the high- tech industry's quest is finding and then exploiting the right technology, like checkmating the king, creates new game patterns.
Digitizing the Business: e-Business Patterns For Evaluation Only. 50
Once a pattern is understood, it is time to drill deeper. The e-business model determines how you achieve your end goal. Models set the tactical framework of action—of both competitive and cus- tomer behavior—under which the game is played. In chess, these models for action are called openings, tactics, and end games. There are many types of generic openings, such as moving the king's pawn or the queen's pawn. The goal of the opening move is to position a piece, highlighting its significance, preferably in a way threatening to your opponent. Perhaps the opening move threatens an opponent's piece or takes firm control over the center. In business, models are anal- ogous to the tactics used in chess. Models help us focus on those customer, supplier, and internal actions leading to the profitable exploitation of an opportunity.
Once the model is set, it is time to take it to market. e-Business designs represent your operational go-to-market strategy for playing the game. You must motivate your company to act appropriately and to initiate the organizational changes required for its success. You begin the e-business design by answering the questions in Figure 3.1. The answers to these and other questions give you a knowledge base from which to approach the market. You make this knowledge base operational and context-specific when you apply it to your daily marketplace activity, based on your customer's needs and on your competition's moves, positioning, and experience.
All managers interested in the new economy should master the art of identifying, understanding, and exploiting the knowledge gained from analyzing their business, using the pattern/model/design approach. In this chapter, we discuss the various emerging e-business patterns. We then develop these further by drilling down into the pattern's implications for a given business model. The specifics of how to make your chosen model operational and apply your e-business design are discussed in Chapters 4, 12, 13, and 14.
Focusing on the Whole Picture
Thanks to the Internet, industry landscapes have undergone major upheavals, allowing previously unrelated industries to clash. A seemingly endless number of innovators are bringing their creative ideas to the market. Visionary entrepreneurs see boundless opportunities in today's world and act with lightning speed to capitalize on them. No company is unassailable. No longer do huge corpo- rations have sole access to the capital markets. Today, it's possible for relatively unknown but tal- ented people to raise huge sums of money.
How should management respond in these turbulent times? Begin by asking the right questions. e- Business is teaching the same historical lesson we've seen before: Change the competitive ques- tion, and you change the rules of the game. By focusing on the right question, companies can proactively alter the nature of competition.
Businesses must change behavior in order to remain competitive, shifting from old market channels to new, from production-centric to customer-centric processes, from old business models to new, from old intermediaries to new, and from physical products to digital products. Before you jump into the deep end of e-business change and begin shifting your operation toward the future, it's important to stop and consider the emerging structural patterns that characterize the e-economy (see Figure 3.2). In the following sections of this chapter, we discuss each of these e-business patterns to help you better understand which one best addresses your firm's needs. Understanding the e-business pattern that best meets your requirements helps you answer the following fundamental questions.
Digitizing the Business: e-Business Patterns 51