Rethinking the Internet

In an attempt to assess the current e-business arena, BusinessWeek hosted its third annual e.biz conference in Chicago last week. Conference speakers covered a wide range of industries from automotive and banking, to shipping and travel.

Speakers highlighted that in order to stay in the e-game, companies should give customers what they want and remember the old economy rules.

Dr Hal Varian, dean, School of Information Management and Systems, as well as professor of economics at the University of California, Berkeley, said the same economics apply in both the information and industrial economies. It is only the focus that is different.

"We see that there is a difference between products and cost in the new economy. This is a critical issue with a relatively simple answer."

He explained that when developing a new product there is often a high fixed cost, or sunk cost. This cannot be recovered when the product goes to market because another company can launch a similar product and charge much less for it, resulting in a price war.

A good example is the Encyclopaedia Britannica. The first copy sold at $2 000, then Microsoft came out with Expedia, which sold for virtually nothing. The question, according to Varian, is how do companies avoid this commoditisation?

"This is where the easy answer lies: Versioning. It is not new. This has been a traditional strategy. Take publishing for example. First a book comes out in hardcover. Then a few months later the paperback version comes out with a substantially lower price tag. The reader who wants to pay less waits longer to read the book."

Quicken is a good example of this in software. There is the low-end version for users who just want to balance their chequebooks and then the high-end version for users who want more substantial financial control.

Mark T Hogan, president of e-GM and group VP of General Motors, said that although America might be in a recession, the wire connection between businesses and their customers wouldn`t go away.

He added that on average, 54% of GM customers go online to shop for a new car. GM also has a project in Brazil where a person can order, specify and track their car online. Out of 70 000 Celta models sold in Brazil, 40 000 were sold online.

Marriott International`s VP for e-commerce, Shafiq Khan, said travel has become a Web battleground where everybody is fighting for space. This has made intermediation critical in order to survive.

"Intermediation has some distinct advantages such as mass reach at low cost, the ability to aggregate services and leverage content."

He explained that Marriott approached the intermediation issue with caution. "First we kept our focus on our channel. All our functions had to be customer-centric. Secondly we manage our participation in online channels very carefully. We only work with those channels that support our objectives.

"We are also extremely careful not to provide free access to key assets such as inventory, functionality, products and customer data. Finally we keep an eye out for big players. We look for opportunities that will lead to acquisitions, strategic alliances and partnerships."

Tim Geiken, VP, e-commerce, corporate marketing for United Parcel Services (UPS), also noted that e-commerce is the same as traditional commerce.

"You still have your relationship, a promise and an order to fulfil. However, e-commerce is more that just bits and bytes, it is the integration of bits and bytes with bricks and mortar."

He added that the traditional supply chain is changing into an end-customer demand chain. The current challenges of this demand chain are no real defined standards, a lack in behaviour changes among organisations and their customers, no consistency across the demand chain, and finally privacy.

The advantages of this demand chain are that once you have satisfied customers, their preference for online channels are strengthened. It is also more cost-effective and it reaches everyone`s desktop.

Ann Cairns, VP and global head of e-solutions at Citibank e-Business, said her key issue was justifying e-business expenditure.

"We have 10 million online customers. We also do Web-based banking with 2 000 corporate customers in 84 countries. Although this sounds impressive, it is disappointing. It relates to single-digit adoption rates.

"One reason for this is that customers did not yet want some of the solutions we were providing. Other reasons include standardisation, lack in global cooperation, legal issues, compliance regulation challenges and various technical adoption rates."

Cairns cited an example of these adoption rates: "Most North American businesses still use cheques. They are still paper-based, whereas many emerging markets are almost exclusively electronically-based."

She added that in order to justify e-business expenditure, a three-year planning window had to be developed. New pricing models were needed at Citibank to recuperate the large initial capital investment. "We also realised that e-revenue should be measured in terms of the underlying businesses they drive, and that cost avoidance can be as important as revenue. Citibank has saved millions through remote implementations."

Cairns provided some pointers in how to navigate through the current turbulent market: "You need to develop sophisticated risk management tools to help you stay on course. Focus on what matters to the consumer. See the universal desire for e-billing systems and payment capabilities to connect into an e-commerce site."