The media is full of articles extolling thepotential benefits of e-commerce. However, these are largely from the perspective ofconsumer sales. A poll by ComputerWorld of 100 senior systems managers found that 36percent had diverted resources to internet projects. This was done purely as a result oftop management reading a media report on e-commerce technology. This is hardly a strategicrationale. Sales of mid-range and enterprise systems have been boosted by the demands ofcompanies rushing to develop e-commerce facilities. In short, the hype surrounding thepotential of e-commerce is driving organizations to develop e-commerce capabilities, oftenwithout considering the strategic implications. This article will explore some of thepotential implications of the much anticipated explosion in e-commerce activity.
The current scenario
It is now commonplace for majormanufacturers to require suppliers (and increasingly customers) to be able to implementElectronic Data Interchange (EDI). The key benefit is a reduction in paper basedtransactions in favor of electronic ones with a corresponding saving in transactionprocessing costs. Based on the real costs of processing, the savings are obvious.
The effects of the web-based technologieshave already started to make themselves felt. Lower cost internet technology basednetworks (those using the TCP/IP protocol) are replacing the more expensive Value AddedNetworks (VANs) that initially enabled EDI. The initial organizational benefits areoperational cost savings. Using the web-based approach, however, additional services caneasily be added to those of simple transaction processing.
Examples of how additional customerservices can be provided on the back of e-commerce applications abound. Aircraft unable tofly while waiting for spare parts can cost airlines up to $40,000 an hour. Boeing (US) hasset up a web based on-line spare parts service, which allows airlines to check up on partavailability directly. The system links to Boeing’s IMS database to identify theclosest warehouse that stocks the part and allows the customers to place orders on-line.Customers can then track deliveries (using hot links within the web site) via FederalExpress and United Parcel Services’ own web enabled parcel-tracking facilities. Thishigh level of customer service helps to build better customer relationships.
The adoption of similar customer servicesin a competitive environment would encourage greater customer retention.
With the acquisition of a new customerestimated to cost five times as much as retaining an existing one, there are major bottomline implications here. There are however further key differences between traditional EDIand the new web-based facilities, which are highlighted in Figure 1. The major implicationis the provision of a more open market place. Direct communications with product consumersare possible over the internet.
FIG.1 Traditional EDI v web-basedfacilities
Source: EuropeanInitiative on e-commerce
Dell Computers stand out as probably themost successful current on-line selling operation, with sales of $2 million per day. Itssystem allows customers to configure personal computer systems on-line before placingorders. The majority of Dell’s customers are major corporate clients such as Boeing.Boeing value the flexibility and speed of ordering which Dell’s on-line systemoffers. The customer gains the benefits of being able to tailor orders for individual PCsystems and to speed up the purchasing cycle.
Many organizations (such as a university)purchase PCs using the traditional purchasing cycle. They obtain quotations from a numberof suppliers, evaluate the alternatives, and then place cumulative departmental orders togain volume discount. Unfortunately, due to the nature of the market, by the time theorder is activated at the agreed contract price, the same configuration is available forless (even from the same supplier). The traditional corporate buying process not onlyslows down the purchasing cycle but also purchases cost more. In addition, because of thepaper based transaction process, additional costs are incurred.
Dell’s system offers similarfacilities to all customers whether they are multinational organizations buying thousandsof computers a year, or private individuals buying one. The only difference is that thepricing structure favors corporate buyers.
What prevents other organizations fromemulating Dell’s success? Dell has always been a direct sales operation. The lack ofretail outlet overheads allows Dell to be highly price competitive. Many companies tryingto offer products or services on the internet provide no price benefits because of anatural reluctance to alienate existing distributors. This results in some products beingoffered at higher prices on the internet than through traditional distribution channels,despite lower cost structures. This restriction does not apply to new competitors enteringthe market. New market entrants with no distribution network to restrict their activitiescan, instead, compete on price and service. This allows them to potentially undercutestablished providers.
With the market for internet salesestimated at $200 billion by the year 2002 in just the UK, new entrants are continuouslyenticed into the market place. However, is anybody actually making any real money on-line?It is estimated that less than a third of on-line merchants actually break even, let aloneaccrue profits. Amazon.com (the largest internet bookseller) had on-line sales of $27.9million for the second quarter of 1997 -but lost $6.7 million. Major experiments inon-line retail areas set up by IBM and Barclays failed to generate large sales volumes.Barclays Square had to be closed down, although it was later re-launched.
A number of factors have, to date,restricted the predicted growth in on-line shopping. Ownership of personal computers andhence potential access to the internet is still limited to a minority of total consumers.Numbers are, however, growing rapidly. Indeed, some European countries have alreadyovertaken US levels. In the Netherlands, 38 percent of its population has a PC, and 22percent of these have internet access. Adoption of the technology has been perceived asslow. However, when comparisons are made with the adoption curves of other technology-ledproducts, this is not true. Credit cards and Automated Teller Machines (ATM’s) took nearlyten years to be widely accepted, and television took 25 years.
The second factor affecting the UK is thecost of on-line access. Although Internet Service Providers (ISP’s) provideconnection via a local number, there is still an on-line incurred cost. In the US, bycomparison, local calls are usually free, which encourages internet usage.
Perhaps parallels on the likely impact ofinternet technologies can be found in the financial services sector. Private bankingcustomers already expect to use ATMs for cash withdrawals. Direct banking is common placewith many companies offering telephone banking services. However, there are now neworganizations entering the UK banking sector who have no branch network and offer internetbased banking services. One such company, now entering the European market, already hasover 500,000 customers in the US. How long can the UK-based banks continue to carry thehigh overheads of the branch networks and remain competitive? Banks have diversified intofinancial services but these products will soon feel the impact of on-line serviceproviders. Insurance, retirement plans, stock market trading and so on can be handled overthe internet at a lower cost, quickly, and conveniently.
Private consumers are very concerned aboutissues of security and privacy. This is an emotional and perceptual problem. In reality,the technology is already available for secure on-line transactions.
A survey by World Research Inc showed thatof 930 respondents, 70 percent cited worry about internet security as the major reason fornot purchasing over the internet. Credit card transactions using Secure Sockets Layer(SSL) public key encryption are in fact much safer than conventional credit card payments.Unfortunately, customers do not yet believe this. Visa and Access™ have recentlyadopted the Secure Electronic Transaction (SET) mark, which gives even further protection.In an attempt to alleviate consumer fears, organizations (such as eTRUST in the US) arespringing up to ‘police’ use of personal data by e-commerce organizations.
There is increasing evidence that manypotential customers gain product information on-line and then order by more conventionalmeans. This greater availability of competitive information has implications. Agco (betterknown in the UK as Massey Ferguson) utilizes web technology to provide product informationto European based dealers via its own intranet. One of the by-products of providing thisservice is that customers have become increasingly aware of price differences acrossnational borders. For example, a farmer living near the Belgian border might cross theborder to a neighboring country to take advantage of such a price difference and thensimply drive his purchase home. In the past he would probably have assumed that priceswere uniform. The net effect of greater customer information is likely to cause adepression of margins, as consumers directly compare prices from alternative suppliersbefore purchasing.
Use of new technologies in the UK hashistorically followed the lead of the US. There are indications that acceptance ofe-commerce by consumers is growing. Figure 2 shows the growth in e-commerce in the US byproduct type.
Fig.2 Growth in e-commerce in theUS
Source: Forrester ResearchJanuary 1998
By comparison with the overall retailsector in the US, these numbers are small. However, the growth rate is high and as withany innovation, early adoption is slow but will grow rapidly with a potential explosiveexponential growth to follow.
Some products and services arefundamentally more suited to e-commerce than others. According to Forrester Research,worldwide ticket sales for travel and entertainment alone could be worth $8 billion by2001. There are obvious benefits of selling ticket bookings, music and computer software.The activity is not only carried out on-line but in the latter two cases the product canalso be delivered direct. How long will it be before new recordable Digital Versatile Disk(DVD) devices (the potential replacement for CD’s and CD-ROM’s) make it possiblefor music to be downloaded direct to your own system after purchase.
The number of small to medium sizedcompanies with internet facilities is growing fast. It has doubled in the last year to 31percent. Consumers have very limited mechanisms for differentiating between differenton-line service/product providers. This will allow new and smaller organizations tocompete directly with larger established multinationals.
Finally, how long will it be before a majormanufacturer breaks rank and uses the internet to sell directly to the end consumerby-passing the traditional wholesaler/retailer network? With greater product information(available courtesy of the internet) consumers could purchase high margin goods(electrical and white goods are obvious examples) direct from a manufacturer. These couldbe delivered directly to their door at large discounts against the traditional retailprice.
The manufacturer could improve margins dueto the difference between wholesale and retail prices. At the same time, undercuttingother competitors who provide margins to members of their distribution chain. Even ifexisting producers resist such temptations, manufacturers from non-EU countries could usethis to enter the market, even if they were required to set up a manufacturing operationwithin Europe.
Nobody can accurately predict exactly whenthe widespread adoption of e-commerce will take effect. However, there is generalacceptance that it will happen. Organizations need to consider the implications for theirown competitive environment. Companies should prepare for increased competition from newentrants into their marketplace. These may not all be direct competitors but will, at aminimum, compete with their customers and suppliers impacting upon the market structure.
There are major implications for existingdistribution channels. For some products and services, these may extend directly fromproducer to consumer, by-passing conventional distribution methods. Organizations set upto take advantage of e-commerce will have low overheads and are likely to competeprimarily on price. This will erode margins generally, as consumers will expectconventional retailers to match internet prices.
International barriers to competition willbe eroded. It will be as simple to buy products from across the globe as from the nexttown. International price differences will be impossible to maintain. The long-term effectmay well be worldwide harmonization of tax and duty. Certainly, quality standards andsafety legislation will become standard. A number of stages in the development ofe-commerce can be identified:
- provision of an on-line product catalog
- pre-sales support via e-mail
- full transaction processing for placing orders
- delivery of product/service directly through e-commerce
- collecting customer details to aid relationship marketing
- provision of interactive discussion facilities for groups of customers
Organizations need to consider at which ofthese stages they currently work and what action is required for them to progress.
Finally, e-commerce will not go away. Theonly question is how long until it impacts your organization. The following quote perhapsbest summarizes the situation:
“If you are not planning to generate alarger part of your revenue from electronic markets, you are going to be left with a muchsmaller market to compete in.”
Walid Mougayar, Cybermanagement Inc.
Roger Baty is principal lecturer inMarketing Information Systems (MIS) at the University of Central England, with aparticular interest in the development of e-commerce. Baty has worked for Unisys andBritish Telecom and was a senior lecturer at Coventry University.