commercecommerce
February 26, 2000
Plans for the day:
8:00- 9:00 Introductions (send me an e-mail giving info about you)
9:00 - 10:00 What is the New Economy?
10:00 - 10:20 break
10:30 - 12:00 What is happening and why: the basics of the IT revolution
12:00 - 1:00 Lunch
1:00 - 2:00 What is happening and why? (Video on the Internet?)
2:00 - 3:00 In-class exercise: Getting Started on Exercise One
3:00 - 3:30 Break
3:30 - 5:00 Discussion of today's readings
Doing E-Commerce is a combination of:
Incorporating and maintaining new technology
Figuring out how to use the technology strategically to generate competitive advantage
What is the New Economy?
Typical response:
Longest period of economic expansion
Low inflation with high growth
Large increases in productivityA more comprehensive answer:
Globalization (definition)
Computers and knowledge-based production
Internet
Nanotechnology
BiotechnologyThese have combine to create a new system of production / distribution / organization
Why has this happened?
Falling cost of communication and transportation (deregulation)
U.S. power in the world economy
How will the New Economy affect us?
E-Commerce (measures)
The New Economy: How is It Different? (pdf)
Laura D'Andrea Tyson, "Old Economic Logic in the New Economy," California Management Review, 41.4, Summer 1999, 8-16
Networks
Increased globalization
Winners, hangers-on, losers
Intensified competition
Accelerating rate of change
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What is happening? Why does technological change have such a profound impact?
In contemporary world we are experiencing radical changes in costs, prices, computing power, products, innovations, organizational - social - and political change brought on by the IT revolution 90% of the changes from the IT revolution are in front of us What are the historical origins of this revolution?
What happened to bring on the IT revolution?
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Overviews of E-Commerce
What is it the firms are paying I-Builders for?
Stages of e-business
Where are we in the cycle of change created by the Internet?
Evans and Wurster, Blown to Bits, 1-38 What does the case of Encyclopedia Britannica tell us about the competitive environment of the New Economy?
Information and business: Every business is an information business
The Internet alters - by several orders of magnitude - the number of people (reach) who can rapidly communicate complex (rich) information The economics of things versus the economics of information:
The information revolution separates information from physical things and in so doing releases enormous pent up value Richness and Reach:
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What is e-commerce? Commercial activity involving the sale of products over the Internet along with the integration of the Internet into commercial activity and the sale of internet-related products. Characteristics of the new economy: There is growing evidence that the U.S. economy is in the early stages of a powerful new wave of innovation. The leading edge is the information revolution, which permeates every sector of the economy. Over the last year, for example, high tech has taken half a percentage point off inflation and added almost a full point to growth. But there is much more to come. From the Internet to biotech to cutting-edge technologies that are just now nearing commercialization, the U.S. is riding a groundswell of innovation that could carry it well into the next century. ''We've never had a period in which innovation has so permeated our lives as in the 1990s,'' notes Joel Mokyr, an economic historian at Northwestern University who studies innovation. ''We have acquired knowledge in at least three or four areas that will be truly revolutionary.'' Adds Arnold B. Baker, head economist at Sandia National Laboratories: ''There's going to be a fundamental change in the global economy unlike anything we've had since cavemen began bartering.'' In part, the sudden re-emergence of technological progress is the culmination of years of research in disparate fields that are finally reaching critical mass. The Internet, which only became a commercial proposition in the mid-1990s, is the direct descendant of ARPANet, which was based on research funded by the Defense Dept. in the 1960s. The first successful gene-splicing experiment was done in 1973, but biotechnology is only now set to explode. Moreover, different parts of the innovation wave are starting to feed and reinforce one another, as fast computers greatly accelerate the ability of scientists to understand and manipulate genes. Conversely, biological techniques now seem the best foundations for developing tomorrow's new-generation computers. The innovation wave is also being given more force by the globalization of the economy. Bright ideas developed in Israel or India quickly find world markets. Technologically savvy immigrants propel high-tech companies in Silicon Valley and elsewhere. And the ever-expanding markets offer the lure of mammoth profits for a successful product that can be sold worldwide. The result: It becomes far more attractive to speed up R&D in hopes of getting a competitive edge. Skeptics believe that today's hot technologies--the Internet, biotech, and so forth--are inconsequential, in economic terms, compared with past breakthroughs. Fundamental innovations such as electricity and the internal combustion engine, argues Robert J. Gordon of Northwestern University, one of the most articulate critics of the New Economy, ''made possible a half-century of rapid growth in productivity that far exceeds what occurred before, what has occurred since, or what is likely to occur in the foreseeable future.'' And Paul Krugman, a Massachusetts Institute of Technology economist who has consistently attacked the New Economy, recently wrote: ''The truth is that we live in an age not of extraordinary progress but of technological disappointment.''
What Will Drive the 21st Century Economy...And How it Will Define the Coming Decades? WHAT WILL DRIVE THE 21st CENTURY ECONOMY... -- The information revolution will continue to boost productivity across the economy. Over the next 10 years, such information-dependent industries as finance, media, and wholesale and retail trade will change the most. -- A surge of major technology breakthroughs, including biotechnology and MEMs, will begin to create entire new industries over the next 10 years. -- Increasing globalization will simultaneously provide much larger markets and tough foreign competitors. The result: Companies will have even more incentive to innovate while cutting costs.
...AND HOW IT WILL DEFINE THE COMING DECADES -- The economy will grow substantially faster than most economists expect--perhaps 3% or more per year. -- Inflationary surges and large budget deficits will become less likely. -- Despite all the scare talk, the next generation will enjoy a rising standard of living, even while baby boomers are able to retire comfortably. -- Countries that follow policies that encourage innovation, free trade, and open financial systems will enjoy a competitive edge. -- Businesses that master the new technologies will be able to count on better profits and bigger market share.
THE DOWNSIDE -- Major dislocations and uncertainty for workers and businesses will be inevitable as new technologies are adopted. -- Technology shocks will increase economic and financial volatility, both in the U.S. and globally.
The Future Corporation Cisco CEO John Chambers believes that the new rules of competition demand organizations built on change, not stability; organized around networks, not a rigid hierarchy; based on interdependencies of partners, not self-sufficiency; and constructed on technological advantage, not old-fashioned bricks and mortar. The network structure has vast implications for managing in the next century. It seamlessly links Cisco to its customers, prospects, business partners, suppliers, and employees. This year, Cisco will sell more than $5 billion worth of goods--more than half its total--over the Internet, nearly three times the Internet sales booked by pioneer Dell. So successful has Cisco been in selling complex, expensive equipment over the Net that last year Cisco alone accounted for one-third of all electronic commerce. Using the network for tech support allows Cisco to save more money than its nearest competitor spends on research and development. ''It has saved me 1,000 engineers,'' gushes Chambers. ''I take those 1,000 engineers, and instead of putting them into support, I put them into building new products. That gives you a gigantic competitive advantage.'' The network also is the glue for the internal workings of the company. It swiftly connects Cisco with its web of partners, making the constellation of suppliers, contract manufacturers, and assemblers look like one company--Cisco--to the outside world. Via the company's intranet, outside contractors directly monitor orders from Cisco customers and ship the assembled hardware to buyers later in the day--often without Cisco even touching the box. By outsourcing production of 70% of its products, Cisco has quadrupled output without building new plants and has cut the time it takes to get a new product to market by two-thirds, to just six months. In this new model, strategic direction is not formed by an insular group of top executives, but by the company's leading customers. It's an outside-in approach, as opposed to an inside-out. The customer is the strategy.
A New Management Primer Some key lessons from Cisco Systems and other progressive companies: NETWORK, NETWORK, NETWORK FOCUS ON THE CUSTOMER BUY SMART TEAM UP FOR SUCCESS SHARE THE WEALTH THAT PERSONAL TOUCH
Faster, Cheaper, Smarter How the new manufacturing model boosts U.S. competitiveness INNOVATION EFFICIENCIES CAPITAL COMPETITIVENESS
The Emerging E-Commerce Business Model Somewhere out there is a bullet with your company's name on it. Somewhere out there is a competitor, unborn and unknown, that will render your business model obsolete. Competition today is not between products, it's between business models. A real E-corp. isn't just using the Internet to alter its approach to markets and customers; it's combining computers, the Web, and the massively complex programs known as enterprise software to change everything about how it operates. The Internet will change the relationship between consumers and producers in ways more profound than you can yet imagine. The Internet is not just another marketing channel; it's not just another advertising medium; it's not just a way to speed up transactions. The Internet is the foundation for a new industrial order. The new reality is consumer control, and it's as ominous as it sounds if you're not prepared for this radically different future. Indeed, the Internet represents the ultimate triumph of consumerism. Sure, you know the Internet is going to be important, but if you don't have a deep, visceral sense of how radically it's going to change today's industrial order, you're going to lose. Are you convinced that you really understand
the potential impact of the Web? Are you sure that The Net threatens to shatter the mass market into millions of individual consumers doing their own thing online. For the online advertiser, the challenge is to educate, entertain, and entice, for no one can be compelled to pay attention online. If you want to advertise toothpaste online, you need more than photogenic lovers with toothy smiles. Unilever has created a Website for Mentadent toothpaste that offers potential customers the chance to order a free sample, get oral-care advice, and send questions to a dental hygienist. Every week American Airlines sends E-mail to more than a million NetSAAver subscribers listing rock-bottom fares for undersubscribed flights on the coming weekend. A company called Yoyodyne calls it permission-based
marketing, which stands in contrast to In the off-line world, the cost of directly comparing products or services was often prohibitively high. No more. Online, mediocrity will have no place to hide. E-commerce visionaries like Junglee and C2B Technologies are developing powerful search engines that allow consumers to search for products and bargains all across the Net. Using a virtual database that integrates information from dozens of online merchants, and intelligent agents that scan that information to find the best deal on a particular product, Junglee aims to let consumers comparison-shop on a scale previously unimagined. Suddenly, instead of searching ten different sites, would-be buyers can view the results of a Netwide search in one easy-to-read table. The Net currently allows a vendor to build to demand, thus keeping inventory to a minimum. Increasingly the Net will enable building to spec. Why shouldn't you be able to custom-build your own CD, track by track? In letting customers download specific tracks, N2K.com has been taking the first few tentative steps in that direction. Consumers don't want products, they want solutions. Say you want to build a backyard deck. Why can't you go online to a do-it-yourself site, review a dozen potential plans, select the one you like best, have it instantly adjusted to fit the dimensions of your house, compile a complete parts list, order the parts, and have them delivered to your home with a step-by-step instruction sheet? Today this is just an E-dream, but solution selling will be de rigueur on the Net, and it will allow online merchants to substantially differentiate their service from that of off-line retailers. Think about the economics of teaching thousands of Home Depot employees to give helpful advice to weekend do-it-yourself enthusiasts. Now think about the economics of making that advice available on the Web. No contest. The Web will make it possible to hold real-time auctions for just about everything. One of the most successful online auctioneers is eBay. Essentially a national classifieds listing, where potential buyers bid against each other, eBay claims to have more than 900,000 products for sale in 1,086 categories. The site receives 140 million hits a week. E-commerce breaks every business free of its geographic moorings. No longer will geography bind a company's aspirations or the scope of its market. There will be dozens of companies that lose their local monopolies to footloose online merchants. Customers, as well as producers, will escape the shackles of geography. The goal is not just to minimize the hassle of finding something but to minimize the hassle of getting it as well. While companies have spent a decade optimizing the supply chain that runs backward toward suppliers, the delivery chain that runs forward toward customers has changed hardly at all in the past 100 years. Retailers still tell customers, You have to come to us. But online consumers are saying, No way--you have to come to us. My place, my time is the new mantra of consumers everywhere. No one sleeps in cyberspace, and the store is always open. The secret of Hotmail's vertical takeoff? Word of mouse. Every time someone sent an E-mail to a friend, the message carried an offer to sign up for free E-mail. At Hotmail they call it viral marketing: Harnessing word of mouse, Hotmail's message spread like a contagion. Viral marketing of the type perfected by Hotmail is the product of an offer too good to refuse multiplied by exponential word of mouse. Online competitors will undermine the price discipline in cozy markets, even if they don't dominate a segment. They'll also attract the most profitable customers--youthful, tech-savvy, big-volume buyers. Given the high fixed costs of many retailers, it doesn't take a big drop in customers to produce a precipitous decline in profits. So you can't ignore the Web. The Web lends itself to immediate customer feedback and rapid adjustment. Learning cycles are much shorter online than off-line. Companies that are quick to try, quick to learn, and quick to adapt will win. Those that learn fastest, and keep learning, will stay ahead. Companies that take months to assess what they've learned, whose internal processes don't run on Internet time, will get left behind. Zipping through the learning cycle creates positive-feedback effects: The faster a company learns and adapts, the more customers it wins; the more customers it wins, the faster it can learn and adapt. If you don't believe deeply, wholly, and viscerally that the Net is going to change your business, you're going to lose. And if you don't understand the advantages of starting early and learning fast, you're still going to lose. In trying to fill customer orders for specific brands and products, Peapod found that out-of-stocks were three to four times more prevalent than supermarket managers had thought. Clever producers and retailers are going to develop hybrid models that give customers the chance to combine the best of both online and off-line buying. In a study of 850 consumers, Ernst & Young found that 64% of Internet users research products online and then buy them at stores or by telephone. No more holding people hostage through 30-second commercials. No more hype. No more ignorant customers. No more local monopolies. No more search costs. No more Get in your car and come to us. If you've been paying attention, you're sweating by now. In frictionless capitalism nobody makes any money! So how are people going to survive in the so-called New Economy? Well, ultimately the same way they survived in the old economy--through relentless innovation, unparalleled service, and an attitude of genuine helpfulness, but delivered in new ways. The Net is a noose for mediocrity. But it's a humongous springboard for products and services that are truly great and truly consumer-friendly The networked economy is built on the Internet and the computer networks running around inside companies. Those networks will do for knowledge what the steam engine did for manpower: leverage it, move it and use it more efficiently. Information and communication become by far the most important component of the economy. The arrival of the networked economy, the gurus say, should be like the transition from an agrarian economy to an industrial one. The disruption might be greater, though, because the networked economy will happen 10 times faster than the industrial revolution. "E-business communities" These communities are electronic networks of suppliers, distributors, commerce providers, customers and even competitors. Their mission: to collectively produce products and services by exchanging information online. In the 1980s and '90s, a radical shift occurred when advances in communication technologies allowed information to be exchanged between companies. Organizations could "virtually" integrate their supply chains through electronic links to their partners: one central company connected to its partners in a hub-and-spoke network. Businesses on the Net can focus on what they do best, and mix and match efforts with partners in ways never before possible. That's the power of e-business communities. They represent a whole new system for creating wealth, in other words, a new way of doing business. They're fast and flexible. They reduce supply chain costs. They create markets. They empower their customers and in turn, are empowered by them. They skim the cream off the top of large pools of talent. In the networked economy, the key to competition lies in building strategic partnerships and finding innovative ways to deliver products and services, old and new. Four types of e-business communities -- the value chain, open market, aggregation and alliance models -- are evolving in the networked economy, expected to generate more than $526 billion in revenue by 2002. The Value Chain: Cisco is successful because it carefully and efficiently manages the flow of information from customer input (customers order directly through the Web site) to product delivery. A network of distributors, manufacturers and suppliers are constantly competing with one another, which drives innovation. Information is still shared among competitors, leading to a combination of healthy competition and collaboration. This level of coordination would be unthinkable without the Net. Open market: Priceline.com is a Web site that lets consumers bid for their plane tickets, and more recently cars and hotel rooms. Buyers submit a "guaranteed bid" for desired flights -- the lowest price they think they can get away with. Priceline then forwards the bid to participating sellers. The first airline to accept gets the sale. Priceline completes the transaction. Aggregation: HomeAdvisor, Microsoft's EBC answer to home buying, doesn't just offer hundreds of thousands of listings available on its Web site. It also has developed a variety of partnerships to provide real-time mortgage calculators, crime and school statistics, maps covering every U.S. metro area, live e-mail updates and loan qualification. Alliance: the 3Com PalmPilot case. It is an example of an Alliance EBC -- the most "virtual" and free-flowing type of EBC. PalmPilot is unique because most of its product development happens outside the company. But unlike Cisco, there's no one in charge. The EBC instead works more like a giant online jam session. Rather than guarding its programming secrets, 3Com makes its "code" available to one and all. The result? A huge community of users (most of them hackers) and partners developing support software, parts and accessories. PalmPilot benefits from an increase in the number of functions it performs, not to mention a growing community of committed users. If a customer buys a router, the program
automatically tracks when the next software upgrade is available
and ships a reminder to the salesperson to pay the customer a
call. If a company hosts a But what really blows marketers out of the water is that marketing automation lets them work in what Fletcher calls "Internet Time." Marketing campaigns, which are getting more specialized and focused as they target much smaller potential market segments, can be modified in real time based on the success or lack or success of a given campaign, he says. The market space Rubric occupies was one that didn't exist even two years ago. It only is possible because of the rapid emergence of a truly networked economy. It's all about instant access to information, databases, instant connections and instant answers. At SSM Health Care, a network of 23 Catholic hospitals and health care facilities in the Midwest, setting up a computer network to process and relay lab reports to physicians is saving $350,000 a month. The system serves 19,000 physicians and handles 70,000 reports a month. Lab results go into a central database built using Lotus Notes software and, depending on a physician's pre-set preferences, are routed to fax, computer or -- if the results need urgent attention -- a text pager. The notion of what it means to be a retail company will change in five years when there are a billion people on the Internet. The bundling of services on the Internet into products ranging from soap to cars is what makes them competitive. Every company becomes a retail company. Every company will need to reach out to consumers directly and develop relationships with them, rather than selling only through retailers. What does it mean to be in the educational sector when working and learning become the same activity and networked knowledge is the foundation of success? (Are you working today or learning?) Every company will become an "education" company or it will fail. If your company doesn't have plans to establish its own "college," it is probably in trouble. The new site includes: A virtual dressing room, where consumers can download images of clothes in their "shopping bag" in eight seconds or less, without installing special graphics software. The images can be arranged on-screen so customers can see how they look together. A service allowing customers to order custom-tailored blue jeans. Virtual salespeople offering men tips on matching pants and shirts. The next frontier in electronic commerce isn't about fancy voice and video features, although plenty of those will arrive before too long. The emphasis is on using existing database technology and some standard graphics software to make online shopping more personal. It's part of an effort to build customer loyalty and trust in a competitive market. Before the networked revolution, buying products from remote Chinese factories meant time-consuming journeys to the East or dependence on go-betweens. Now, Asian Sources Online is a cyber gateway where East meets West and goods flow back and forth, oblivious to time differences, language barriers and physical distance. And, since more and more people are depending on themselves as a resource, he adds, "people really want to have brands that are reputable, reliable, that they trust, that integrate into a one-stop financial services hub." "If you hook up with the wrong brand and you have a good brand name, it could so thoroughly destroy some of the value."
Bane, Bradley and Collis, "The Converging Worlds..." Why use this article?
How do Figure 2-3 and Figure 2-4 provide an analytical basis for trying to determine the forces controlling change and the outcomes of change? Terms: system integrators 39 Clemons and Bradley, "Strategic Uncertainty.... This article attempts to provide some conceptual help in thinking about the massive strategic uncertainty created by the web and e-commerce. Use quote on 85-86 How can businesses - new or old - plan for and cope with radical market changes? One way of seeing this is to ask: what are the implications for "zero-cost bandwidth?" or zero-cost interactions? How does this radical decline in cost affect the balance of power between making products/providing services internally or obtaining these goods and services externally? Make or buy What is strategic uncertainty? Strategic uncertainty is information about the future, to which we cannot assign probabilities, that affects significantly our ability to make decisions about how to position the firm. Seven strategic uncertainties about the way consumers will interact with online businesses: 1) What patterns of evolution in consumer adoption of online buying; what segments of the market will be affected first? 2) Importance of brand names; which brand names? 3) How much risk will consumers accept in making online purchases? 4) How important will consumer attachment to shopping outlets be on the web? 5) Will consumers accept the collection and use of individual information profiles that will enhance purchases or will privacy sentiments block this? 6) Who will own, control, and benefit from consumer information? 7) Will traditional retailers be replaced by new and different types of business forms in selling directly to customers? Will online shopping evolve like the adoption patterns for ATMs? Reduce uncertainties to: 1. Will consumers opt to stick with traditional retail interaction offline or will they migrate in large numbers to online purchases. 2. Will consumers control the purchasing interaction or will they accept intermediaries as facilitators to lower cost and make shopping simple? 3. Will the internet remain an open system based on inteoperability or will it become controlled by major players? Scenario analysis Identify the key uncertainties Scenarios
Ease of use of the internet Large number of sellers Mass Customization
Sellers own and control customer information and use it to their advantage Significant alliances among goods providers
How do we think about the problems of decision making in these different scenarios? There may be great pressure to respond to the e-commerce revolution without being able to distinguish the probabilities associated with different scenarios. Decision makers must manage the trade-offs between: (1) investment now to become a first mover or to respond to competitor (with the losses that may come from this - for example, the loss of traditional retailers who drop your product when it goes online) and (2) waiting to see what will happen (reducing the uncertainties) with the costs of being left behind. Managers will also need to cope with having a combination of online and traditional firm. The innovations of the online group may affect the morale of the traditional group. Large numbers of employees may resist change and act to undermine the success of the online operation. Correct decisions may produce increasing returns in that they are amplified into major strategic advantages. Incorrect decision may also generate amplified costs that become large strategic disadvantages.
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