The Digital Information Highway: Business Strategies for Internet Commerce

www.economist.com

A Survey of E-Commerce, page 65 February 26th - March 3rd, 2000

dot.com

.Com Fever - You got it !

SOURCE: The Economist, February 26-March 3, 2000

On-LineRetailersServices

Real Estate

Bookstores

Date & Mate

Restaurants

Pet Supplies

Music StoresAstrology

Search Engines

Sporting Goods

SOURCE: The Economist, February 26-March 3, 2000

SOURCE: The Economist, February 26-March 3, 2000

SOURCE: The Economist, February 26-March 3, 2000

SOURCE: The Economist, February 26-March 3, 2000

E-Commerce - the buying and selling of products and services over the internet….I want a piece of that pie!

Is this your definition ????

A few years ago this may have been the case, but duplicating a part of the buying-selling process does not change enough of the entire process to produce a significant economic outcome

Don’t get trapped inside the box

Think outside the box ! New and creative ways to make your business better - more efficient, more profitable.

Internet Commerce

or

Electronic Commerce

These terms are often used interchangeably since the future of electronic commerce is in the hands of the internet.

What does Electronic Commerce Mean ?Electronic Commerce is a lot of things to a lot of people:

• Communications Perspective, e-commerce is the delivery of information, products/services, or payments performed electronically.

• Business Process Perspective, e-commerce is the application of technology toward the automation of business transactions and work flows.

• Service Perspective, e-commerce is a tool that addresses the desire of firms, consumers, and management to cut service costs while improving the quality of goods and increasing the speed of service delivery.

• Online Perspective, e-commerce provides the capability of buying and selling products and information on the Internet.

Internet Enabled Business Practices

Communications (email)

Electronic Data Interchange

(Procurement)

Technical Data Interchange

(Engineering)

Mass Customization

(demand driven manufacturing)

Virtual and Team Based

EnterprisesOutsourcing and Coordination of

Logistics

Video Conferencing

Document Workflow

Supply Chain Management Procurement

Digital Content Creation and Manipulation

Marketing, Sales & Distribution

Channels

Advertising

Electronic Commerce - Destined to change business habits in many ways.

• New ways to interact with suppliers, partners and clients

• Improve speed, efficiency, spontaneity, interactivity, pervasiveness, and cost reduction.

How to Define E-Commerce or Internet Commerce

“the opportunities for companies to electronically exchange information and services that are important to their business. It doesn’t have to involve money. Electronic commerce includes the creation of an open marketplace - in contrast to electronic data interchange, which does not. The internet is synonymous to vast marketplace”

Jay M. Tanenbaum, Chairman, CommerceNet

“electronic commerce is about a global electronic marketplace that enables all members of a value chain to interact spontaneously for mutual benefits. It provides an environment where customers are empowered to control the buying process more effectively, retrieving and accessing personalized information. It provides a platform for complete relationship management, not just a one time transition”

Randall Whiting, CEO, CommerceNet

How do these key phrases affect your organization ?

• Exchange of Information and Services

• Creation of an open global marketplace

• Spontaneous interaction of players in value chain

• Empowerment of customers

• Platform for relationship management

Digital Value Creation

The process of converting digital inputs into value-added outputs

• New value can be created by adding digital value on top of old digital value

• by turning old value (or products) into new digital value replacements

Digital Input ProcessValue Output

New Intermediaries Arrival

If you don’t add value to your digital product quickly enough, someone else will organizations that are called intermediaries

Hijack your potential new value by adding new value on top of your oldvalue, aggregate it, and resell it with more value - in essence, stealing your customers

They will ease their way into the traditional buyer/seller channel, and begin to redirect buyer traffic

DigitalInformationPrice x $

New Company B Intermediaries Digital Information Processing

Process Digital Information(organized &compressed)Price 2x$

CustomersCompany A Manufactures raw digital information

Adds New Value

suppliers

partners

clients

- A new method for creating efficient links with partners, suppliers, and clients

E-Commerce

Business Catalysts - Factors driving the growth of electronic commerce.

• Value chain inefficiencies

• Cost of business transactions

• Growth markets

• Competitive Pressures

• Demands of Electronic Consumer

The Distribution Chain

• A given product travels down thedistribution chain that may or maynot add value to it. By the time theproduct reaches the user, the markup is on average 135%.

• Consumers worry about the perceivedlack of value offered by the distribution channels.

• Manufacturers are concerned with the fact that more customer value is beingleft with the distribution channels.

Disintermediation

A term that refers to the removal of organizationor business process layers responsible for certain intermediary steps in a given valueor distribution chain.

With the internet, the distribution chain is beingshortened since, in principle, manufacturers can link up with customers directly. Especially if theplayers in the distribution chain add no value.

manufacture

wholesale

distributor

retail

customer

$ 40

$ 43

$ 47

$ 94

7.5%

9.3%

100%

Total135%

Distribution Channel

manufacture

wholesale

distributor

retail

customer

$ 40

$ 44

$ 88

9.3%

100%

Total120%

Distribution Channel Delayering

manufacture

wholesale

distributor retail

customer

$ 40

$ 80

100%

Total100%

Distribution Channel Delayering

manufacture

Customer $ 48

$ 40

Markup 10%Shipping 10%Total = 20% arrives at doorstep

Distribution Channel Delayering with Internet

10%

Shipping 10%

0 1 2 3# of layers between customer/manufacturer

150

125

100

75

50

25

0

Mar

kup

(%

)

Delaying Distribution Channels

ManufacturerwholesaledistributorretailCustomer

ManufacturerdistributorretailCustomer

ManufacturerretailCustomer

Internet

(2)

(0)

(3)

(1)

The cost of doing business with traditional hard-copy paper based meansthat are human intensive continues to grow, whereas the electronic processing of transactions can be done at a fraction of the original cost.

Costs of Business Transactions

PROCESS PAPER/HUMAN ELECTRONIC SAVINGS DESCRIPTION COST COST FACTOR

Invoicing

BankingTransaction

Customer Service

MortgageApplication

$100

$1.50

$15-$25call center

1% of value

$10

$0.15 to$0.25

$3-$5Internet

0.2% of value

10

6-10

5

5

1996 Price Waterhouse Technology Forecast Report

Search for Growth Markets

- Retail markets are barely expanding … large retailers are posting declinesin sales and earnings. They are finding it hard to expand marketshare inconventional market places.

- By shifting attention to open market places, such as internet driven markets,there is a chance to redefine the market and capture new market space.

Grown can come from:

• Creation of new on-line markets for existing products• Creation of new products specifically designed for on-line markets• Opening up of larger national and international markets

Competitive Pressures

• You competition is doing it so you have to as well.

• There are not many cases of current market leaders that have lost their position because of electronic markets.

• Presumptive dominance is challenged continuously.

Demands of the Electronic Consumer• Customers are wired savvy and are awareof the convenience of electronic interactions.

• Customers choice will be driven by the richnessand depth of the in-line services offered by vendorsor service providers, such as banks and retail stores.

• Internet empowers consumers to a new level of sovereignty.

Consumers want-(1) Easy and comprehensive comparison shopping(2) The ability to bid out a request on the web(3) Self service control

The United States is Winning the InternetRace -

• A lot of venture capital for innovative e-commerce opportunities

• President Clinton (7/1/97) A Framework for Global Electronic Commerce

• Effective public offering vehicle

• US has the biggest market (computers) and infrastructure

• US companies own most IP associate with internet hardware

• Japan and Europe behind but starting to move faster

SOURCE: The Economist, February 26-March 3, 2000

Technology Drivers

Convergence of Information Appliances -

• The marriage of several information accessappliances are giving birth to many sophisticateddevices.

• They are the point of sale devices that can be used toconduct electronic transactions, retrieve information, authenticateusers, and perform other functions related to e-commerce.

Converging TechnologiesInteractive TVWeb TV

Wallet PC

Intercasting

Web Phone

Net(Web) Casting

TV PC

Palmtop Wallet

TV Internet

Phone Internet

Internet Video

Converging Industry Service Providers

IT Vendors

Telephone Companies

Financial Institutions

Software Companies

Positioning to be your end-to-end e-commerce providers

Aiming to capture e-transactions

Capturing new financial networks

Content providers

Challenges Facing Internet Commerce

• Technology• Legal and Regulatory• Organization and Business• Behavior and Educational• Other

Technology - Security

Security is not even close to absolute on the internet.There are still many challenges that companies facein the following security areas:

• User access• Data, application, and database security• Transaction and payment security• Network and systems security• Security Maintenance and Management

Technology - Payment VehiclesCustomer

Customer’s Bank

Merchant

Merchant’s Bank

Secure Networks

Intermediaries

Many different internet payment methods

Technology: Integration, Integration, Integration

Interoperability

hardwaresoftwareconflicts

hardwarehardwareconflicts

softwaresoftwareconflicts

Technology: Comparative Buying Capabilities Competitive and Non-Competitive

internet

$5.29 $5.49 $5.09

$5.29$5.49

$5.09

$5.29 KMart$5.49 Target

** $5.09 WalMart

Tide Laundry Detergent

(1 gallon) Process Information

Technology: Richness and Depth of Content

Content is the innovatory of the Web,and is key to market success.

In 1995, Amazon.Com opened it Website with 1M titles in its virtual innovatory.

There is a lot of zero content stuff out there

Technology: Reliable NetworkInfrastructure Service

• Cannot trust 100% uptime• Higher degree of trust in secure applications

More and more companies are placing businesscritical applications on the internet, … , so reliability is a big technological issue.

Technology: Deployment ofPublic Key Infrastructure (PKI)

On the web, how do we prove our identity-drivers license, passport, birth certificate ?

• Need to develop a widespread and universal way to authenticate who you are - no one can pretend to be someone else

• Only authorize people can assess information• Need integrity of transaction, …, transaction not tampered

with• Nonrefutability that insures users a ‘digital’ receipt or proof of

the payment• Time stamping ensures an accurate date/time on a document

that is subjected to a deadline

Technology: Bandwidth Costs

width

Bandwidth is becoming less and less of an issue,but does become a problem in some geographicallocations where the internet is not well developed.

Broadband connectivity linked to internet content arebringing affordability levels to high speed access withrich interactive multimedia.

Legal and Regulatory Challenges The internet is unregulated !

• Global Issues - No territorial limits, so whose laws apply ? Hard to enforce any regulations. If boundaries are transparent, then how can you police them ? Need other types of control than ‘crossing the boundaries.’

• Electronic Issues - There is no writing analogous to documents which are legally binding for years, what happens now with electronic documents.

• Digital Issues - Perfect copies can be made in seconds, and reproduced in large quantities just as fast with little or no cost. How do you ensure intellectual property (copyrights).

Legal and Regulatory Challenges questions, questions, questions

• What happens when something goes wrong in cyberspace ?• Will traditional laws deal with it, or is there a need for new laws ?• If you do international business, are you automatically exposed to the laws of that country?• Who is going to police the actions of the users?• Will you get fined if you don’t obey the rules/laws• Does the gov’t need to know about our buying habits in cyberspace?• Do you need a ‘license’ for the internet ?• Where are the ‘road-signs’ if any exist ?

These are tough questions to answer … Will implementing rules and regulations stifle e-commerce development ???

Legal and Regulatory Challenges Customs and Tax

Should the internet be taxed ?Is it a tax heaven ?

For the most part, taxes, customs and tariffs have not been applied to e-commerce.

When taxes come into to play, what gets taxed ? What doesn’t get taxed ? Who taxes ? Who gets taxed ? How is it done ?

This is happening faster than the gov’t can control it. Enforcing itwould be a nightmare. Industry self-regulation will allow e-commerce to prosper

Framework for Global Electronic CommerceIra Magaziner, Senior Advisor to PresidentClinton on electronic commerce policy.

Legal and Regulatory Challenges Open Questions

• Exports (Drugs, Food)• Copyrights • IP• Domain Name• Trademarks