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Decision-making in the New Economy: Developing an E-Business Strategy

Dr. James R. ForcierManaging Director

Bay Analytics

27 June 2001

Copyright © 2001 by Bay Analytics. All rights reserved.

Bay AnalyticsECONOMIC STRATEGY CONSULTING

Learning From the Internet Investment Bubble


The Dot-com Era

• Innumerable Internet ideas

• Venture capital vs. bank funding

• Growth financing via IPOs

• Billions of public shares sold

• Thousands of market experiments launched


The Dot-com Era

• Lure of substantial earnings encouraged public tech investment

• Investor’s came to expect unreasonable returns

• US$5 trillion in market capitalization


Typical Dot-com Venture

Little economic value

• Untested software applications

• Spurred by easy financing

• Underlying consumer needs questionable

• Frequently not the only/best solution


Typical Dot-com Venture

• Revenues, customers not required for IPO

• No clear path to profitability

• “Content-free” business plans– Hypothetical offerings, value – Objective: first-to-market positioning

• Priority = lucrative “liquidity event”


Dot-coms vs. Economic Reality

Profitability matters !

• B2C & B2B concepts faltered

• Internet advertising revenues dissipated

• VC funding, initial public offerings fell off

• Investor rationality returned


The True “New Economy”


Value From Dot-com “Bubble”

Diffusion of innovation

• Failing businesses frequently purchased

– March 2001: 52 dot-coms shut down; 130 sold

– US$60 billion spent to buy dot-com technology over past year alone

• “Traditional” company experimentation

Sources: Total Telecom, Bay Analytics research


Value From Dot-com “Bubble”

Major macroeconomic shift

1. Steam age - production moved to factories

2. Railway system - allowed mass markets

3. Electricity - enabled assembly line

4. IT/Internet - catalyzing business efficiency


The New EconomyFirms will use IT & the Internet to:

• Reduce transaction & operating costs

• Increase factor productivity

• Streamline supply & production flows

• Improve information exchange

• Enter & create new markets

• Reach new customers

• Grow revenues


The New Economy

E-commerce

First phase: basic goods/services automation

– 20% of corporate spending

Next phase: inventory & general sourcing, purchasing, raw materials procurement

– 80% of corporate spending

– Huge, untapped electronic marketplace


The New EconomyE-commerce

– B2B purchases in 2001…

• Via Web sites: US$ 503 billion

• Via electronic marketplaces: US$ 172 billion

• Via electronic data interchanges & private networks: US$ 508 billion

Total:US$1.183 trillion

Source: Yankee Group


The New Economy

• Projected worldwide B2B Internet commerce (excludes private networks)

2003: US$3.6 trillion

2005: US$8.5 trillion

• By 2004, top 500 companies will handle 1/3 of their transactions on-line

Sources: Forrester Research BV, Boston Consulting Group


The New Economy

– European ASP market to grow between 2000-2005:

• 130% compound annual rate

• US$5.8 billion market by end of period

– B2C spending 2001: US$74 billion


Internet Grocery Sales

– Goal: market/sell groceries to consumers at competitive prices via Web

– Value proposition

• Direct-to-consumer sales and distribution

• Disintermediate producer-consumer value chain

• Electronic ordering and inventory management

• Lean workforce from elimination of unnecessary positions

• Stocking and delivery via electronic procurement and logistics



Challenges

• High-cost distribution centers

• No disintermediation

• Low-margin business

• Predecessors’ poor track records



Analytical shortcomings

1. Inadequate testing of target segment

• Insufficient consumers willing and able to use service

• Unproven buyer preference for home vs. store shopping

• Some potential users difficult/expensive to serve



Analytical shortcomings

2. Failure to anticipate competitive impacts of market entry

– Webvan’s marketing…

• Raised awareness of competitive threat

• Catalyzed competitor interest in offering low-tech alternatives


Maximizing the Probability for E-Business Success


I. Clarify Current Business Objectives

Clear business objectives are essential for determining e-initiative…

• Relevance

• Priority

• Value

• Application selection



Ensure that your existing business objectives are…

• Fully relevant

• Being pursued aggressively



1. Test current objectives for relevance with key executives, managers

• Do they share a common understanding of overall business goals?

• Are their efforts on target to meet them?



2. Assess relevance of ongoing programs in light of e-business proposal

• Should current programs be altered or delayed in light of e-business initiative?

• Will the e-business initiative need to be modified to avoid disrupting existing programs?

• Will e-business make other initiatives obsolete?

• Will e-business demand that your company change its strategic course?



3. Upgrade objectives if there has been any change in your…

• Competitive position

• Revenue/return goals

• Financing strategy

• Partnerships

• Customer base

• Regulatory environment



4. Ensure up-to-date business objectives are understood throughout the organization

– Make necessary business plan revisions

– Communicate plan organization-wide, with detail appropriate to each position

– Reinforce through management

– Test via employee queries, other


II. Identify & Test E-business Objectives

1. Determine what e-business is to help you accomplish

– Offer new services to customers?

– Better manage your costs?

– Add new lines of business/enter new markets?

– Facilitate deregulation or restructuring?

– Transition to a different enterprise type?



2. Ensure that e-business supports and complements your overall corporate goals

– Test “goodness-of-fit”

• What outcomes are sought via e-business?

• Do outcomes make sense per your larger business objectives? Market opportunities? Competitive positioning?

• Is an e-business approach necessary?



3. Gather information from affected consumers, suppliers, employees

– Are your assumptions about their requirements/preferences correct?

– Will your proposed e-commerce initiative…

• Benefit or support them directly?

• Impose costs, other burdens on them?



4. Clarify the true gains you will achieve through your e-business initiative

• Example: Hunt Company’s decision to forego a B2B exchange due to its…

– Disclosure of proprietary data

– Inability to handle product-classification codes

– Generation of small & credit-deficient new customers

– Inability to duplicate personal attention


III. Evaluate E-solution Cost Effectiveness

1. Forecast realistic and achievable objectives

• Estimate the costs of your e-business project

• Compare them against other options

• Develop means to measure how well those estimates are met



2. Forecast realistic and achievable objectives

• Determine what the e-application can actually do for your business

– What results have others seen?

– Have others been pleased with outcomes? Costs?

– What would a “worst-case” result be? How likely is it to occur? Could you live with it? What would fixes cost?



3. Calculate total solution costs

• Does your e-business costing methodology include…

• Temporary & permanent staffing needs?

• Workflow and personnel dislocations?

• System training?

• Parallel processing for critical operations?

• Software and hardware obsolescence?

• Upgrade requirements?

• Legacy system changes/upgrades/de-commissioning?

• Ancillary and adjunct system changes?



Example: B2B Internet commerce

– Of 42 western European companies’ who made sizeable investments in B2B Web portals…

• 40% do not know their portal’s total development cost

• 50% have no monetary savings target for their portal

• 74% have not set goals for generating business via their portal

Source: Forrester Research BV



4. Compare total solution costs and achievable objectives

• Incorporate new system’s expected useful life

• Discount operational timeframe for market evolution, obsolescence

• Assume diminishing marginal returns

• Assume unforeseen costs/unanticipated problems

• Quantify future modifications for your changing business objectives



The economic “bottom line”:

If your proposed e-business endeavor does not enable you to increase revenues or reduce staff, you shouldn’t be doing it.



For supply-chain, procurement systems:

– What specific business needs are you trying to satisfy? Purchasing? Inventory control? Management of supplier relations?

– Would the benefits of a public electronic exchange outweigh the costs?

– Are there sufficient transactions, suppliers, efficiencies to warrant a private exchange?



For financial, planning/ERP systems:

• Will you realize tangible labor savings?

• Can the new systems integrate with & “talk to” legacy applications?

• Will the analytical and reporting outputs have to be modified, customized?

• Can the new system be expanded/altered to meet changing business requirements?



For marketing/sales/CRM systems:

• Will solution generate value-added sales and marketing information?

• Will the solution’s cost be offset by adding new customers and sales?

• Will the solution fully automate processes or demand human augmentation?



CRM Example

• European CRM buyers’ software expenditures

– 1999: US$423 million

– 2004: US$3.5 billion

• 90% of European organizations claim to have a CRM strategy

• Fewer than 50% are happy with their CRM solution

Source: Sybase



CRM Example

• 26% of telecommunications providers are unsure about which CRM software to choose*, due to…

– Confusion as to what CRM can accomplish

– Large number of changing CRM solutions; no one can meet all of a company’s needs

– Buyers do not clearly understand their customer-relationship management requirements

*Source: Kainos



All Systems

• Is an e-solution the best alternative, versus…– Upgrades to current approach

– Organizational, staffing, management changes

– Staff training, incentives, re-direction

– Process re-engineering

• Can you ensure the same commitment/level of quality as your other high-priority activities?

• Will the results justify the labor, management time, capital required?


To Maximize Likelihood for E-business Success

Employ technology cost-effectively to:

• Increase revenues

• Reduce costs

• Support overall business objectives


Thank You!

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