CHANGING THE VALUE CHAIN: A MODULAR APPROACH

Jumping rather than stepping slowly into cyberspace can be disastrous, as many companies have discovered. A gradual, piecemeal approach, these authors point out, is not only a more cautious one, but importantly, one that enables managers to evaluate and modify each stage of an e-business plan immediately after it has been implemented. In this article, the authors describe a three-stage model that will force managers to closely examine their relationships. At each stage, a manager will feel in control and on top of change in what is a very dynamic, fast-paced business environment.

“The B2B boom: E-commerce between businesses is set to explode as technology upstarts attack the old economy—and the old economy wakes up to the power of the Internet” (Globe and Mail, March 16, 2000)

“Data Security: is anybody safe anymore?” (Link, March 2000)

Headlines such as these abound in the media and waylay our attention by the use of hyperbole. Two extreme notions constantly jump out at us. One is that the Internet is the road to personal freedom and that it is going to change our lives forever, for the better, of course. The other notion is that the Internet is an extremely unsafe environment that is going to rob us of our privacy, if not of everything that we are worth: Big Brother is not just watching but is poised to strike you down.

The reality, if we may be excused for the term, floats somewhere between the hype and the phobia. There are no absolutes, and ups and downs are the nature of any business, no matter how it is conducted. Though capable of effecting significant change, the Internet may be better viewed as an evolutionary technology that offers an alternate, often very efficient, method for achieving our goals. The purpose of this article is, however, neither to laud nor to condemn, but to present an overview—and a model—of how conducting business through the Internet can impact the value chain.

B2B: WHEN HYPE IS REALITY

Whether one subscribes to the notion of “Internet or bust” or “Internet and dust,” the ubiquity of the Internet, at least in the more affluent corners of the world, cannot be denied. As more and more organizations realize the full potential of this electronic environment in cost-cutting and reshaping the very dynamics of space and time, the Internet becomes the preferred means of conducting business. According to one source, in 1999 global e-commerce was worth over $150 billion (all currency in U.S. dollars); 80 percent of those transactions were between businesses.

Though much of the attention today is focused on e-retailing success stories such as Amazon.com Inc. And eToys Inc., it is the B2B market which is experiencing the major shakeup. According to International Data Corporation (IDC) of Toronto, the B2B market in Canada alone will grow by more than eightfold over the next four years, to $56.1 billion.

B2B e-commerce is currently dominated by the larger players in the field. IDC’s research indicates that only 10 percent of small businesses engage in e-commerce (this figure, of course, must be tempered by the fact that the total number of these businesses varies according to different definitions of “small”). The fact, however, remains that when business giants move on-line, their suppliers and intermediaries are compelled to take to the Net as well.

Increased revenue isn’t the only impetus for moving online. The operating efficiencies that accrue from Web-enabled commerce are also a factor. Access to a constantly updated flow of information, the ability to conduct most of your business on-line and in real time, and the opportunity to channel all your operations through a single source, thus eliminating redundancy and errors in data entry, all make e-commerce a very attractive proposition.

Operating efficiencies are designed not just to win goodwill but to be converted into hard cash as well. PricewaterhouseCoopers estimates that the cost of processing transactions on the Net is 10 times cheaper than traditional methods. Organizations with Web-based procurement systems report an annual average return on investment of 130 percent, enough to cover the cost of the investment in the technology in six months.

A MANAGEABLE TRANSITION

Many businesses, especially many small ones, are re l u c t a n t to migrate to cyberspace. For these businesses, a gradual introduction to e-commerce is one solution. This consists of a modular approach that allows time for testing and evaluation before the business makes any major commitment. The possibility of a modular approach—with its accompanying sense of having some control over the change process—becomes evident in a three-stage model we describe next.

Stage 1

In a traditional commercial interaction, the business value chain is seen as a series of interconnected functions between a buyer and a seller. This is re p resented as a ladder of commerce, with two parallel streams of operations, re p resenting the buyer and the seller, respectively. The buyer’s set of functions starts with a felt need, then proceeds to product research and analysis, selection, order, payment, delivery, installation, operation and maintenance. The seller’s set begins with creating awareness of a product or service, the dissemination of product/service information, sale bid and closing, taking and tracking the customer’s order, invoicing, production, delivery and after-sales support and service. The number and length of rungs on the ladder re present the resources required for the transaction.

In order to achieve the desired results for each function, a company must initiate an action. When the action links the company with another organization, it becomes a transaction. In the traditional mode, the buyer, in order to fulfill a need for a product/service, would research it through different sources—the media, libraries, or the relevant literature made available by sellers and other interested parties. This would involve various trips to the different sources, resulting in comparison and selection, the placement of an order with the seller, payment, delivery and so on. The seller would have access to a largely geographically proximal market—though in mail-order transactions, proximity is not such an issue—where buyers would be solicited through advertising in different media and/or personal contact. Orders would be taken and tracked through paper trails, resulting in delivery and after-sales support, once again through much file tracking.

The entire effort would be considerable. On the con consumer’s side, the search and research for the desired product, as well as the actual purchase conducted at the seller’s premises, entail time and energy. Similarly, the seller would deploy significant resources in reaching out to potential customers, in taking and tracking orders, not to mention in housing and maintaining sufficient inventory to fill those orders.

In B2B transactions, where the volume of the exchange is increased, maintaining separate data files on different transactions, even through EDIs, can be painstaking. Errors in entry, if undetected, often get compounded. Valuable hours, which could be employed gainfully in improving and enhancing products and services, are frittered away in inconsequential tasks.

Stage 2

In this stage, the traditional rungs on the ladder get replaced with newer ones that utilize information technologies that serve the same basic functions, but do it faster, more accurately and with significant cost savings. The resources that are saved through e-commerce transactions affect profitability for both the buyer and seller. Web-based technology also offers businesses the opportunity to re-sequence and streamline operations, making the organization leaner and meaner. Organizations that do not wish to change overnight can take it one or a few steps at a time. Very often, an organization will first move its communication functions on-line. An intranet is set up for internal communications, followed by an extranet for communication with the outside world. The global reach of the Net opens up a potentially larger customer base and allows for swifter, more accurate communication in real time.

Today, a number of companies are using the Web to share information in the earlier or later phases of the value chain. Companies like CE Franklin, National Oilwell Inc. And Schlumberger are offering product information quickly and effectively, to the customer’s benefit (www.cefranklin.com, www.natoil.com, www.schlumberger.com). Web technology enables sophisticated product presentations that could include three-dimensional representations, sound, animation and video clips of customer testimonials.

Add-ons such as the above allow firms to extend and tighten their operations, achieving cost-efficiencies without disrupting the existing organizational structure . Hesitation to engage in e-commerce rests very often on security issues and the lack of standard protocols. This technology has, however, evolved to a point where security and privacy matters are being handled with a growing confidence. This is reflected in an IBM poll that indicates there is a significant increase in the perceived safety of ecommerce. As communities of interest get established on the Net, they work together to develop standard protocols which prove mutually beneficial. This should spur adoption, as the players who get on-line first tend to have a say in the development of these protocols.

Organizations that can get past security fears can still take advantage of this technology by adding the Internet as another arm in their marketing arsenal. Consider the case of Lands’ End, the outdoor clothing retailer. Lands’ End added Internet catalogues and order taking to its existing catalogue and retail operations. This not only increases the client base for this retail giant, it also ensures ease of purchase and order tracking, and quicker response time at the buyer’s and seller’s end.

Another company that is adopting the modular approach to e-commerce is Tartan Engineering, a mid-sized engineering firm that is moving toward a leadership position.

The company has moved from using the Internet for email and document exchange to maintaining a more prominent Web presence to keep in touch with its clients. Though still at stage 2 of the model, the company intends to move to the next stage, where it will conduct all of its business on-line.

In the above-mentioned cases, the organizations have chosen to maintain their basic structure, while at the same time introducing minor changes. If you look at the model, you will notice that the typical intermediate phase in organizations adopting e-commerce involves changes in the top rungs of the ladder of commerce, the part of the value chain that entails communications, research and selection. Reaching this section of the ladder reflects faster response time and the streamlining of logistics, with financial benefits to both buyer and seller. Though the actual purchase, delivery and maintenance aspects still continue in the traditional manner, some organizations engage in electronic order tracking and purchasing in addition to their normal, ongoing practices.

Take a look at how just minor changes in the communications strategy benefit both buyer and seller. Though transactions at all stages of the model serve the same functions, the specifics of the transactions change when e-commerce is introduced. For example, a stage 2 function such as the identification of needed products and suppliers would have proceeded with visits to corporate libraries and other traditional information sources. That search will now become faster and a lot more efficient through the use of electronic search engines and directories that bring all the media and the tools for collection, comparison and analysis right to the searcher’s desk.

On the other hand, the seller has the ability to reach its target market in a few clicks, with interactive devices to stimulate awareness of product/service and sales, and the capability to obtain reams of consumer data and other time-sensitive information. All of these resource savings from streamlining transactions flow directly to the company’s bottom line, whether it participates in the transaction as a buyer or a seller.

It must be kept in mind that while the Internet does extend geographical reach, and hence potential market share, its use as a strategic tool for capturing a larger customer share of the existing market is also notable. If others are making use of this remarkable technology to win potential customers with their pitch of quick, painless and, often, more economical sales, it would be inadvisable to stay out of this profitable loop. Even governmental bids are now posted on-line, so those wishing to get any of these contracts had better follow suit.

Stage 3

The next step in the adoption of an e-commerce model is to move all links of the business value chain on-line. If one considers the glowing testimonials of firms that have moved to an e-commerce model, this commitment should not be a hard one to make. Even though it may initially require a substantial investment of resources, the payback is fast and far outweighs the investment.

Moving all parts of the business value chain on-line entails some organizational restructuring and relearning. This may be unsettling to some initially, but when all business functions can be channelled through a single source such as the Internet, keeping track of the numerous strands of organizational dealings becomes a lot easier. Thus, organizations that have embraced this technology are reporting operating and cost efficiencies as well as a reduction in errors in data entry and order tracking.

The coming together of the parallel sets of buyer-and-seller functions indicates the streamlining of the supply chain management and sales automation, with quicker response time and greater efficiency. This has a positive impact on the company’s bottom line. The tightening of the value chain also results in the elimination of redundancy and reduced errors. Reduced inventory obviates the need for expensive warehousing, and shorter purchase cycles lead to faster turnover.

Apart from the obvious benefits of faster, more accurate and cost-effective transactions, there are the less obvious but possibly more significant benefits that follow. These are the value-added functions that the staff can focus on when mundane transactions are automated. Typically, the staff responsible for buying and selling functions in organizations spend 25-40 percent of their time on traditional transactional activities. Automation releases a significant portion of man-hours which can then be invested in negotiating better contracts, improving customer relations/service and R&D.

There are real-life success stories that support these claims. Take the example of Shell Chemical. Shell has increased its profits considerably by using the Net to strengthen its relationships with its customers and suppliers. With the help of SIMON, its new software package to assist with supplier-managed inventory, Shell tracks the usage pattern of its customers, to make more accurate production forecasts and reduce inventory. The software anticipates customer demand and proactively replaces inventory. This has strengthened Shell’s relationships with its customers and suppliers. The company estimates a 10 to 1 return on investment.

Another company reaping the benefits of conducting its business on-line is Utilitynet.net, an organization which, as the name suggests, acts as a go-between for utility companies and their customers, helping the latter pay their monthly dues. From humble beginnings in 1981, the company now processes $500 million worth of utility payments, earning considerable revenues in the process. Additional services are being added all the time. A natural extension of processing utility payments was the entry into data mining, producing reports that assess a company’s readiness for utility industry deregulation. The company has further expanded into producing greenhouse emissions reports and oil and gas equipment auctions. Plans for the future include trading gas credits and facilitating utility load management.

The list of success stories is a long one, whether it is the saga of industry giants or the tale of a mid-sized supplier like C.E. Franklin, a company that is increasing its revenues through e-procurement. With the development of newer, m o re efficient software and security measures, Web-enabled e-commerce is set to spin many more stories like this one.

Technology enables, but it cannot transform business practices unless there is a corresponding effort from the user of the technology. Stage 3 of our model indicates the tightening of the business value chain with its subsequent impact on the company’s bottom line. Yet, to achieve this, businesses have to be responsive and proactive in implementing ideas and practices that will pay the dividends being sought.

Though most of this may appear to be common knowledge, it is our hope that our model provides a clear, visual representation of what B2B e-commerce entails. We also hope that the various stages in the model emphasize the potential and possibility of a modular approach, and give the reader the sense that he or she will have some control over the change process.

The fact is, B2B e-commerce is the way of the future. Though change may be unnerving for some, sound business sense dictates that one should exploit this new technology to one’s benefit. By using the modular approach, organizations can implement and evaluate gradual changes, thus making the best of this dynamic environment.

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