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E-commerce (Click to select text)
As use of the Internet has grown by leaps and bounds, it is clear that electronic commerce will proliferate rapidly in the years ahead. The number of Internet domains in the United States is more than 1.3 million. Most major companies now have Web sites, if only to market themselves, and many others are exploiting intranets to improve internal operations. As many as 163 million personal computers worldwide will have access to the Internet by the year 2000. As television and telephony migrate onto the Internet, wireless communication explodes, and countless other new applications attract users, one of the biggest challenges is understanding the economic and social logic driving change. While much of the frenetic growth is fueled by the Internet's obvious capabilities-e-mail, newsgroups, Web sites, and a modest amount of actual market transactions-it remains uncertain what business models and Internet functions will prove most popular and profitable over the long term. Much will depend upon how the new electronic technologies will change existing business practices, market structures, and the social habits of the workplace, marketplace, and home. Can we discern how electronic commerce adds value to conventional marketplace transactions, making the Internet a preferred venue for business? Will markets of the future be substantially more efficient, to the extent of being "friction-free?" Or will a new regime of dominant players arise to eliminate competitors and create "winner-take-all" marketplaces? As electronic commerce spreads internationally, an equally profound issue is the fate of national sovereignty. Economic globalization, particularly of capital markets, is altering the traditional prerogatives of nation-states to control what can take place within their territorial borders. National governments are facing growing challenges not only in managing the terms of international trade and finance, but in collecting taxes, controlling the domestic money supply, and addressing domestic social and cultural needs. The Internet and other electronic technologies are playing an important role in this transformation. For six years, the Aspen Institute's Communications and Society Program has sponsored the Roundtable on Information Technology to explore such issues. In August 1997, the Program once again convened a small group of top executives of information technology companies, computer scientists, academics, and government policymakers to discuss "The Globalization of Electronic Commerce: How New Information Technologies are Altering the Social, Economic, and Cultural Landscape." The 27 conference participants met August 21-23, 1997 in Aspen, Colorado, to consider an agenda prepared and moderated by Charles Firestone, director of The Aspen Institute Communications and Society Program. This report distills the major themes of that discussion. Although the participants are the primary source of this report, unless cited to a particular person, none of the comments herein should be taken as embodying the views or carrying the endorsement of any specific attendee at the conference. Most of the report is the author's own interpretive synthesis, supplemented by various materials credited in the endnotes. Part One: Electronic Commerce and the Restructuring of Markets The Global Advance of Electronic Commerce Communications and Society Program August 1997 The Aspen Institute At their most rudimentary level, digital networking technologies can be seen as just another vehicle for buying and selling. Yet they are, of course, much more. They are a tool for reinventing business-to-business relationships. They constitute a medium for building richer linkages with customers. Within organizations, electronic technologies are stimulating changes in productivity, management practices, and corporate culture. Externally, by linking intranets to the Internet, organizations are beginning to integrate their internal operations more closely with their vendors, partners, and customers. "The promises [of electronic commerce] are pretty heady," said Karen White, senior vice president of worldwide marketing and business development at Oracle Corporation. "We're going to minimize transaction costs, reduce cost structures, maximize production quality, reduce time-to-market and open new markets, and somehow, through all this, gain competitive advantage." This, at least, is the vision. It is significant that the investment community, once skeptical or indifferent, is also beginning to see the economic potential of the Internet. In an August 1997 report, "Cyber Commerce: Internet Tsunami," investment banking firm Goldman Sachs concluded that "cyber commerce" over the next decade "will create hundreds of billions of dollars of new Internet-driven market capitalization across [many] industries, much like the PC industry over the previous decade." Three "Audiences" for Electronic Commerce At this early stage in the Internet's evolution, one of the most difficult challenges is conceptualizing a new taxonomy for electronic commerce. For Oracle's Karen White, one of the most useful categories for understanding the medium's potential is its distinct "audiences." White sees three key audiences: other businesses, consumers, and one's peers within an organization. Business-to-BusinessNetworking Historically, electronic data interchange, or EDI, has been the most highly developed system by which trading partners communicate with each other. Developed in the late 1960s, this highly automated business-to-business system for exchanging e-mail messages about orders, shipments, deliveries, and payments is efficient, reliable, and secure. It allows companies to streamline administrative systems and reduce costs, while improving the management of key assets and liabilities (e.g., monitoring retail inventory levels so fast-selling products can be restocked quickly). 1 As a closed, proprietary system that entails considerable expense and effort to adopt, however, EDI has distinct limitations. Implementation is often difficult, and rigid protocols tend to favor standardized communications among long-term trading partners, not quick, ad hoc dealings with any business. In this respect, EDI is a product of a slower-moving era, the 1960s, in which stable Fortune 100 firms used mainframe computers to interact with captive suppliers. Today, writes William Burnham in an analysis for Piper Jaffray Research, "EDI's rigid, non-spontaneous, non-real time nature prevents trading partners from engaging in the kind of collaborative, interactive analysis that is often required to finalize a contract, shipment schedule, or payment." 2 To overcome some of these deficiencies, a complementary closed networking system, direct data interchange, or DDI, is now emerging. Going beyond EDI, DDI is designed to allow interactive, flexible, real-time communication between trading partners. A company using DDI will eventually be able to open a "window" into another firm's enterprise system and directly manipulate, analyze, and transform that firm's internal information. But skeptics point out that implementation of this vision may not succeed, and that DDI does not allow sufficiently robust, automated, or high-volume information exchange. The Internet-in contrast to both EDI and DDI-is an open, real-time networking system that allows spontaneous connections on a global scale with any buyer and seller. It is relatively cheap to use and can reach a much larger universe of potential business partners than closed networks. In this respect, the Internet is a distinct improvement over so-called VANs, or value-added networks, which are private communications networks that connect a number of trading partners together (using EDI, for example). VANs function much like the Internet, but are more secure and reliable, and also offer special value-added services. But VANs are likely to be supplanted by the Internet as the latter's quality, reliability, and customized features improve in the years ahead. Business-to-ConsumerLinkages A second key audience for electronic commerce is the consumer, as discussed in the following section on the effects of electronic commerce on retailing. The Internet has a special appeal for smaller companies and entrepreneurs because of the relatively easy, low-cost entry into markets that it enables. This gives newcomers with imagination and basic resources the capacity to transform a consumer retail market. Examples are the legion of startups that came from "nowhere" to succeed: Amazon.com (books), Travelocity (travel tickets), Auto-By-Tel (automobiles), N2K (music), and Yahoo! (Internet search engine), among many others. Electronic commerce not only gives startups amore equal footing with more established brand names, it enables consumers to shop around and thus encourage greater price competition. Moreover, the Internet allows companies to introduce entirely new services not generally available in the physical world: easy comparison shopping based on quality and price, quick searches of data archives for specific information, compilations of visitor-generated information (such as book or product reviews), hyperlinks to other Web sites with useful information, and so on. Business Intranets As described in the 1996 Aspen Institute Roundtable on Information Technology report, The Networked Society: How Technologies are Transforming Markets, Organizations, and Social Relationships, intranets not only make communications within a company cheaper and more efficient; they represent a new platform for remaking some of the core functions of an organization, including product development, production scheduling, inventory control, sales and marketing, and procurement. Over time, these changes alter social relationships within a company and thus its management style and values. Intranet-driven organizations tend to eliminate hierarchy and become flatter in structure. Employees are given greater autonomy and responsibility, making their independent knowledge and creativity a more important company asset. Decision-making can occur more quickly, based on greater supplies of timely information, than in conventional organizations. As we will see below, electronic networks tend to change work practices, values, and culture within businesses. Another useful way to look at the potential of electronic commerce, says Karen White of Oracle Corporation, is by function: fulfillment, merchandising, marketing, advertising, customer service, and so forth. A functional perspective "helps you identify leverage points and efficiencies," said White. "It helps you ask, What should I be outsourcing? What is left of my business at the very core?" A functional approach also helps a company develop focused solutions. The consumer group can concentrate on improving the supply chain, the financial services department can focus on the back-end payment system, the Internet commerce group can work at installing more merchant servers. Yet it is important to look at electronic commerce in a cross-functional way as well, to ensure that all the "vertical" functions within a company are well-integrated. For example, said White, consider how an ordinary buyer/seller transaction may have implications for other corporate functions: "A consumer buys a stereo on the Internet, but based on the particular stereo bought, he or she may get a $10 certificate good for purchases at Tower Records. The stereo store may get a referral fee from Tower Records, for sending the consumer to a business. So a simple transaction between a consumer and a business may also entail relationships between two businesses, each of which has its own fulfillment and promotional objectives." Most analysts agree that business-to-business transactions are the most promising market for electronic commerce in the short term. Forrester Research estimates that business-to-business Internet commerce, now an $8 billion market, will grow to be a $105 billion market by 2000 and a $327 billion market by 2003. The business-to-business electronic marketplace will take off first because companies are organized to improve operational efficiencies and integrate supply chains; centralized decisionmaking and CEO leadership can also bring swift changes. By contrast, consumers tend to adopt new technology at slower, more predictable rates, regardless of a given technology's benefits; consider the slow adoption rates for automatic teller machines and cellular phones. Over the long term, however, consumers are expected to embrace the many conveniences, cost savings, personalization, and other features of online shopping. As this market becomes an estimated $6 billion business by 2000, generating 30 percent of online consumer revenues (the remainder coming from advertising and subscriptions), online shopping will provoke far-reaching changes in the nation's retail businesses and in people's daily buying habits. How Electronic Commerce Will Change Retailing The online retail market is still so new, experimental, and evolving, that it is difficult to make sweeping generalizations about its future. One thing is clear, however: the balance of bargaining power is shifting from sellers to consumers. Consumers are becoming radically empowered as they gain new tools for identifying highly specific goods and services, making refined product comparisons, and holding price auctions among sellers and among other powers. Evidence of this change can be seen in the rise of the "virtual community" as a business model. As explained by John Hagel III and Arthur G. Armstrong, the Internet enables customers organized as online communities "to take control of their own value as potential purchasers of products and services." 4 The authors describe how virtual communities are enabling customers to become "more sophisticated capturers and managers of their own information. In essence, virtual communities will act as agents for their members by helping them to get increased product and service information-not to mention lower prices-from vendors at the same time that they meet a broad range of social needs to communicate." On the consumer side, virtual communities help bring together people who share common interests (professional expertise, political views, hobbies); they help them conduct group conversations; and they help a community aggregate the resources (publishers, vendors) that the membership finds useful. On the seller side, virtual communities help companies find likely customers more easily and at a cheaper cost, and encourage vendors to tailor their products to meet demands of this specific community. There is some question whether virtual communities will retain their integrity as social groups, as Hagel and Armstrong assume, if they venture into commerce. Already there are signs that a more atomized, commercialized ethos may ultimately prevail, as exemplified by the two attorneys known for flooding the Internet with junk e-mail. That pair, Lawrence A. Canter and Martha S. Siegel, argue that "some starry-eyed individuals who access the Net think of cyberspace as a community, with rules, regulations, and codes of behavior. Don't you believe it! There is no community!" 5This remains an unresolved tension, whether a mannerly "netiquette" or a brazen commercial spirit-or perhaps a novel mixture of both-will characterize electronic commerce. Commoditization versus Personalization of Products The Internet has given new momentum to two conflicting forces in commerce, commoditization of products and personalization of them. On the one hand, electronic commerce is encouraging more products to be regarded as pure commodities which vary chiefly in price. On the other hand, the Internet makes it much more possible for consumers to obtain products more personalized to their needs or tastes. "Branding" of products is reaching "new levels of granularity," said Deborah Triant, president and CEO of Check Point Software Technologies, just as the range of products subject to commodity pricing is increasing. Books, for example, are one of the leading categories of products that are now being sold as commodities via the Internet. Yet this commoditization is coupled with a growing personalization of service. Amazon.com, for example, invites customers to submit their personal preferences of authors or book genres in order to receive automatic e-mail notices about new books. Customers are also invited to submit their own reviews of books, which are then aggregated with other customer responses. Commoditization and personalization on the Internet are not mutually exclusive; they often coexist quite well. As Deborah Triant explained, "Distribution of books got commoditized on the Internet, but you don't say, 'I want a book on computers so find the cheapest one.' You say, 'I want this book by this author.' For this author, the Internet doesn't cause an increase in commoditization at all. It causes an increase in his or her ability to market." Triant predicts that commoditization will expand to "a much broader range of products" in the future, particularly in business-to-business commerce. An intriguing question is whether the dichotomy of commoditization and personalized service will persist over the long term. "A brilliant new company may come in and provide both global and local services, and develop incredible personal service as well," said Eric Schmidt, chairman and CEO of Novell. "The point is, with computers you can have the appearance of personal service while driving commoditization and services on a global scale. If someone can figure out how to do both simultaneously, you will have a huge new problem and opportunity." Glenn Osaka, vice president and general manager of Hewlett-Packard's Extended Enterprise Business Unit, is less worried about commoditization as a business threat than personalization: "If you want to define yourself as only providing a product, that's fine. You'll go out of business. But if you can add information content [to a product],customize it, and personalize it, you'll create a new environment, and you will have an advantage. Now there is an issue of how long you can sustain that, and what you have to do to keep moving." The analysis becomes more complicated, however, when the interaction of online and real-world commerce is considered. After all, people do not only buy and sell; they also shop. And while some aspects of shopping are easier online, other aspects-touching and feeling a product, trying clothing on, looking at colors-are often not equivalent in cyberspace. Americans seem to be more amenable to online shopping, unlike Europeans and other foreign consumers who find it distasteful on both aesthetic and social grounds. But the bifurcation of shopping from actual buying creates the novelty of people who may go shopping in inefficient, real-world markets (where they can touch products and interact with sales clerks),but then make their final purchases in the more efficient electronic markets(where prices may be cheaper). And what model will arise as the preferred online shopping experience? "Some things are easy to search for on the Net," said William Janeway, managing director of E. M. Warburg, Pincus and Company, "while other things are crude and difficult," citing the unpleasant experience of trying to read the New York Times on the Internet. "There is a periphery where efficient [online] markets imperialistically carve out and undermine the profitability that goes with providing a differentiated service," said Janeway. The problem is, many conventional enterprises such as book stores, when faced with more efficient online competitors, "have not responded in differentiated ways. They were just as rude as ever, they had the same business hours, they didn't provide better coffee, etc . . . " One response to the imperialism of online markets, suggested Janeway, is for "the inefficient specialist-vendor to provide a context in which the buyer wants to complete the transaction because he's invested so much time and effort in it." The shopping experience can be made more attractive, or filled with personal attention or helpful sales advice, for example, such that the consumer is disinclined to transfer his purchase to an online vendor to consummate the transaction. Vendors who cultivate enduring customer relationships that go beyond discrete transactions may also gain long-term competitive advantages. This can be achieved if a company "adds information content" to the transaction-in Glenn Osaka's words-or makes it a more appealing experience, or brings a certain brand-name reputation or quality service to the transaction. In such cases the purchase becomes more than the sale of a commodity. This, indeed, is an approach used by L.L. Bean and other retailers who assiduously develop knowledgeable, friendly customer service, and fast, trustworthy fulfillment of orders. The customer reaps a real or perceived "something extra" that adds value to transactions-transactions that, through electronic commerce, might otherwise be headed toward commoditization. Goldman Sachs, in its 1997 report, concedes that online retailing is "not ready to turn stores into dinosaurs," but finds that several product categories are especially ripe for online commerce. Chief among them: books, software, computer hardware, office products, music, and electronics. The least promising categories: perishable food, variety discounters, off-price apparel, department stores, auto parts, and specialty apparel. The report explains: "The Internet's reach, eradicating the geographic barriers of land-based retailing and its information intensity, make it particularly well-suited for the format offering the highest level of consumer satisfaction, albeit to the narrowest band of consumer: the 'gnat-egory killer,' a format that 'explodes' a small, highly defined category, catering to high-interest product enthusiasts." 6 Marketing and "Branding" on the Internet The twin forces of commoditization and personalization in electronic commerce make it even more important for companies to develop sharp brand identities for themselves and their products. How else, in a marketplace of expanding size and fragmentation, will customers come to recognize and trust a company and its products? Waring Partridge, vice president for messaging, wiring, and multimedia services for AT&T, argues that, unlike the conventional marketplace where one's brand identity and geographic location are distinct, in electronic commerce "brand is location." Citing Amazon.com, Partridge foresees "an increasing convergence of virtual location and brand as sources of profit. To go one step further, location can actually signal terms and conditions of access, as in the flower-ordering service 1-800-FLOWERS.The name signals that your call is free. What we don't have on the Net is the 1-800 equivalent. The Internet is cheap, but it's not free." The geographic reach of the Internet-and the potential customer base it thus makes accessible-requires more aggressive branding of goods and services. Why should a company be satisfied with a local market, however robust, if it can reach a larger universe of customers through aggressive marketing and branding? If this nascent trend accelerates, indeed, merely local name recognition may become a distinct limitation and a competitive disadvantage. The brand name competitor with large geographic reach (facilitated by the Internet) will be more able to woo the high-profit, high-volume business, leaving the more difficult, complex customer needs to less efficient local generalists. This is precisely what is occurring in healthcare, as profit-making hospital chains increasingly specialize their services in distinct categories such as cancer treatment, heart surgery, birthing, and rehabilitation and long-term care. The new business model, writes Regina Herzlinger of Harvard Business School in Market-Driven Health Care, is the "focused factories" that can deliver consistent products or services at the lowest cost. As Herzlinger old the New York Times, "There's a transformation from a health care system organized primarily by the providers to a system organized by the needs of the patient. A hospital that does everything for everybody just won't be as efficient as a focusedprovider." 7 Branding and marketing plays a central role in this new competitive landscape. Healthsouth, a chain of 135 rehabilitation hospitals and thousands of clinics, is trying to endow its operations "with a brand name as recognizable as Wal-Mart," reports the New York Times. "Sports figures helping to publicize the brand include Michael Jordan, Tom Glavine, and Emmitt Smith." Steven Friedman, senior chairman and limited partner of Goldman Sachs and Co., sees a rich promise in the branding of medical care, especially as the capabilities of distance medicine (Internet-facilitated diagnosis and treatment) improve. "Why have a major malady diagnosed by a local community hospital when it can be diagnosed by the best possible doctors at a major medical center?" asked Friedman. "Why should we not see brand naming of the great hospitals of America, while community hospitals do only those things that are necessary to be done there?" The new technologies may indeed offer new marketing and branding possibilities for health care, agrees Dr. Steven Charles, the founder and chairman of MicroDexterity Systems, a company that designs surgical dexterity enhancement equipment for vitreo-retinal surgery. But the technologies may be less amenable to medical diagnoses and treatment. Certain kinds of diagnosis may be possible, Charles conceded, but "procedural medicine-stick a needle in here, make an incision here-is going to be a larger challenge." Other problems remain unresolved as well. How can large numbers of patients be transported long distances in cost-efficient ways? How would the psychological support of families be provided? More fundamentally, how do we overcome the complexities of credentialing physicians across state lines? (Currently no such national credentialing agency exists.) What standards would be used to evaluate quality of care in any case? Notwithstanding these particular problems in branding health care across state lines, the Internet offers rich new opportunities for marketing and branding, especially for high-tech companies with little marketing capacity. Joseph Vardi, the principal of International Technologies Ventures, a private venture capital enterprise based in Israel, cites the experience of a company he helped found, Mirabilis Ltd. The company's best-known software, ICQ (as in "I seek you") allows users to identify which of their friends and associates are online at any given moment, anywhere in the world, and then to connect with them in real time. "In nine months, the company came from nowhere and got 2.5 million users to download its software, at 24 cents a user, including capital, labor, development, etc.," said Vardi. "Without the Net, we couldn't dream of trying to do that." The Mirabilis business plan aims to use its free software and desktop icon to aggregate a huge audience of computer users, which can then be plied with advertising and online shopping opportunities. Marketing and branding are in many respects made cheaper and simpler via the Internet. Companies can more easily reach potential consumers, engage in "conversations" with them, and offer them detailed product information. But online marketing and branding has is own special complications. The psychological and social dimensions of buyer/seller relationships online are still evolving, and customers seem to be both more fickle and more loyal than conventional consumers. With a few mouse clicks, would-be customers can flit away from a company's Web site to check out competitors. Yet many companies have nurtured extremely loyal customers by providing timely, useful, and/or entertaining content on their Web sites. Traffic volumes can be huge, along with repeat visits. This power equation in the commercial relationships between sellers and consumers has been altered: the consumer now has greater control. Marketing information can be voluntarily "pulled" by the user, who need not endure offensive marketing involuntarily "pushed" at him. One way that companies are seeking to gain commanding competitive advantages is by positioning themselves as preferred gateways, or "portals," between buyers and sellers. This is Microsoft's apparent strategy in its new ventures into online insurance, real estate, travel planning, car sales, classified advertising, local events calendars, and other emerging varieties of electronic commerce. Establishing one's Website as a key traffic node is also the strategy used by various search engines (Yahoo!, Excite, Lycos, etc.); Yahoo! has sought to sweeten the relationship with computer users by offering personalized "My Yahoo" pages. Controlling the computer desktop is an even more potent way to aggregate a large community of users, i.e., market share, as Microsoft is demonstrating with the bundling of various software packages (particularly its Web browser) into the Windows 95 operating system. Mirabilis, however, developed its own ingenious way to access the daily "mind share" of users that Windows 95 enjoys. Its freely distributed ICQ software places a flower icon in the task bar of Windows 95, giving the company direct access to users, who can conveniently click into the ICQ domain. Access is not enough to succeed in this business model, however. The online business generally must meet higher standards of performance than conventional businesses, and cultivate more transparent, trusting relationships with users.
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