The Benefits of eBusiness

Pradeep Anand- January 1998

(This article was written in January 1998 and is certainly dated!)

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Electronic Business (eBusiness) has captured the media’s attention, and has been well received on Wall Street- eBusiness related stocks are flying high, so far, defying all traditional laws of economics and gravity! Industry research organizations are busy drawing the proverbial hockey-stick diagrams showing how eBusiness’s growth will be exponential, again defying older business assumptions about diffusion of innovations and market inertia.

However, not a day goes by, without eBusiness showing up and affecting the way we behave at work or at home. EMail is the first wave of Internet’s benefits. Its ubiquity simplifies access across all geographic boundaries, and time zones.

But, the real power of the Internet has yet to be seen. Its promise is in its ability to transform the way a firm conducts its business with its customers, with its suppliers, and within its own organization. Internet based buying, selling and processes provide opportunities to many businesses to reinvent themselves, creating new business designs and models for evolving market spaces.

The irony of the situation is that consumer related online businesses are capturing the markets’ imagination while, in reality, business-to-business (B2B) online sales outpace its higher profile counterpart. According to Forrester Research, annual B2B commerce is expected to grow from about $43 Billion in 1998 to about 1.3 Trillion in 2003. During the same period, business-to-consumer (B2C) commerce is expected to grow from $7.8 Billion to $108 Billion!

To some firms the jury is still out about eBusiness’s economic benefits. These cautious firms wonder about the timing of their entry into the Internet market space and the correct answer is "right now!"

What is eBusiness?

A simple response: eBusiness is the use of electronic, computing, and Internet-based technologies to change traditional revenue models and business designs to the mutual benefit of customers and vendors.

A wordy answer: eBusiness is the replacement of ineffective existing methods of information flow in the supply and value chains of an organization, and creating new ones with Internet-based, computing, and communications technologies. eBusiness liberates resources like manpower, materials, money and time, which can then be redistributed for more value-added tasks, to bring incremental revenue and profits to customers and suppliers.

eBusiness, by definition, implies the usage of Internet-based technologies, but to what end? Initially, eBusiness was used to replace current methods of information (bits and bytes) flow within and outside organizations. Current methods of information flow to and from customers can be slow and expensive, and contribute costs that are unsustainable in environments of extreme competitiveness.

For example, a typical manufacturer may receive about 20% of the ultimate selling price to the end-user. Eighty-percent of the margin is spent in the distribution pipeline from the manufacturer to the end-user. Elimination of the non-value add intermediaries in the value chain (or disintermediation) can deliver substantial benefit to both the producer and the consumer. Pundits predict that eBusiness’s disintermediation contribution will be as significant as Henry Ford’s Model T was to the manufacturing and production paradigm. Forecasters predict that distribution costs will collapse substantially in the next decade, significantly altering all methods of consumer and business buying behavior!

Prior to eBusiness, automation required proprietary client-server solutions- communicating through modems or dedicated lines. eBusiness is different from these older solutions in a significant way: the user does not have to be provided with unique software at the desktop (or laptop)- all the user needs is a commonly available browser to access Web-based information.

Thus, eBusiness eliminates the resources and costs needed to distribute and maintain software of various antiquities in the users’ domain. This was a substantial waste. With Internet-based technology, the "infobase" is written once and can be accessed from anywhere, anytime. Also, the cost of keeping it constantly updated and current is minimal, without incremental distribution and maintenance costs.

Benefits of eBusiness

The benefits of using the Internet based technologies can be simply summarized into three terms: 1. Expand markets to increase revenues 2. Reduce costs and 3. Strengthen customer relationships. Early entrants in the eBusiness fray will have "first mover" advantages that late entrants will find almost impossible to overcome.

Expand Market Coverage

Conventional markets have limits in terms of space and time. eBusiness eliminates these limitations of geography and time zones. The whole world is the available market, 24 hours a day. Internet access is now available, wherever work is conducted, at a desk or off-site. Worldwide business professionals, buyers, and decision-makers have access to the Internet, spanning all time zones.

This market is now available 24 hours a day, 7 days a week, 365 days in a year,  to a supplier. The buyer conducts business "where" and "when" they want to without traditional limitations. So, with eBusiness a firm creates a global, "365x24x7" availability to its customers.

This does create problems in "channel conflict" which need to be anticipated, and resolved. Members of current distribution methods have been known to oppose eBusiness implementations, even within their own organizations. eBusiness is seen as a threat and this channel conflict can torpedo the most brilliant implementation.

Additionally, an eBusiness firm can offer complimentary and supplementary products, and add-on promotions as buyers make selections. A sophisticated site like suggests companion or add-on books or CDs to those selected to purchase. This leads to a larger volume of ordering, creating a higher revenue stream at a marginally low cost per transaction.

Moreover, eBusiness makes previously uneconomical markets attractive. The unattractiveness of markets is because of their inability to deliver acceptable margins to the supplier. The low cost of gaining and fulfilling customers with eBusiness expands the volume of customers who can deliver acceptable margins.

This increases the size of the available market by turning marginal segments into profitable ones. This ability to turn frogs into princes is powered by eBusiness’s low variable costs for addressing marginal segments. Additionally, the power of the add-on products can also be sold into these previously unprofitable segments, turning them into substantially profitable ones.

Further, market pull is created by presence on the Internet. There is a distinct trend for buyers and professionals to go to the Internet for many steps of the purchase cycle. The Internet is used to find and qualify suppliers, try out products, and directly purchase products. Major organizational buyers have shown a strong shift toward Web-based procurement. Purchasing Magazine in their July 1998 issue had current statistics on purchasing managers usage of the Net (Figure 1).

Figure 1

Reduce Costs

The major cost-reduction benefit is the promise of changing the distribution of products and services to customers. Products requiring little or no experience in the buying cycle can be purchased by the customer on the Internet and delivered directly without intermediaries. The elimination of various layers of distribution is the major cost reduction benefit to the market.

The outcome of the battle between and the "brick & mortar" booksellers was a forgone conclusion- Barnes&Noble and other booksellers had to get on the bandwagon- to a web-based selling model- to compete. Similarly, online trading firm’s (like ETrade’s) challenge to traditional brokerage firms has evoked responses from DLJ, Merrill Lynch and others that mimic the "lowest-cost-distribution" model of eBusiness.

In Business-to-Business environments, Web-based purchasing systems have the unique ability to reduce waste in the purchasing process, and thereby improving customers’ overall profitability and competitiveness.

The National Association of Purchasing Management outlines the following benefits:

bulletReduction in process variations
bulletReductions in costs and errors through end-to-end process integration
bulletVendor sourcing strategy support
bulletImprovements in process capability
bulletProcurement paradigm shift from passive to active
bulletElimination of unwanted paper trail
bulletImproved access to information in an easy, reliable and timely manner
bulletReduction in costs and cycle times associated with high-volume, low-dollar MRO (maintenance, repair, operations) transactions

Of these, MRO spending is estimated to be about $250 to $400 Billion in the US. This accounts for more than half of a company’s expenditures. Moreover, this activity costs about $100 or more per transaction- often more than the cost of the purchased goods. These MRO transactions have human and paper intervention leading to substantial errors and delays.

eBusiness provides an economic alternative in situations where purchase transaction volumes are large and the information exchange is minimal. Almost all MRO transactions are formal communications and acknowledgements like purchase orders, change orders, invoices, shipping instructions, and bills of lading. All of these can be eliminated with an Internet based procurement system, at low transaction costs.

eBusiness also contributes to reducing costs by delivering a unique combination of delegation of the purchase transaction while maintaining central control and audits. Decentralization in paper based systems also meant loss of control over the purchasing parameters like who can buy, where and when can they be buy, what, and how much can they buy.

This has two major benefits: 1. It effectively distributes the procurement activity to where the decision is made and 2. It reduces purchasing of unauthorized products from unqualified suppliers. This combination provides the procurement function ample opportunity to focus on more value-added activities, such as strategic buying and relationship management.

Additionally, intervention by a person in the information flow into or out of an organization has the potential to add some impediments like 1) delays, and 2) errors. The combination of these two impediments is deadly in the creation of waste- reducing cost effectiveness.

On the other hand, people can also add dramatic value to the process of delivering products and services to customers. Therefore, it is imperative that all transactions be reviewed to see if value is added at every step, without errors and delays. Automation of low or no value-add transactions can increase the speed and accuracy with which a firm can respond to its customers or vendors or within its own organization.

Strengthen Customer Relationships

very simply, the purpose of a business is to find and keep customers. eBusiness has the ability to deliver benefits that can address both aspects of this statement- to find and retain customers, by delivering better purchase experiences to the buyer.

Buyers are migrating to Internet buying in situations when it’s faster, better, and cheaper than traditional methods. This migration is driven to a large part by experiences that are, in their turn, powered by the nature of the goods.

Faster: eBusiness assures faster delivery of products and services by speeding up order fulfillment, and delivering into just-in-time upstream processes, particularly in Business-to-Business environments. Also, eBusiness’s integration into legacy inventory systems helps to speed up product delivery cycles and information.

Better: This aspect of the customer experience is imbedded in the improved accuracy of information. Paper and client-server based systems with their "version control" limitations created problems that set limits to their efficiency. The "write-once, read-many" environment of eBusiness assures that internal and external audiences see and work with the same up-to-date, accurate data.

Accurate pricing, delivery, and product information goes a long way in enriching the customer’s buying experience. Additionally, where little customer-vendor interaction is required, eBusiness creates an opportunity for virtual self-service counters.

Moreover, eBusiness has at its disposal multi-media technology to create attractive, expressive, presentations that are "magnets" and create "stickiness" to the vendor’s site. Additionally, the ability of technology to allow customers to segment themselves, create opportunities for custom multi-media based interactions- for each individual customer, rather than a mass in a segment! The ability to tailor presentations to a "segment of one" is that of an electronic salesman making a personal call on a customer.

Besides optimizing communications, the self-customizing capability can be extended to each individual’s or firm’s buying habits, preferences, invoicing terms, order fulfillment quantities and other informational issues of interest to both the vendor and the customer. The ability to capture data at every stage of a transaction creates a wealth of information to better understand customers’ buying, usage, and reordering patterns and preferences.

Moreover, the Internet enables the creation of a loyal community built around the firm’s products and services. This virtual community is critical to customer retention in an environment of low switching costs!

Cheaper: The Internet is a great equalizer; it turns every vendor into an equal in a competitive bid. A consequence of eBusiness enabled market expansion, is that the customer now has more choice in suppliers. The customer has more alternate vendors, and lower prices are anticipated in all eBusiness driven markets.

The Challenge

No firm is invulnerable from the changes that eBusiness will bring to their market place. The most important issue is to act now- in anticipating trends and discontinuities in the market space, and to use this rare opportunity to leap frog over competition.

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