E-commerce and E-business lecture notes

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STRATEGIES for e-BUSINESSPart 1 PART OVERVIEW INTRODUCTION This introductory part sets up the overall context for the book. It contains the following elements:  A definition of the key terminology used throughout the book The goal of this introductory part is to provide a guide and a context for the content of the book. Chapter 1 starts out  An overview of the evolution of e-business over time with definitions of the most important terms used in the book, such as e-business, electronic commerce and mobile  A discussion of how concepts and e-commerce, and the concepts of strategy and value cre- cases contribute to building e-business competence ation. It then provides an overview of the evolution of e-business over the past decade and recognizes four distinct periods: (1) the grassroots of e-business, (2) the rise of the Internet, (3) the crash, and (4) the consolidation phase. Chapter 2 shows how cases and concepts help to enhance creativity and analytic abilities, leading to increased overall e-business competence.2CHAPTER 1 Key terminology and evolution of e-business Chapter at a glance 1.1 Key terminology 1.1.1 e-Business 1.1.2 Electronic commerce 1.1.3 Mobile e-commerce 1.1.4 The concept of strategy 1.1.5 The concept of value creation 1.2 The evolution of e-business 1.2.1 The grassroots of e-business 1.2.2 The rise of the Internet 1.2.3 The crash 1.2.4 The consolidation phase Learning outcomes After completing this chapter you should be able to:  Understand what the terms of ‘e-business’, ‘electronic commerce’ and ‘mobile e-commerce’ mean.  Define the concept of strategy and differentiate between different levels of strategy development.  Describe the life cycle of technological revolutions and illustrate it through different historic examples.  Recognize the four main periods of the e-business evolution over the past decade and explain the peculiar characteristics of each period.Part 1 · Introduction INTRODUCTION The purpose of this chapter is to set up the stage for the remainder of the book. Since, due to the relative novelty of e-business, there is not yet a clear and shared view of what this domain entails, we first want to ensure a common understanding of the key terminology used throughout the book. Section 1.1 includes the definition of e-business-related terms and concepts as well as some strategy-specific perspectives. Following that, Section 1.2 provides a framework that describes the typical stages of technological revolutions and positions the evolution of electronic business during the past decade within this framework. 1.1 Key terminology 1 1.1.1 e-Business The term ‘e-business’ is defined here as the use of electronic means to conduct an organization’s business internally and/or externally. Internal e-business activities include the linking of an organization’s employees with each other through an intranet to improve information sharing, facilitate knowledge dissemination, and support management reporting. E-business activities also include supporting after- sales service activities and collaborating with business partners, e.g., conducting joint research, developing a new product, and formulating a sales promotion. In spite of the distinct terminology that is used, e-business should not be viewed in isolation from the remaining activities of a firm. Instead, an organization should integrate online e-business activities with its offline business into a coherent whole. The FT article ‘It’s too early for e-business to drop its “e’’’, provides a further discus- sion of the importance of the ‘e’ in e-business. 1.1.2 Electronic commerce Electronic commerce, or e-commerce, is more specific than e-business and can be thought of as a subset of the latter (see Exhibit 1.1). Electronic commerce deals with the facilitation of transactions and selling of products and services online, i.e. via the Internet or any other telecommunications network. This involves the electronic trad- ing of physical and digital goods, quite often encompassing all the trading steps such as online marketing, online ordering, e-payment, and, for digital goods, online distri- bution (i.e. for after-sales support activities). e-Commerce applications with external orientation are buy-side e-commerce activities with suppliers and sell-side activities with customers. 4Chapter 1 · Key terminology and evolution of e-business 1.1.3 Mobile e-commerce Mobile ‘e-commerce’, or m-commerce, is a subset of electronic commerce. While it refers to online activities similar to those mentioned in the electronic commerce category, the underlying technology is different since mobile commerce is limited to mobile telecom- munication networks, which are accessed through wireless hand-held devices such as mobile phones, hand-held computers and personal digital assistants (PDA). Exhibit 1.1 Electronic business includes electronic commerce and mobile electronic commerce e-business Electronic commerce Mobile e-commerce Source: adapted from D. Chaffey, E-Business and E-Commerce Management, FT Prentice Hall, 2002, p. 9. FT It’s too early for e-business to drop its ‘e’ Jargon is used to make the banal sound Now, ‘e’ is on its way out. Yet, despite every- enthralling, the simple sophisticated. It is often thing I have said, this is bad news. The ‘e’ has used to disguise the fact that the speaker, or been chased away by the dotcom crash, which writer, does not know what he is talking about, transformed it from magic drug to kiss of or cannot be bothered to find a more precise stock market death. But, even before that, it word. In the past five years, one letter has come was going out of fashion. One senior consult- to symbolize the worst of jargon. The fifth letter ant told me in 2000 that the ‘e’ would be in the Roman alphabet, it has been used in front dropped by his organization within a year or of business, commerce, finance, procurement, two (it was). His argument – widely accepted – learning, enablement, government. Almost any was that internet-based business would noun you can think of has probably been an e- become so pervasive that it would be pointless, noun. Companies have used ‘e’ liberally to give indeed damaging, to talk about it as a separate  themselves a buzz on the stock market. discipline. 5Part 1 · Introduction  E-business would and should disappear into ‘Leave your strategy to us; we understand it business. And so it should; but not yet. At the better than you can,’ they would tell their open- Richmond Events e-forum last October, several walleted clients. They hired technical people – hundred senior managers from blue-chip com- indeed, the real skills shortage was at the techni- panies gathered on a cruise ship to be assaulted cal end – but they kept control. by a mixture of cabernet sauvignon and hard Sadly, these agencies also sowed the seeds of sell from vendors of e-services of various sorts. their own destruction, because they could not There was a ‘last days of Rome’ feeling about it, match either the technical skills of systems integra- as delegate after delegate let slip that he or she tion specialists, or the strategic skills of the big had either just left their e-job, or was about to. consultancies. Meanwhile, a sizeable minority of What was particularly interesting was that organizations kept their e-business strategy in- people were revealing their ‘real selves’ beneath house and under the control of their IT their e-titles: they were either information tech- departments. Add to this the rush by boards to nology people, or they were something else. While pour money into Internet ventures simply for the a few could talk strategy and technology with sake of tickling the share price and it is not surpris- equal fluency, most gave their backgrounds away. ing that so much was wasted so fast by so many. They were happy speaking about marketing and How is it, then, that any companies managed strategy, or about integration issues; not both. to exploit the new technology effectively? How I have since received a letter from Richmond did Cisco, Dell, Electrocomponents, General Events announcing the death of e-forum, saying Electric manage it? that its functions would be rolled into either the IT Largely, because people at the summit saw directors or the marketing forum. The divide that that the secret was in bringing technologists and was apparent at the event has been formalized. non-technologists together and making them Why does this matter? Because, even as it has work together – and often they used the banner crumbled, the value of the letter ‘e’ has become ‘e’ as a marshalling-point. The good e-business ever more clear. It is, or has been, a bridge managers I have met are (or were) either tech- between technical and non-technical managers. nologists on the way to becoming strategists, or From the earliest days of the commercial non-technologists with an increasing under- internet, proponent after proponent of the standing of IT. On the way, I stress; rarely close strange new medium said the same thing: ‘Don’t to achieving fluency in both. let the IT people run it.’ They believed the effec- The new media agencies, for all their arro- tive use of the internet depended not on the gance, were also attempting to master both skills. technology but on a strategic understanding of Again, they had a long way to go; so it is a shame what it could do. that they have been humbled so brutally. The Technologists were, of course, vital for imple- danger, as the e-bridge crashes into the river, is menting the strategy, but they often knew too that the great unrealized possibilities of the inter- much about the trees to be able to see the wood. net will be swept away with it. When an Also, most IT directors had a ‘supplier’ role to organization has a cadre of managers with a real an organization; they were rarely involved in understanding of both strategy and technology, strategic decision-making. fine – let the bridge collapse. But until then, some As the commercial internet became form of e-business department and function – e-commerce and then e-business this view held, labeled with whatever jargon – should remain though there were tensions. Many companies essential to any intelligent group’s structure. put their trust in new media consultancies led Source: D. Bowen, ‘It’s too early for e-business to drop its “e”’, by marketing people who loved to talk strategy. Financial Times; May 21, 2002. 6Chapter 1 · Key terminology and evolution of e-business 1.1.4 The concept of strategy In addition to e-business, strategy is the second key thrust of this book. More specifi- cally, we analyze and illustrate how firms develop and implement strategies for their e-business activities and draw lessons and guidelines from the studied practices. However, we should recognize that the term ‘strategy’ means different things to dif- ferent people. To get a clear understanding of the meaning of strategy the way it is used in this book, let us first consider the following definitions of strategy and then suggest a common foundation. Strategy is: … the direction and scope of an organization over the long-term, which achieves advantage for the organization through its configuration of resources within a chang- ing environment to the needs of markets and fulfill stakeholder expectations. 2 Gerry Johnson and Kevan Scholes … the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carry- ing out theses goals. 3 Alfred Chandler … the deliberate search for a plan of action that will develop a business’s competitive advantage and compound it. 4 Bruce Henderson. … the strong focus on profitability not just growth, an ability to define a unique value proposition, and a willingness to make tough trade-offs in what not to do. 5 Michael Porter Based on the above definitions, we would like to stress the following aspects that are 6 crucial for strategy formulation:  Strategy is concerned with the long-term direction of the firm.  Strategy deals with the overall plan for deploying the resources that a firm possesses.  Strategy entails the willingness to make trade-offs, to choose between different directions and between different ways of deploying resources.  Strategy is about achieving unique positioning vis-à-vis competitors.  The central goal of strategy is to achieve sustainable competitive advantage over rivals and thereby to ensure lasting profitability. Having defined the concept of strategy, we can now differentiate it from the concept of tactics, a term that is often used interchangeably with strategy. Tactics are schemes for individual and specific actions that are not necessarily related with one another. In gen- eral, specific actions can be planned intuitively because of their limited complexity. A firm can, for instance, have a certain tactic when it launches a marketing campaign. Strategy, on the other hand, deals with a more overarching formulation that affects not just one activity at one point in time but all activities of a firm over an extended time horizon. To achieve consistency between different activities over time, intuition is generally not sufficient; it also requires logical thinking. Drawing an analogy with 7Part 1 · Introduction warfare, we could say that while tactics are about winning a battle, strategy is con- cerned primarily with winning the war. Furthermore, it has often been argued that the increasing importance of technology reduces the need for clear strategies. Firms should instead focus primarily on getting their technology to work. This is especially true for the technology underlying e-business and electronic commerce. Yet, technology is not, and cannot be, a substi- tute for strategy. In fact, overlooking strategy and how a firm can create sustainable competitive advantage is a likely recipe for failure. Just because certain activities are feasible from a technological perspective does not mean that they are sensible from a strategic perspective. Ultimately, IT and the Internet should be used not for the sake of using them but instead to create benefit for customers in a cost-efficient way. Formulating long-term strategies has become more difficult due to the continu- ously changing business environment. How long-term can a strategy be when the technological environment is permanently changing? This is obviously a difficult question that has no clear-cut answers to it. When a disruptive innovation emerges and redefines the basis of competition, previous strategies become all but worthless. This was the case, for instance, when Amazon.com entered the book-retailing market with its online bookstore and when Napster launched its file-sharing platform for online music distribution. Nonetheless, it is important to be aware of the trade-offs that arise when a firm gives up long-term strategy in return for short-term flexibility. Within organizations, we typically recognize the following three different levels of strategy (see Exhibit 1.2). They are (1) corporate-level strategy, (2) business unit strat- egy and (3) operational strategy. It is important to note here that most of the cases featured in this book deal primarily with issues related to the first two levels of strategy. Corporate-level strategy The highest strategy level, i.e., the corporate-level strategy) is concerned with the overall purpose and scope of the firm. It typically involves the chief executive officer (CEO) and top-level managers. Corporate strategy addresses issues such as how to allocate resources between different business units, mergers, acquisitions, partner- ships and alliances. Consider, for instance, the merger in 2000 between AOL and Time Warner, where the CEOs of both firms looked across all the businesses of their respective companies before deciding to merge the two corporations. Another example of corporate strat- egy that is important in the e-business context is the choice of distribution and sales channels. For example, the top management of Tesco plc first made the decision in 1995 about whether to use the Internet to sell groceries online and then on how to set it up organizationally (see Section 9.3 for a discussion of the different ways of organizing e-commerce ventures). Only then was the responsibility delegated from the corporate level to the Tesco.com business unit. Business unit strategy Business unit strategy is concerned primarily with how to compete within individual markets. Dell, for instance, operates distinct business units that target large corporate 8Chapter 1 · Key terminology and evolution of e-business customers, private households and public-sector customers. Since these are very sep- arate markets, with differing needs and preferences, it is also necessary to formulate a distinct business unit strategy for each one of these markets (see Section 4.1.2 on market segmentation for e-commerce). At a more detailed level, a business unit strategy deals with issues such as industry analysis, market positioning and value creation for customers. Furthermore, when formulating a business unit strategy, it is also necessary to think about the desired scale and scope of operations. Operational strategy Operational strategy deals with how to implement the business unit strategy with regards to resources, processes and people. In the context of e-business, this includes issues such as optimal website design, hardware and software requirements, and the management of the logistics process. Furthermore, this also includes operational effectiveness issues, which are addressed by techniques such as business process re- engineering (BPR) and total quality management (TQM). Although these approaches are important, they do not belong intrinsically to strategy formulation, since, as stated above, strategy is about making trade-offs; that is, about deciding which activities a firm should perform and which ones it should not perform. Operational issues are of high importance for any organization; how- ever, they are not the primary focus of this book, and covering them in-depth would 8 overextend the scope of the book. Exhibit 1.2 The focus area of the cases is on corporate level and business unit strategy Corporate Primary focus level area of cases Corporation strategy Business Business Business Business level unit A unit B unit C strategy Operational Function A Function B Function C strategy 9Part 1 · Introduction 1.1.5 The concept of value creation The ability of a firm to create value for its customers is a prerequisite condition for achieving sustainable profitability. In the context of e-business strategies, the concept of value creation deserves special attention because many Internet start-ups that ended up in bankruptcy at the end of the Internet boom years did not pay enough attention to this issue. Instead, they were frequently concerned mainly with customer acquisition and revenue growth, which was sustainable only as long as venture capi- talists and stock markets were willing to finance these firms. Nowadays, however, in a harder and more turbulent business environment, it is imperative that strategies focus on what value to create and for whom, as well as how to create it and on how to capture the value in form of profits. In economic terms, value created is the difference between the benefit a firm provides to its consumers and the costs it incurs for doing so. Because of the importance of value creation, we devote all of Chapter 5 to this topic and address the various issues related to this concept. 1.2 The evolution of e-business Before discussing e-business from a structural perspective through the e-business strategy framework presented in Part 2, we first want to analyze the evolution of e- business over the past decade and compare it with the life cycle of other technological revolutions. Carlota Perez defines them as a ‘powerful and highly visible cluster of new and dynamic technologies, products and industries, capable of bringing about an upheaval in the whole fabric of the economy and of propelling a long-term 9 upsurge of development’. Whether the printing press, steam engine, railway or car, all technologies have gone through similar surges. Perez divides the surge of a technological revolution into two consecutive periods: (1) the installation period, which consists of an irrup- tion stage and a frenzy (‘gilded age’) stage, and (2) the deployment period, which consists of a synergy (‘Golden age’) stage and a maturity stage. These stages are typi- cally separated by a downturn or crash, as shown in Exhibit 1.3. Below, we describe in more detail each stage of a typical surge of a technological 10 revolution:  Irruption (1). The irruption stage takes place right after a new technology is intro- duced to the market. Revolutionary new technologies, also called ‘big bangs’, include the mechanized cotton industry in the 1770s, the railway construction in the 1830s, and, more recently, Intel’s first micro-processor in 1971. During the irruption stage, innovative products and services based on the new technology appear and start to slowly penetrate the economy, which is still dominated by the previous technology.  Frenzy (2). The frenzy stage, also called the ‘gilded age’, is characterized by a sense of exploration and exuberance as entrepreneurs, engineers and investors alike try to find the best opportunities created by the technological big bang irruption. Using a trial-and-error approach, investors fund numerous projects, which help to 10Chapter 1 · Key terminology and evolution of e-business Exhibit 1.3 Technological revolutions move through different stages as their diffusion increases INSTALLATION PERIOD DEPLOYMENT PERIOD Previous great surge Maturity 5 4 Synergy (‘golden age’) 3 Crash 2 Frenzy (‘gilded age’) Next great Eruption 1 surge Time Big bang Next big bang Source: Adapted from C. Perez, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, Edward Elgar, 2002, p. 48. quickly install the new technology in the economy. However, as investors become increasingly confident and excited, they start considering themselves to be infalli- ble. Depending on the technological revolution, they have financed digging canals from any river to any other river, building railway tracks between every city and village imaginable, and, more recently, creating online retailing websites for every conceivable product, be it pet food, medicine or furniture. This process typically continues until it reaches an unsustainable exuberance, also called ‘bubble’ or ‘mania’. At that point, the ‘paper wealth’ of the stock market loses any meaningful relation with the realistic possibilities of the new technology to create wealth.  Crash (3). The gilded age is followed by a crash, when the leading players in the economy realize that the excessive investments will never be able to fulfil the high expectations. As a result, investors lose confidence and pull their funds out of the new technology. Doing so sets off a vicious cycle, and, as everyone starts to pull out of the stock market, the bubble deflates and the stock market collapses.  Synergy (4). Following the crash, the time of quick and easy profits has passed. Now, investors prefer to put their money into the ‘real’ economy, and the success- ful firms are not the nimble start-ups but instead established incumbents. While, during the frenzy stage, there were many start-ups competing within an industry, the crash led to a shake-out where most of these ventures went out of business. During the synergy stage, few large companies start to dominate the markets and leverage their financial strength to generate economies of scale and scope. Now, the emphasis is no longer on technological innovation but instead on how to make technology easy to use, reliable, secure and cost-efficient. 11 Degree of diffusion of the technological revolutionPart 1 · Introduction In order for the synergy stage to take hold, governmental agencies need to introduce regulations to remedy the fallacies that caused the previous frenzy and the ensuing crash and, by doing so, to regain investors’ confidence. For instance, following the stock market crash in 1929, the US government set up separate regu- latory bodies for banks, securities, savings and insurances, and also established protective agencies including the Federal Deposit Insurance Corporation (FDIC) and the Securities and Exchange Commission (SEC).  Maturity (5): The maturity stage is characterized by market saturation and mature technologies. Growth opportunities in new and untapped markets are becoming scarcer, and there are fewer innovations resulting from the new technology. During this stage, companies concentrate on increasing efficiency and reducing costs, for instance through mergers and acquisitions. In today’s mature automobile industry, for example, large global manufacturers such as Daimler Benz and Chrysler, and Renault and Nissan, have merged or established strategic partner- 11 ships in order to generate scale effects and expand market reach. For a more extensive example of a surge of a technological revolution, consider the evolution of the railway industry in England. Railroads started to become popular in the 1830s. Many entrepreneurs, financed by eager investors, started constructing rail- way routes throughout the country, which culminated in an investment bubble in 1847. Initially, when building railway tracks, investors sought out those projects that showed a clear need and were easy to build. As the bubble kept growing, investors, searching desperately for investment opportunities, started to fund projects for which there was hardly any demand and that were complicated and costly. Ultimately, railway companies were even building tracks that were running in parallel to one another, even though it was obvious that only one track could be operated profitably in the long term. Inevitably, the railway bubble burst; after the dust had settled, the stocks of railway companies had lost 85% of their peak value. After the crash in 1847, when a large number of railroad companies went bankrupt, the industry bounced back, rapidly increasing mileage and passengers, and tripling revenues in just five years after the bust. After 1850, railways drove much of England’s economic growth, and they con- tinued to dominate the transportation market until the automobile became a 12 medium of mass-transportation in the middle of the twentieth century. We can observe similar evolutions with other technological revolutions, such as steel production, steam energy and, more recently, the automobile (see Exhibit 1.4). The above perspective illustrates that the time from the first commercial usage of a new technology to its widespread application can stretch over a periods lasting up to 50 years. Within these long periods, their diffusion and growth are not continuous. Instead, they are often marked by a crash, when the initial exuberance and optimism about a new technology fades. One of the main reasons for these long gestation periods between the irruption and the synergy stages is that it is not sufficient to just have the appropriate technol- ogy in place. In addition, managers need to be willing and able to abandon previous ways of doing things and start using the new technology in such a way that it actually creates value. This takes time and requires a lot of experimenting and fine-tuning. The development of e-business has been quite similar to that described above. During the past decade, e-business has changed dramatically, evolving through the 12Chapter 1 · Key terminology and evolution of e-business Exhibit 1.4 Major technological revolutions during the past two centuries show similar patterns of evolution INSTALLATION PERIOD DEPLOYMENT PERIOD 1 2 3 4 5 Technological revolution ‘Eruption’ ‘Frenzy’ ‘Synergy’ ‘Maturity’ ‘Crash’ (core country) The Industrial Revolution 1770s and early Late 1780s and 1797 1798–1812 1813–1829 1780s early 1790s (Britain) Age of steam and railways (Britain, then spreading to 1830s 1840s 1847 1850–1857 1857–1873 Continental Europe and the USA) Age of steel, electricity, and heavy engineering 1875–1884 1884–1893 1893 1895–1907 1908–1918 (USA and Germany overtaking Britain) Age of oil, automobiles and mass production 1908–1920 1920–1929 1929 1943–1959 1960–1974 (USA, then spreading to Europe) Timeline Source: Adapted from C. Perez, Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages, Edward Elgar, 2002, p. 57. following four periods (shown in Exhibit 1.5), which mirror the evolution of the 13 National Association of Securities Dealers Automated Quotations (NASDAQ) during the same time period.  Grassroots of e-business (1). Before the widespread commercial use of the Internet, the NASDAQ showed only modest increases. Between 1983 and 1993, it hardly doubled from 350 to 700 points. We refer to this period as the grassroots of e-busi- ness which corresponds to the irruption stage in the Perez model.  Rise of the Internet (2). Even though the beginning of the dot.com boom cannot be determined precisely, we chose 1995, the year when Amazon.com was launched, as 14 the starting point of the rise of the Internet period. The year 1995 also saw the going public of Netscape, the maker of the Netscape Navigator Web browser, which presented the first initial public offering (IPO) of a major Internet com- pany. This period, which corresponds to the ‘gilded age’, finds its reflection in the strong rise of the NASDAQ, especially during the late 1990s. At the peak of this frenzy stage, the NASDAQ traded at price/earning (p/e) ratios of 62, after it had 15 not exceeded p/e ratios of 21 in the years between 1973 and 1995. 13Part 1 · Introduction  Crash (3): The bubble burst in March and April of 2000, when the NASDAQ crashed. Between 10 March and 14 April 2000, the NASDAQ dropped 1727 points or 34%. By the end of 2000, it had fallen by 45%.  Consolidation phase (4). The subsequent consolidation has been characterized by a more sober approach to e-business and a refocusing on the fundamental drivers of value creation. The NASDAQ continued its decline for another two years, albeit at much slower rates, until it bottomed out in early 2003. At the time of the writing of this book in autumn 2003, we are witnessing signs of an e-business revival, as is reflected in the rise of the NASDAQ during the second half of 2003. If this trend continues, it would mean that this consolidation phase presents the beginning of the synergy stage (‘golden age’), mentioned in the Perez model. Exhibit 1.5 During the past decade, e-business companies have passed through four distinct periods, as reflected in the evolution of the NASDAQ Grassroots of Stock Market Consolidation Rise of the internet 1 2 3 4 e-business crash phase 5000 – 45% 4500 4000 3500 3000 2500 2000 1500 1000 500 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Year Launch of amazon.com Source: NASDAQ quotes taken from Factiva.com. 14 PointsChapter 1 · Key terminology and evolution of e-business Exhibit 1.6 The case studies in the book cover the four periods of the e-business evolution Grassroots of Rise of the Consolidation Stock Market 1 2 3 4 e-business internet phase crash Year of case setting 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 IT infrastructure Minitel CompuNet and services e-Government and EAMS e-Government e-education Chateau Tesco Alcampo Amazon Online B2C in retailing vs. Peapod vs. Bol Nettimarket B2C in financial Nordea Advance Bank e-purse services Bank B2C in Ducati Ducati v. Harley manufacturing Terra Lycos B2C in media DoubleClick Google B2B in e-commerce and B2B BrunPassot CitiusNet Mondus Covisint e-marketplaces C2C e-commerce eBay Online file P2P e-commerce sharing 12Snap Mobile NTT DoCoMo e-commerce Paybox Source: NASDAQ quotes taken from Factiva.com. 15Part 1 · Introduction In the following sections, the above three time periods are discussed in more detail. The purpose of doing so is twofold:  First, to provide a longitudinal context for the case studies that are presented in Part 3 of this book (see also Exhibit 1.6). Each case study presents unique insights into the main characteristics of each specific period. These are demonstrated by the content of each case and also the quotes provided by the top management of the companies featured in the case. For instance, the following statement, made by Jeff Bezos, CEO of Amazon.com, in 1998, was perfectly acceptable at that time, but it would hardly be welcomed by investors in today’s business climate: ‘We are going through a critical stage right now. We want to extend our offer on a global scale and we want to invest even more in customer service; that’s all very expensive. This would be a miserable moment to make profits.’ Also, the chief technology officer of 12 Snap, a German start-up company offering mobile marketing services, would have probably made a more exuberant statement during the boom years than the one he made in 2001, when he com- mented on the strategy of his firm: ‘In the next couple of quarters, there is no such a thing as a high growth, high-risk business model. It’s our job to create money and a viable business, and that’s the focus for now.’ Thus, while focusing on the content issues of the cases presented in the book, we also find it particularly revealing to notice how different economic situations influence the actions and statements of the executives and managers who are portrayed throughout the cases.  Second, to explain with hindsight some of the underlying characteristics of each time period using concepts such as the five forces industry framework, value cre- ation and capturing, and economies of scale and scope. These concepts are explained in more detail in Part 2. 1.2.1 The grassroots of e-business Before the Internet became a widely used platform for conducting e-business trans- actions, companies were already using other information and communication technologies (ICT) infrastructures. These included electronic data interchange (EDI), inter-organizational information systems (IOS), and public IT platforms such as the Minitel videotext system in France. They enabled companies to internally con- nect their business functions and also to reach out to their suppliers, customers and third-party partners. However, the value-creation potential of these technologies was limited due to the high costs involved and the limited benefits that were achieved. System implementation costs were high since most of these ICT infrastructures were more or less proprietary and had to be adapted extensively to the individual needs of each company. The benefits of these systems were limited due to two factors. First, the number of companies using these IT systems was relatively low compared with today’s ubiqui- tous Internet, thus limiting the number of potential partners. Second, even if a company used an ICT infrastructure, its IT systems and applications were not com- patible with those of its business partners. This made it difficult at best, and if not impossible, to inter-connect different ‘islands of technology’. As a result of the above 16Chapter 1 · Key terminology and evolution of e-business factors, e-business existed to only a limited extent within and across companies or even beyond national boundaries (see the FT box ‘Minitel proves a mixed blessing’). The case studies of Brun Passot, a French paper manufacturer and office supplies distributor, and of CitiusNet, a horizontal e-marketplace, illustrate how in the late 1980s e-business enabled and early 1990s electronic trading between companies. At that time, the Internet was not yet available for commercial use. These companies leveraged an alternative platform, the Minitel system, which was developed by the French government and rolled out nationwide in 1982. The case study of CompuNet, a German IT product reseller and service provider, shows how a firm used IT before the advent of the Internet to provide top-quality service to its corporate customers. CompuNet relied on technologies such as com- puter–telephony integration (CTI), enterprise resource planning (ERP) systems, and groupware to remotely service its customers’ IT network and offer a unique life cycle guarantee of the PC product. FT Minitel proves a mixed blessing When Internet service providers began to pro- Minitel is now blamed for the country’s slow mote their services in France in 1996, France take-up of the internet, and hailed as the plat- Telecom, then a state-run monopoly, immedi- form from which France can leap on to the ately stepped up advertising for Minitel, the worldwide web. French online service, in an effort to shield it ‘French consumers have been making online from the competition. purchases for more than 15 years,’ says Ramzi Four years later, Wanadoo, France Telecom’s Nahas, managing director of Fimadex, a venture internet arm, is the country’s biggest ISP and adviser. ‘Minitel has played an important role in the former monopoly – now the largest market dispelling consumers’ fears about making pay- capitalisation on the Paris Bourse – is selling ments on a screen.’ ADSL high-speed internet connections to the The French still feel that credit card details are country’s households and small businesses. more secure on a less open system. In 1995, ‘In France, you cannot dissociate the internet before net access was widely available, 16 per from Minitel,’ says Philippe Guglielmetti, chief cent of train reservations on the SNCF national executive of Integra, the country’s pioneer in railway were made through Minitel. France e-commerce services and infrastructure. Telecom estimates that almost 9m terminals – Minitel, launched in 1983, was a rudimentary including web-enabled PCs – had access to the equivalent of today’s net-PC. Roughly double network at the end of last year. In the past few the size of a table-top telephone set, it had no years, Minitel connections were stable at 100m a storage capabilities, a black and white screen month plus 150m online directory inquiries, in displaying text only, and an in-built modem spite of growing internet use. that was slow by today’s standards. Millions of A recent survey of Wanadoo customers showed terminals were handed out free to telephone that 82 per cent also used Minitel regularly. More subscribers, resulting in a high penetration rate significantly, 14 per cent started logging on to among businesses and the public. Paradoxically, Minitel after they became web users.  17Part 1 · Introduction  Other surveys show that Minitel is more Another consultant says habits acquired in efficient than the net for some uses. According the Minitel age are tempering managers’ enthu- to France Telecom, a train reservation takes siasm for the internet. ‘Almost two-thirds of projects that start as ambitious internet opera- on average 3.5 minutes on Minitel, compared tions end up being scaled down to a website with 4.5 minutes on SNCF’s website. Directory that connects users to the company’s existing inquiries take 30 seconds and 1.5 minutes Minitel server,’ says an IT specialist. respectively. But there are signs that sophisti- Mr Nahas at Fimadex says the average age of cated users of Minitel are switching to the French senior managers is higher than in the Internet. US, ‘which means they are less computer liter- Customers of Cortal, the online brokerage ate. Most of these managers see the internet as of Paribas bank, have been trading securities just another way of channelling orders for their on Minitel since 1993. Barely a year after products. Very few are aware that their whole Cortal launched internet trading in October marketing strategy must be reviewed.’ 1998, two-thirds of online trades had shifted to But Minitel’s most important contribution to the new service, with Minitel handling the French e-business will undoubtedly be in the remaining third. form of lessons learnt. Minitel provides more France Telecom, which has invested large than 15 years of statistics about retailing and sums to develop Minitel, believes it will co-exist online usage habits. – and gradually converge – with the net in the ‘A lot of what is happening on the internet coming years. Software to access Minitel has today took place locally in France in the been embedded in the French version of the 1980s,’ says an information technology consult- Windows 98 operating system, alongside ant. ‘We have known for years that sex chat Microsoft’s Internet Explorer web browser. rooms, dating services and financial applica- France Telecom is not alone in hanging on to tions are the engines of innovation and revenue Minitel. Most French companies are also generation in an online environment.’ attached to the network, partly because of the Integra says the Minitel experience can be investment they have made but mainly because transposed into internet business practices. they have perfected the methods to generate ‘Early studies in the US predicted that internet revenues from online activities. transactions would stabilise at 1 per cent or 1.5 France Telecom charges Minitel users, at per cent of consumer goods retailing,’ says Mr rates of up to 1 a minute, on their monthly Guglielmetti. ‘Our experience with Minitel leads telephone bill. It then pays back part of the sum us to think that e-commerce could make up to the companies that operate Minitel servers. some 10 per cent of sales of products adapted to In 1998, Minitel generated €832m (824m) distance selling.’ of revenues, of which €521m was channeled by Minitel sales in recent years accounted for France Telecom to service providers. Wanadoo’s almost 15 per cent of turnover at La Redoute and sales (which are not published) are ‘insignificant Les Trois Suisses, France’s biggest mail order in comparison’, according to a company official. companies. Integra estimates that Minitel repre- Analysts say Minitel’s structure, a monopoly sents 7–8 per cent of all French distance selling. operated by a governmental organisation, was One of the biggest barriers to greater internet a blessing and a curse. ‘That it operated on a use is the French language. Integra, which oper- single network made it safe and allowed e- ates web hosting services in several countries, commerce to take off in France,’ says says 90 per cent of its servers are in the language Mohamed Lakhlifi, sales manager at Unilog, a of the country they are based in. ‘This is not a Paris-listed computer services company. ‘But problem when your language is English,’ says an regulatory hurdles and the absence of competi- executive. ‘It becomes a problem when your lan- tion stifled innovation.’ guage is less widely used.’ 18Chapter 1 · Key terminology and evolution of e-business  Conversely, French e-business is expected to have an embedded chip with a dedicated identi- benefit from a number of national factors. The fication code, which makes online payments country is more advanced than most of its more secure. neighbours – and the US – in its use of smart- Source: ‘Minitel proves a mixed blessing’, www.FT.com, 8 February, 2000. cards. All credit and debit cards issued in France 1.2.2 The rise of the Internet In July 1995, the Internet boom years began with the launch of Amazon.com, today’s best-known online retailer. The subsequent five years were characterized by great exuberance and the belief in the seemingly unlimited potential of the Internet. During that time period, the profitability and economic viability of companies and business models did not seem to matter much. Instead, metrics such as ‘click- through rates’, or ‘number of eyeballs’, i.e. the number of visitors to a site, were the main determinants for stock market success and media coverage. In the case of the fashion retailer Boo.com, the founder Ernst Malmsten did not even have to provide investors with these kinds of metrics. The mere hope of high future profits allowed Boo.com to spend 30 million of venture capital money, even before launching its website (see the FT box ‘Burning money at Boo’). For a more detailed insight into this period, consider the example of Priceline.com, which allowed people to purchase airline tickets through the Internet. Priceline.com went public on 30 March 1999, and the shares that were issued at 16 each soared immediately to 85 each. At the end of the day, Priceline.com had reached a valuation of almost 10 billion, which was more than those of United Airlines, Continental Airlines and Northwest Airlines combined. While these airlines had a proven business model, valuable brands and substantial physical assets, Priceline.com owned only a few computer servers and an untested business model. In fact, the company even stated in its IPO prospectus that it did not expect to be profitable at any time in the near future, that the business model was new and unproven, and that the brand might not be able to achieve the required brand recog- nition Investors ignored these warnings because they believed that they would always be able to sell the stock to someone else at an even higher price. This invest- ment approach during the Internet boom years became known as the ‘Greater Fool 11 Theory’. In the USA, some 100 million people, about half of the adult population, had invested in stocks at the peak of the bubble. As the stock market kept soaring, more and more people – who had seen their colleagues and friends get rich – also started investing in Internet stocks. This meant that the chances of finding a ‘greater fool’ were high – at least during the Internet boom years. The case studies in this book dating from the above time period and featuring companies such as Advance Bank, Amazon.com BertelsmannOnline (BOL), Alcampo.es, Peapod.com and mondus.com, illustrate this very same spirit of almost boundless excitement and optimism. The fundamental driver of the e-business boom was the belief that it would be possible to increase value-creation multifold because, as explained below, the Internet would lower costs while, at the same, time increasing consumer benefits: 19

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