Models of Virtue
- 27 April, 2000 12:13
For almost 230 years the world hailed Encyclopaedia Britannica as its most comprehensive and authoritative source of knowledge. Millions of families proudly forked out up to several thousands of dollars for the privilege of owning a set. Now technology and some brash young competitors have blown Britannica's tried and true business model out of the water. Suddenly any hope of survival for Britannica means doing what would previously have been considered totally insane - cannibalising its own revenues to make the encyclopaedia available free online.
That's how profoundly the new economy challenges the assumptions that have underpinned successful businesses for generations. The new economy demands new business models - and that's a reality many Australian companies remain ill-equipped to face. "If you don't allow cannibalisation of your existing channels to protect the existing business, then very soon someone else will cannibalise them and the new business will be marginalised," says Paul Lewis, associate partner financial services with Andersen Consulting.
"Australian companies in general still seem to be struggling with this challenge and run the risk of losing their market position to new, nimble start-ups. Unless you are highly efficient and highly effective, someone else can just wipe your feet from underneath you," Lewis says. An effective e-business is a network of participants, each of which are individual companies, and all the new business models are networked models, he explains.
Companies everywhere are grappling with the problem of devising new business models that will work in the new economy. "Competition today is not between different products. It is between different business models," Professor Gary Hamel told a recent US leadership conference sponsored by Cambridge Technology Partners.
It is a game most businesses will have to play sooner rather than later. Wait-and-see just won't cut it in a world where a competitor can steal your customers using new and innovative ways to market, sell and service, thanks to streamlined processes, new technology tools, new flatter organisational structures and more customer-centric and innovative cultures.
Instead, trial and error must serve. "The really exciting thing about the emergence of both B2C and B2B is the fact that there are no rules," says Geoff Gander, general manager of SupplySearch. "The amount of new concepts and business models that have come to light in the past few years is unprecedented.
"Couple this with hungry capital markets all over the world and you have the vast array of companies that have raised money in the billions. most of these have no history of revenue or profitability, but instead a radical new business model that looks to leverage the change in buying patterns created by e-commerce," he says.
On the Internet, says Daniel Lavecky, CEO of Pure Commerce, sustainable competitive edge is not based on patents, because technology is changing so rapidly. It is not based on geography, because the Internet is limitless. It is based on customer experience and building customer "stickiness" - that is, getting people to stay with you by finding a business model that will let you keep on adding value so they'll keep coming back.
And there are plenty of models out there which organisations can adopt and adapt to their own purposes. Greengrocer.com.au managing director Doug Carlson freely admits to borrowing his business model from Dell Computer. "The fact is that Dell has been very, very successful at taking on the big, traditional computer companies," Carlson says. "The others can't compete because they have a completely different mindset. When you've grown up online, you understand the business and the industry much better than if you're a clicks and mortar person.
"Like Dell, we get all the money up front, we let the customer program our production line, we keep no inventory and we deliver the customer a very good product at a very cost-effective price. It's that business model that allows us to be better than the competition."
Still, not everyone will be able to just copy their business model from someone else and expect it to work for them. Netscape president and CEO Jim Barksdale says understanding how the burgeoning Net economy is going to change your business model and everything you do each day is a critical part of making your company successful in the future.
Patterns as Frameworks
"Creating new kinds of supply chain transactions, becoming an enterprise service provider, acquiring customers through a portal, setting up a custom portal, outsourcing and hosting Internet applications - these are all new ways of doing business that just didn't exist three years ago," Barksdale says. "And they are ways of doing business that take advantage of the capabilities of Internet technologies to provide transaction integrity, scalability, reliability, and manageability. Internet technologies also let you quickly create prototypes, test them online, and refine them, thereby giving you a quicker time to market."
The risks are high and the way ahead uncertain. As more and more consumers exercise their buying power on the Internet, and dotcom companies find new and innovative ways to market, sell and service, organisations are having to make numerous adjustments at once. It's a fast, no-holds-barred, high-stakes game of survival of the fittest: where relationships are constantly shifting and the rules remain entirely undefined, but where patterns are starting to come into clearer focus.
"While the Internet's impact on business models varies from industry to industry, definite patterns have emerged," writes Forrester VP research Mary Modahl in her book Now or Never: How Companies Must Change to Win the Battle for Internet Consumers. "Taken as a whole, these patterns offer a valuable framework for thinking through how a company's financial performance will be affected by the transition to the Internet."
Modahl says hopeful dotcom companies, making their rounds of the venture capitalists in search of funding, create business plans that are inherently tough for established competitors to mimic. The fastest way to do that is to undermine the pricing structure of the existing business. "This strategy buys the dotcom time, in which to grow. Existing players resist cutting prices, especially while electronic commerce still represents only a tiny fraction of total sales," Modahl says.
To attack the pricing structure of an industry, a start-up must realign all the components of revenues - in other words it must change the revenue mix of the industry (who pays for what, and how). "These three elements are highly interrelated," Modahl says. "A start-up that wants to change the how, or pricing structure, must first find a way to alter what is being sold and also locate new customers - the who - to generate revenues to support the business."
The brash new upstarts are not only doing so with gusto, they are getting smarter and more aggressive at it by the day. The days of the Internet start-up founded in a garage and built on a shoestring are over. Now the threats to existing businesses come from second-generation start-ups backed by millions of dollars of investment and formed by people with years of complementary skills in Internet businesses. And they can move fast. For instance, Business Week reports US start-up Epinions.com went from idea to operating business in 12 weeks with $8 million in venture capital.
Trial and Error
Michael Hentschel, principal author of the report "Profit: E-Commerce Business Models and Enabling Technologies" from Datacomm Research and Techvest International, says many of the new business models are based on electronic information chains. And he says there'll be plenty of experimentation until businesses get the new models exactly right. "The Internet is the most efficient market ever devised, but the inexorable drive towards cost and below-cost pricing will compel vendors to discover new paths to profit. Traditional business models will be replaced by new models based on electronic information chains," Hentschel says.
The report says many businesses will sell products at cost, making money off advertising, shipping and handling charges, membership fees, and cash flow. Auction sites will continue to evolve, and shopping bots will make the entire Internet into one, big real-time auction.
But sometimes what looks brand new is really something old in a new guise. Peter Williams, head of e-business with Deloitte Touche Tohmatsu, uses the example of the numbers of Internet start-ups that operate on the premise that traffic is the real currency of the Web. Free ISPs like Freenet, he points out, in being able to generate enough money on advertising per user to enable them to provide a free ISP service, are not all that different from free-to-air television providers who make their money on advertising revenue.
Not only can such models give the business enough revenue to survive in their own right, they can also create other revenue-raising opportunities. "Organisations like that are able to leverage customer relationships and maybe start providing them with transactions down the track, or entering into vendor alliances with other providers who provide them with some trial commissions or whatever," Williams says. "So those business models aren't unique, but they're being provided in a different way - it's giving away something for free and then leveraging that - like Netscape giving away its software originally. Suddenly they had a portal business which made some dough and then they created a brand which allows them to sell high-level software."
Meanwhile, others experiment with becoming an enterprise service provider, acquiring customers through a portal or hosting Internet applications.
Eric B Upin, managing director with US-based investment analyst Robertson Stephens Upin, identifies five new business models that early adopters are experimenting with. In the content model players try to develop a portal strategy and become a destination, offering news about the industry and deriving revenue primarily through advertising and subscriptions. Under the distributor or aggregator model one company may offer a wide range of products or there may be a catalogue with products from thousands of suppliers. Some players aggregate buyers, like a purchasing group, to get better prices from suppliers.
Under the auction model, organisations like eBay describe products and put them out for bid. In the software model, developers provide software infrastructure to run a piece of the business and charge for the transactions performed with that technology. Then there is the exchange or e-marketplace, considered the holy grail of B2B. This refers to a real-time, highly liquid, anonymous trading environment that brings together large populations of buyers and sellers. In the e-marketplace buyers and sellers will get together to create complementary revenue streams, provide new ways for existing players to conduct trade and pave the way for additional new models like bid systems.
Upin says once vendors are selected and exchanges established it is likely to become a "winner-take-most" situation. As a result, the winning players will probably have durable businesses with high barriers to entry. "Like most Internet industries, viral marketing allows for geometric growth. By virtue of the Internet, we expect their reach to be almost infinite with low variable costs," he says.
If the Global 2500 wants to keep playing the game in the face of all that new competition, Forrester Research says, it should consider entirely reshaping their organisations for e-commerce. In a recent report, Forrester advised companies to deploy a centralised group within the organisation (dotcorp) to take the existing business online, and a spin-off group (dotcom) to create new business models.
Leading bricks and mortar organisations like John Fairfax Holdings, News Corp, Telstra and the main banks have already taken the advice - moving to create new stand-alone businesses to give them Internet credibility. In doing so they've found that spinning off the Internet side of the business can give an organisation much greater flexibility as it struggles to develop the culture, leadership, employee performance and remuneration policies essential to retain staff in the new online world. It can also reduce the problems of trying to create an organisation with the capability to react fast to new business realities from a cumbersome, control-oriented, centralised business structure.
But it is a strategy that carries some considerable risk. Bob Hayward, senior VP Asia Pacific Operations GartnerGroup, says such moves can lead to a fragmentation between the traditional organisation and its e-commerce component. "My experiences tell me that people tend to be very stove-piped in their thinking inside an organisation. They think within the unit that they operate in rather than the organisation as a whole and this could well exacerbate that," Hayward says.
People left to work in the bricks and mortar side of the organisation may also become increasingly resentful at being left behind, he says, and it can create tensions within the company. "You're setting up almost an artificial barrier between the brick and the click, and everything that we're telling everybody is that the really successful organisations blend the best of both into these hybrid bricks and clicks organisations. By separating them, aren't you really officially creating a barrier there that doesn't exactly encourage or facilitate communication between the two parts of the company?" he says.
Formulating the right business model means recognising not only how e-business improves efficiency but finding ways to create value, says Andrew Macpherson, head, Andersen Consulting e-commerce program in Asia-Pacific. "It involves recognising what is important to the customers and bundling that into the product that you provide to them, then working out how you can create an alliance that might create a new product and therefore a new market segment."
But while it clearly works for an organisation like Greengrocer.com, it could be a serious mistake for all Australian companies to assume they can look overseas for models, says e-Business Australia managing director Tony Clement. Australia shouldn't look to the US for leadership without recognising that the US business environment is totally different to that which prevails here, Clement says.
"The US culture is driven by opportunity and by winning," he says. "Australian culture is driven by not failing," says Clement. "Looking to the US for leadership is a recipe for failure. For a start, if a company is doing anything successfully in the US and it sees Australia as a viable market, it is going to do it here, and it will leverage its brand. You're not going to be able to compete with an America Online.
"I think Australia needs to create its own models - new ones that will fit with this particular economy, and also possibly be more applicable to the Asian economy," Clement says.
A recent report from Cambridge Technology Partners called "New Economy Primer" notes that the US Department of Commerce has neatly segmented the Internet section of the new economy into businesses that specialise in:
1. "E-tailing" or retailing with a digital front end: E-tailing is Amazon's area, and it is all about selling tangible goods such as books or flowers or groceries via the Web.
2. Building out the Internet: Companies such as Cisco, Lucent, and British Telecom are in the business of adding bandwidth in hardware and software, pushing it to the home, doing it internationally, making it more robust. Others, such as Deutsche Telekom, Olivetti, and Telstra, are emerging as players. Newcomers such as Bermuda-based Global Crossing are lining up. And in nations such as India, China and Brazil, local telecoms are preparing to respond to explosive demand before the upstarts do.
3. Business-to-business e-commerce: These companies are busily streamlining supply chains to their industries. Examples include General Electric, whose light bulb operations are saving vast amounts by ordering parts and material online; and the auto industry's Automotive Network eXchange.
4. Digitisable businesses: Any product or service that can be reduced to bits and bytes: airline tickets, concert tickets, music, stocks, cash receipts, catalogues, books and classified ads.
"Using that framework, it's easier to see that if the product or service can be digitised, it can easily be deconstructed and divided among nimbler newcomers who are driving entire fleets of metaphorical trucks into the gap between mass-based businesses and those that traffic in data about those mass-based businesses," the report says. "It's not the same in any business that makes or sells tangible goods, or that runs on huge infrastructures of hard assets. Oil refineries and auto plants aren't about to be digitised away. Groceries will still need to be physically packaged and shipped."
The report says the Internet will touch those businesses differently, forcing new levels of efficiency onto their front ends and forcing them to overhaul their back ends.
- S Bushell
According to Forrester Research, while most of today's Net commerce replicates offline processes, three classes of business activity native to the Internet are now approaching critical mass - those of aggregators, auctions, and exchanges. Each of the three models attacks different inefficiencies and opportunities, according to the research company.
"Aggregators concentrate demand. Aggregators pool supplier content to create a searchable one-stop shopping mall with predefined prices for buyers within a business community. Chemdex serves a buyer community of research scientists, while OrderZone will serve broad-based industrial customers. These cyber stores help fragmented buyers and sellers find each other fast.
"Auctions reduce sellers' losses. Auctions pit buyers against each other to purchase seller surplus. Inventory Locator Service's aviation spare parts auction and FastParts' electronic components auction liquidate products that deteriorate in value. On the Web, sellers and buyers can participate in multiple, real-time auctions simultaneously - without accruing physical-world search-and-travel costs.
"Exchanges create stable online trading markets. Like stock exchanges - Nasdaq or the Paris Bourse - online exchanges provide vetted players with a trading venue defined by clear rules, industry-wide pricing, and open market information. Exchanges like Altra Energy in electricity and natural gas and the Automated Credit Exchange for emissions rights earn revenues on transaction fees. An online industry spot market can operate at a fraction of real-world cost."
Forrester says aggregators, auctions, and exchanges play different roles in a business marketplace - reducing dispersion, facilitating liquidation, or creating industry-wide spot pricing. "While these models operate as niche entities today, by 2003 e-marketplaces will evolve to offer all three mechanisms," the report says.
- S Bushell
No Business is an Island
An e-business is not a single organisation but a network of suppliers and alliance partners that together serve the end-to-end customer experience, says Paul Lewis, associate partner financial services with Andersen Consulting.
Lewis says strong e-commerce ventures take the customer perspective and structure their operations from the "outside in", with the customer service processes at the heart of the operations. "This contrasts strongly with the functional or product-based organisations that are common in established traditional businesses," he says.
The networked model of the business makes alliance management a critical capability and means all the elements required to interact with the partners in the alliance must be incorporated into the business. Lewis says it is important to understand that since you can influence but not control partner organisations, processes, people and spheres of responsibility, all must be negotiated and renegotiated at short notice to resolve operational problems.
"Inside the organisation, the structures need to be flat and lean, highly decentralised, cross-functional, and set up for fast and efficient decision making," Lewis says. "This is fine for a small start-up, but at odds with what usually exists in an established enterprise. In a successful e-organisation, fluid project-based organisation structures are common in which cross-functional teams come together to achieve a particular objective, then disband and reassemble in another configuration to address a different issue. At the individual level, roles need to be defined with high levels of decision-making authority and autonomy to encourage fast decision making and to respond to the motivational needs of the e-workforce."
The biggest challenge for an established business setting up an e-business is to recognise how its more control-oriented, centralised decision-making processes must change, Lewis says. That's why so many successful e-business ventures of large established companies set up separate autonomous businesses or divisions to unshackle the old business from legacy policies, rules and attitudes.
"The challenges for a start-up come later. As the start-up e-business grows, it needs to establish some of the controls that exist in the established business without losing its nimbleness," he says.
- S Bushell
Boom Times Ahead
E-marketplaces promise huge efficiency gains and lower costs through electronic buying and selling. They give customers a way to instantly compare price and availability across multiple manufacturers and products. And while they are barely in their infancy, their impact on the entire marketplace is set to be profound, says Lane Leskela, principal analyst GartnerGroup e-Business Intelligence Services, based in Hong Kong.
By 2004 almost a trillion US dollars worth of transactions will be going across e-marketplace transaction networks each year in the Asia-Pacific region alone, Leskela told CIO. Much of that activity will take place in Australia, where a number of e-marketplaces have already been set up as buyer advocacy procurement markets. These operate across a number of different procurement-based product areas to source goods on behalf of large corporate buyers.
"Australia we believe will be one of the three largest markets in the region and we believe that it will represent by 2004 [almost] $US299 billion - that's the aggregate of buy-and-sell transactions going across networks that include companies and traders, suppliers and buyers there," he says.
Many of the e-marketplaces focus around products like chemicals, petrochemicals, metals, and healthcare products - industries with extensive supply chains and significant in-built inefficiencies. One company with special industry knowledge will typically act as aggregator for numbers of players on a hosted network.
Leskela says unlike dotcom start-ups, where return on investment can be an afterthought, e-marketplaces have a revenue-generation model. "Unlike the other part of the market, they actually start with the idea that they want to make a profit."
Unusually, some of the most exciting developments in the e-marketplace arena are occurring in the Asia-Pacific at the same time as they are happening in North America and Europe. "The most interesting proposition about this is that it is not relevant in some situations to talk about who's ahead and who's behind. This is a real-time event. And what I mean by that is we have telecommunications companies and ISPs along with financial institutions and very traditional industries, especially slow-growth near commodity industries, that are actually pushing a lot of the vertical B2B e-marketplaces."
But Leskela warns that while e-marketplaces provide a tremendous opportunity, suppliers and vendors would need to continue to spend a lot of money at the back end of these systems to continuously expand and integrate.
Numbers of Australian businesses have taken the plunge into the B2B e-marketplace arena. Prominent examples include FoodConnect Australia, which has just piloted what it hopes will be a premier electronic trading and meeting hub; C&W Optus's MarketSite portal which will link into a global network of portals in the US, UK, Japan; and Solution 6's eccountancy.com, for accountants.
Regionally they include iSteelAsia.com, Asia's first Internet-based steel trading exchange, set up to increase transparency and boost efficiency in the market and provide tremendous savings for industry participants, says Andrew Yao, a founder of the exchange.
"It is important to establish such an online exchange where people can interact, because there is so much inefficiency and so many layers of exchange created by traders in the steel market, Yao has reportedly said.
David Maire, general manager, Internet commerce group with Solution 6, says its stage one site had already demonstrated the value of a vertical industry-focused portal. "We believe the future lies in a more integrated approach, where you have this portal or vortal that has the content, has the community, has the context, and has the commerce capability, but that also integrates applications," he saysAccording to Forrester Research, as e-marketplaces scramble to gain critical mass over the next 18 months, they'll cherish the buying and selling volumes of large organisations. Forrester says to best leverage this non-balance sheet asset, corporations should treat their participation in e-marketplaces as strategic partnerships - insisting on equity or other favourable terms in return for their volume.
And it says companies must act fast. "The value of one firm's participation won't be worth much once Net markets gain critical mass," a recent report says. "The majority of e-marketplace growth in industries like computers, paper, and shipping will take place by 2002 - meaning the fate of market-makers in these supply chains will be sealed in the next 24 months," Forrester says. "As online marketplaces expand in these industries, the key challenge will quickly move from capturing participants to keeping them. To cope with this competitive environment, Net marketplaces should partner now with value-added service providers in financing, logistics, and insurance in order to build differentiated offerings."
- S Bushell