old ecomm models

8/20/2019 Old Ecomm Models

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Disintermed1iation Concept

The concept of shortening the supply chain or "disintermediation"caused by electronic commerce is a relatively new concept. Typing‘disintermediation’ into Yahoo’s search engine, results in over 18

document matches. !ccording to one author, the word has onlybeen around for three or four years. n its widest sense,disintermediation means the elimination of intermediaries such asdistributors and retailers.

There is a natural evolution in the ways organi#ations provide valueto the supply system. The value system $%orter & 'illar 1(8)*, as%orter terms it, is in a period of change given advances ininformation technology+. hat is it that fuels the interest ininformation technology towards value chains- Transaction costtheory provides some insight. igand and en/amin havesummari#ed that there are two mechanisms for coordinating the0ow of materials and services through ad/acent steps in the valuechain mar2ets and hierarchies.

344567!T47 34T

hat are the costs that support coordination between multiplebuyers and sellers, i.e., mar2et transactions, and those supportingcoordination within the 9rm, as well as industry value chain, i.e.,

hierarchy transactions-: n the most basic sense, we can thin2 ofthese costs as the costs of channel inventory procurement andinternal general & administrative costs. n a larger sense, we canconsider the cost of accessing customers and managing customerrelationships. ;conomic theory and practice shows that 9rms willsee2 to minimi#e the costs. ;vidence in this regard comesfrom + Technologyogistics 4perations. ?on @ir2egaardremar2s "t used to be 3ompany A competing with 3ompany Y, 7owit


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e can see why companies such as + and E; that lin2 thedistributor’s inventory management systems with themanufacturers and suppliers electronically, are growing so rapidly.The opportunity costs of ineFicient overhead and wor2ing capitalare enormous. ;ven if we view the opportunity costs as the costs ofdistributor inventory and order processing the savings are verytempting. Cor eGample, 6oug Tuttle H 7ational 6irector of IighTech %ractice 6eloitte & Touch 3onsulting said $on 6ell versus3ompaJ*, "6ell has a 1D K 1+D cost advantage over someone li2e3ompaJ mainly because of the lac2 of inventory.")Thus, its notsurprising that 6ell has been able to maintain competitivelyadvantageous prices. 4n 'arch (th, 1((8, 3ompaJ warnedinvestors of disappointing results for among other things, fallingprices and demand. 4n the same day, 6ell said, that not only is

demand 9rm, but they are "not feeling price pressures and continueto price to our $6ell’s* cost structure". 'any people havespeculated that 3ompaJ’s resistance to setting up an onKline directchannel forced them to consider acJuisitions of higher margincomputer companies such as 6igital ;Juipment 3orporation.

!% has recently placed it sta2e in the eKcommerce mar2et with aneJuity investment in 3ommerce4ne. The agreement is to integrate!%’s world leading enterprise resource planning application, !%5L: into 3ommerce 4ne’s 3hain uite for cooperate purchasing on

the orld ide eb. 3huc2 6onchess, =% of mar2eting andbusiness development at 3ommerceK4ne stated, "suppliers arebrought into the eJuation as if they were departments inside thecompanyMit will allow companies to chec2 a supplier’s inventory,place the order, and reconcile order problems."

65;3T '46;> ICT

o why aren’t traditional tangible goods industries shifting to acustomerKdirect model- Cirst, to dump your intermediaries would

suggest that the manufacturer could ta2e over privileged customerrelationships eFiciently. n fact, that is not the case. ! 1B" computerscreen with da##ling graphics cannot replace the power of humanrelationship. %lantronics nc’s. $ma2er of telecommunicationheadsets*, 3;4 recently noted that demand in the call centerindustry for headsets has recently begun a strong return as peopledemand human interaction for service. !lso, distributors are willing

http://www.sap.com/http://www.commerceone.com/http://www.plantronics.com/http://www.sap.com/http://www.commerceone.com/http://www.plantronics.com/


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to accept lower net pro9t margins on the order of )DK1D whichmanufacturerLdevelopers are not willing to invest in $+ND 54reJuirements*.

This is not to say that electronic commerce business systems will

not replace the role of human interaction. 4n the contrary, giventhe nonlinear growth of business to business netKbasedtransactions ($200B by 2001 ! "lso see Exhibit 2) the mar2et of electronic opportunities will be large. t is closer to say that manypeople erroneously /ump to the net as the endKtoKend solution forcutting costs. Yet they forget the strategic implications of theirdecision. This, in fact, is the 9rst reason we haven’t seen atremendous shift to opening electronic direct channels by eGistingmanufacturers in traditional tangible goods industries. nstead,

ma/or investments in the =3 community are being targeted atbuilding the new digital middlemen.O tartups such as !ribaTechnologies, 3ommerce4ne and !ctra usiness ystems areautomating business produces that support electronically lin2edbusiness value systems. The =3 community believes that theirinvestments in 45' $operating resource management* companieswill lead to the emergence of the new value chains.

The second reason we haven’t seen a ma/or shift to the electronicchannels is the complications caused by this new arrangement.

3onsider the sources of value in the traditional supply chain at thedistribution level. holesalers provide a ma/or inventory anddistribution location to warehouse and distribute product tohundred and maybe thousands of local retail outlets. The localretail outlets, then provide local sales, service and support for theproducts they sell. holesalers provide value mainly in theeFiciency of their distribution and ma2e money on their ability tominimi#e inventory and stimulate demand at the retail level.5etailers, provide value mainly through their availability ofproduct, information dissemination, service and local

administration. ith the advent of 45' software coupled withhighly eFicient distribution networ2s a signi9cant portion of thetraditional value at the wholesaler and retailer levels is madeunnecessary. hat is necessary are the client lists, relationshipsand mar2eting information at the local level that is so crucial to themanufacturer.


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o what has happened when the manufacturer has tried to move tothe direct model- 3onsider 3isco’s %at Crey, 'anager of upply3hain 4perations on sharing information between supply chainpartners. "e’ve run into Juite a bit of resistance," says 3isco’sCrey. ">ots of people /ust aren’t ready to start sharing informationon this level."O Crey probably isn’t surprised in reality. f thedistribution channel doesn’t trust the intentions of themanufacturer you can bet they will resist sharing their most

valuable assets, i.e. customer intelligence.

This is not an isolated case. ased upon our research, we have notidenti9ed even one public company in an eGisting traditionaltangible goods supply chain that has opted to open an electronicchannel directly to its end users. e see the largest untapped

opportunity in electronic commerce going to the value chains thatadopt the electronic business model that aligns the strategicsources of value of the distributorLretailer with the manufacturerand supplier while eliminating the ineFicient transaction costs.Pntil that occurs, we will continue to see merely shavings of costscoming out of supply chains versus order of magnitude strategicimprovements.

Business #odel Direct to Consumer

ith more than :1 million connections to access the eb, usersspread around the world are truly starting to believe in the nternetas a viable emerging channel for purchasing both products andservices. 'any companies have opted for starting from stage 1 todevelop a business plan for this purpose. They have emerged inwellK2nown industries li2e computer sales, boo2, investing, homedelivery, etc. ith innovative business models, they have managedto ta2e mar2et share away of traditional mar2eting channels. 6elland !ma#on.com are considered to be innovators in the adoption of

this model and in the following section we will discuss theadvantage of a channel strategy li2e theirs.

"#"%&'.CIistory

http://www.cisco.com/http://www.amazon.com/http://www.cisco.com/http://www.amazon.com/


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!ma#on was founded in 1((B by 3;4 ?eF e#os, when he wasloo2ing for a eb service that would oFer eKcommerce advantagesunavailable at traditional retail stores. oo2s came to the top of hislist of viable products to sell because of the unlimited amount oftitles and the easiness to develop search and retrieval interfaces.ac2ed by approGimately Q1 million in venture capital money from

?ohn 6oerr, the company incorporated in ?uly 1((B. n ?uly 1(() !ma#on sold its 9rst boo2 on line. ince then, it has gainedsigni9cant sales momentum and developed a number of vendorrelationships. t is one of the most widely 2nown, used and citedcommerce sites in the eb with daily hits to its site averaging over8,, which translates into : million hits per year. ales haveincreased signi9cantly from Q8O), in the 9rst Juarter of 1((R toQRR'' in SB 1((O. t presently has more than (B, customer

accounts in 1R countries. 8

;lectronic !dvantages of onKline store

ome years ago, boo2stores began building bigger stores in eFortsto meet demand and more eFiciently manage inventories. arnes &7oble and orders led this superstore trend. These businessmodels typically reJuire signi9cant investments in both real estateand inventories. !verage boo2sellers carry around 1:, titles,with some of the biggest ones carrying 1O,.( !ma#on.com has

signi9cant advantages over these traditional retail boo2storesincluding

Direct customer advantages

• +B hours a day, O days a wee2 availability

• Pnlimited shelfKspace that provides potential customers withaccessibility to more than +.) million titles, 1B times morethan traditional boo2store superstores.

• !ccess to search and retrieval systems that ease the customersearch /ob.

• =alue added content as teGt eGcerpts and titlerecommendations, which can be provided to aid the customerin their purchase decision.


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• Elobal accessibility from all over the world, onKline stores li2e !ma#on.com can eGploit the advantages of selling anddistributing worldwide.

Cost advantages

• 3entrali#ed and largely automated operations instead ofinventory management in a complicated supply chain. Thisdirectly impacts cost structure and allows for rapid inventoryturns. 6emand forecasting is simpli9ed and channelmanagement is eliminated.

• >ow investments in real assets and real estate.

!nalyst 'iles 6. 5uss eGpects that the company, which is stillwor2ing at a loss, will reach pro9tability by the end of 1(((, aftercritical sales volume is reached. This eGpected growth is based on anumber of 2ey advantages

• !ma#on.com has positioned itself as the leading onKlineretailer and by owing and retaining the advantages of a 9rstmover.

• rand eGtension !ma#on can leverage its strong brand name

by selling other products li2e 36s and videotapes. !lreadythey have begun selling a limited number and will slowlyeGpand their product breadth. 3ustomers interested in variousproducts will be able to eliminate most acJuisition $shipping*costs.

• oo2s and music sales already generate Q1) million onlinerevenues. This category is eGpected to grow signi9cantly inthe following years.

• !ma#on.com has developed strategic alliances with 9ve out ofthe siG most visited sites in the nternet, including ;Gcite,Eeocities, !4>, 7etscape and Yahoo, ensuring that thecompany has the maGimum eGposure to online subscribers.


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• !ma#on.com continues to build a database of customer’sinformation and purchasing patterns, enabling true directmar2eting to pump sales.

Business #odel raditional ith ransitional Baby *teps

ome companies have been assuming a more visionary attitudetowards the utili#ation of the nternet as an important businessKtoKbusiness communications means. (see Exhibit +). nstead ofselling directly to its customers, the auto industry is an eGample ofan industry that has ta2en small steps by rolling out ;Gtranets andother services to lin2 the diFerent components of the value chain,suppliers, manufacturers, dealers, etc. n the following paragraphswe will outline the steps one of the "ig three" auto manufacturershas ta2en.

,ord #otor Company

Cord 'otor 3ompany’s Cocal%t ;Gtranet was rolled out in 1((Owith the intention of providing customer support worldwidethrough its networ2 of 1), dealers.1 5epair records ofindividual vehicles are available online for throughout thedealership chain, along with inventory, pricing, 9nancing, andpromotional information to help salespeople close a deal.

!n ;Gtranet in this sense is no more than a networ2 comprisingelements of both ntranet and nternet, establishing securecommunications and data eGchange between internal and eGternalusers. elow are some of the pros and cons of an ;Gtranet li2e theone Cord has launched

%54

• 3ost avings associated with typical channels in terms of

time, travel, phone, and faG calls.

• Caster and cheaper online publishing and distribution ofmanuals and other documentation is faster and cheaper thanprinted materials.

http://www.ford.com/http://www.ford.com/


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• ;nhanced interKcompany collaboration and routine processesli2e purchasing, order ful9llment, and inventory control.

• !Fordable information transportation and prices madeavailable by the nternet.

• >ow training costs since the browser is the functional user’stool.

347

• 3oncern for data security. The fear still eGists that the;Gtranet will provide a direct channel into the company’sdatabases and information resources.

This problem has been addressed by a number of ways such aspassword protection, secure server technologies. 4ther optionsinclude placing the shared data outside the boundaries of thentranet or 9rewall, or contract hosting services to % that provide

virtual private data networ2s with special encapsulations andsecurity transfer protocols.

Business #odel Combinin- raditional and Direct

ome companies have opted for a middle approach in the adoptionof the nternet as a viable and pro9table way to commerciali#e itsproducts. !ny industry in general where dissemination ofinformation is of additional value to consumers is li2ely to besha2en by the nternet sales trend. !mong these are auto sales,9nancial services, travel, insurance, etc. The software industry is aclear eGample of such companies that have been slow and cautiousin implementing a double distribution channel.

'/ #C&*&,

3ompanies li2e ntuit and 'icrosoft are developing businessmodels consisting of a miG of the old supply chain model and a newdirect sales approach.1+ ntuit has been reluctant to push electroniccommerce because they don’t want to upset the traditional saleschannel. Iowever, they are now selling products both on the eband in regular retail stores. !lthough one of the main advantages of

http://www.intuit.com/http://www.microsoft.com/http://www.intuit.com/http://www.microsoft.com/


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selling on the eb should be a lower price due to a lower coststructure, ntuit’s prices on the eb are actually slightly higherbecause of large discounts oFered in the retailing channel. !lanEleicher of ntuit said, "e don


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web technology to totally new systems designed around a businessmodel where the manufacturer can sell direct to the consumer.

;ssentially there are three diFerent approaches to the"intermediation" problem. Cirst, there are many software

companies that build "3onvergence !pplications."1: This is ageneric term that is de9ned as applications focused on solvingproblems and processes eGternal to a company. Cor eGample, an;Gtranet solution would be a type of "3onvergence !pplication."3onvergence applications are also de9ned as systems that use openstandards, usually ob/ectKoriented, and purchased from an outside

vendor rather than developed inKhouse. econd, other companieshave ta2en an endKtoKend approach by providing turn2ey or "Totalolution" systems where a company’s entire operation can be

compressed into one pac2age. This model best facilitates directsales since it gives the manufacturer or distributor an immediatepresence with the customer while also providing the bac2 endbusiness logic for the entire sales operation. hile these turn2eysolutions can bring a company’s sales presence to the web rapidly,many of the most successful solutions have been created by inKhouse development. This is the case for !ma#on, 3isco, and 6ell,who have each invested millions of dollars building custom webKbased systems supporting their new business models.

Enabler ype Coner-ence "pplications

3onvergence applications typically allow a company to improve itseGisting supply chain by optimi#ing certain segments ofcommunication or reducing lead times and errors. Psually thesesolutions serve to reinforce eGisting distribution models rather thandeveloping entirely new scenarios.

;nabler 3ompany 3ross5oute oftware

%roduct !lliance

%rice Q+), to Q1 'illion

3ustomers !daptec

@ey Technology ?ava, indows 7T

http://www.crossroute.com/http://www.crossroute.com/


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3ross5oute’s product "!lliance" is targeted at lin2ing customers,distributors, and suppliers via an ;Gtranet. The business processessupported include inventory replenishment, distributor ordermanagement, and logistics operations. ! 2ey advantage is

!lliance’s integration with bac2Kend ;5% $;nterprise 5esource%lanning* systems. The system allows a manufacturer to instantlydistribute design documents in addition to sales forecast info, %data, and Juality reports to its channel. The result is reduced leadtimes as a competitive advantage to its competitors. !n addedbene9t is a logistics eGtension that allows a manufacturer tomonitor inventory in warehouses operated by third parties. Theycan also send orders to the logistics providers and receive shippingcon9rmations.

4n the other side of the eJuation, distributors can directly enterorders into a manufacturer’s system with up to the minute pricinginformation. %lus the system only allows correctly con9guredorders $in the case of a con9gurable product*. !fter orders areplaced the distributor receives order con9rmation and shippingdetails.

;nabler 3ompany !riba Technologies

%roduct !riba 45' $4perating 5esource 'anagement ystem*

%rice QO), and up

3ustomers !'6, 3isco, 4ctel, =isa

@ey Technology ?ava

imilar to 3ross5oute’s system, !riba has developed ;Gtranetapplications focused on the purchasing side of the supply chain.Iowever, !riba’s focus on the 45' mar2et is somewhat diFerentfrom 3ross5oute’s. 45' systems handle purchasing of industrialsupplies, oFice supplies, capital eJuipment, services, and othernonKproduction items that an enterprise acJuires to support its dayKtoKday operations. Iowever, !riba provides additional functionsinternal to the company such as I5 information for purchaseapprovals that ma2e it very diFerent from 3ross5oute.

http://www.ariba.com/http://www.ariba.com/


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nterestingly, 45' software li2e !riba’s does not give a companyany new ability to manage its customers, rather it has an oppositeeFect. t allows suppliers to be more integrated with customerswho use 45' software. Cor instance, a paperKclip manufacturermight supply a company using 45' software. ith the enhancedability to communicate order information with this customer, thepaperKclip supplier could change its distribution model tocommunicate directly with its customers and eliminate some eGcesscosts in managing a supply channel.

Enabler ype otal *olutions

hile "Total olutions" pac2ages could broadly be de9ned underthe category of convergence applications, they are diFerent in thesense that they enable entirely new business models to beimplemented. Their 2ey advantage is of course faster time tomar2et and lower development costs since the software ispurchased from a speciali#ed vendor.

;nabler 3ompany 4pen 'ar2et

%roduct Transact, >ive3ommerce

%rice Q1+), and up

3ustomers !T&T, arclay Juare, 6isney tore, uy6irect.com,M

4pen'ar2et’s product Transact, originally developed in 1((), hasmatured to become the premiere electronic commerce storefrontsolution. t integrates the customer ordering and payment processalong with bac2 end logic to support the business operation.>ive3ommerce, a webKbased industrial catalog product,compliments Transact by providing the lin2 to a company’ssuppliers. 'anufacturing companies could 9nd it an easy tool touse to develop a web direct sales channel for tangible goods, but‘digital product’ companies have already ta2en it to the neGt level.Cor eGample, uy6irect.com uses 4pen'ar2et’s products to sellsoftware directly over the nternet. This new model totallyeliminates distribution and provides instant delivery to thecustomer.

;nabler 3ompany road=ision

http://www.openmarket.com/http://www.broadvision.com/http://www.openmarket.com/http://www.broadvision.com/


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%roduct 4neKtoKone commerce

%rice Q1, and up

3ustomers @oda2, IewlettK%ac2ard, %hillips ;lectronics, M

road=ision’s 4neKtoKone commerce system provides similarcapabilities to that of 4pen 'ar2et. t also provides capabilities tocrossKsell products to customers and handles digital coupons andother incentives. n addition to the digital storefront application,4neKtoKone handles order management and ful9llment.

Enabler ype 3ome 4ron *ystems

Iome grown systems are by far the most 0eGible of all solutionssince the only reJuirements are a set of development tools and alarge investment from the company. t is interesting to note that thecompanies that have made the largest internal investments indeveloping their web business models are also the companies thatare leading the world in eKcommerce. n fact, in a 1((O year endsummary by 3L7;T, 3isco, 6ell, and !ma#on were identi9ed as theleaders in eKcommerce and described as "M credible, ma2ing lots of money, everyone wants to be them, and it seems to be a sustainablebusiness model on the eb."

Conclusion

! short list of priorities such as adopting a standard for domainnames, ensuring privacy and security, and establishing commercialpractices will shape and determine eKcommerce’s future.ncreasingly companies and individuals are going online for basic

commerce and ways to save money. The industry must commit itself to producing uni9ed and wor2able solutions to the challenges ofselfKregulated business.


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Exhibit 1 5alue Chains in the *hirt ndustry

Exhibit 2 6ro7ected etail nternet ransactions


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Exhibit + #a7or Companies E8Commerce *trate-ies

5endor *trate-y 9hat they say

Di-italE:uipment

4Fer multiKvendorservices as well as6igital productsWleverage !lta =istasearch technology

"usiness to business ;Kcommerce is the biggestmar2et. t’s three to 1times bigger than theconsumer mar2et."

>aura Cranham, =% ofmar2eting for nternetsolutions

3elett86ac;ard

ell hardwareKsoftwarepac2ages for the eb,security and payment

";Kbusiness is helpingcorporations ta2eadvantage of the nternet


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systems, and the I%3hangengineframewor2 for processand wor20owapplications

to improve relations withcustomers and suppliers."

!nn >ivermore, =% andgeneral manager, software

and services group.

B# ell systems thathandle customer care,electronic payments,and supplyKchainmanagementW !pply eKbusiness solutions to vertical industries

"f you are going totransform a company, youneed to master threedisciplinesW technologydeployment, reengineering,and change management.

6oug weeny, =% of

strategic development.

#icrosoft %romote the valuechain initiative, aneFort to integratedisparate supplyKchainapplications using'icrosoft tools andapplications

"e want to leverage oureGisting base oftechnologies, in/ectingcommerce into indows,and commerce enablingour ac2oFice products."

?onathan einstein, >ead

product 'anager of iteerver commercemar2eting.

'oell %romote 7etware asan open platform fordistributed, eb basedapplications, in a /oint venture with 7etscape.

";Kbusiness from ourperspective meansintegrating ;5% softwareon our platform andmanaging theseapplications’"

3hris tone, enior =% ofcorporate strategy

&racle 5eposition databaseand applicationproducts for eK

"e have a very substantialbusiness built around ;Kbusiness."


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commerce in anenvironment based onthin clients and ?ava

eatri# nfante, senior =%of application servers.

*"6 Ielp eb middlewareand ;Kcommerce vendors develop lin2sto 5L: over the 7etWinvest in startups3rossroads oftwareand 3ommerce4ne

"e want to participate inbusiness to business ;Kcommerce both by productdevelopment andinvestments."

Ioward >au, eGecutive =%of venture capital funding

*un

#icrosystems

upply the hardware

for networ2 computingwhile promoting ?avaas a platform forelectronic business

";Kbusiness is a mar2eting

wrapper around a wholebunch of separate butrelated activities aroundthe enterprise."

!nil Eadre, =% ofmar2eting.

old ecomm models

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