How to navigate the curves and glitches on the fibre-optic highway.

As Internet usage continues to climb, it is becoming increasingly dangerous for organizations to ignore electronic business in the hope that it will go away. Recently, Jupiter Communications, an e-business consulting firm, calculated that on-line revenues during the 1999 holiday season totalled $7 billion, an increase of over 200 percent from the 1998 season! (All figures are in U.S. dollars.) This excludes failed purchase attempts, where would-be electronic shoppers attempted but were unable to finalize their purchase on-line (the failure rate is as high as 39 percent, according to the research firm Creative Good, Inc.). Quite obviously, there are key risks and rewards associated with conducting e-business, and we describe them below. We also present a model to help you identify your own organization’s potential and preparedness for conducting e-business.

THE INTERNET JUGGERNAUT

Canadian business leaders are very aware of e-business. Andersen Consulting recently reported that 90 percent of the 250 major Canadian firms they surveyed plan to spend more money on developing e-business applications in the next one or two years. Moreover, 84 percent of those companies agreed that they will rely more on electronic commerce within five years. Despite these stimulating statistics, though, a majority of respondents (70 percent) did not consider e-business to be an immediate priority. In fact, exploiting the full potential of the Internet ranked dead last in terms of the various business priorities listed in the survey! This response is clearly inadequate, especially in light of the Internet’s rapid evolution (where, for example, five human years translates roughly into 35 Internet years). Apparently, executives acknowledge that the Internet is important, yet they appear to be reluctant to establish a presence on the Web.

Many businesses and industries have been successful in spite of electronic commerce. However, their market shares are being eroded by either new entrants or established competitors with an electronic presence. The question has changed from, “Should we build a Web site?” to, “How can we integrate our overall business strategy with the evolving reality of the Internet?” Managers must bow to the inevitable, the juggernaut of electronic business. The key issue, then, is how to best manage the transition from “bricks and mortar” to “clicks and mortar.”

E-BUSINESS RISK

The decision to create a Web presence must not be undertaken lightly. On the basis of what they find when they visit your site, consumers form impressions quickly, and just as quickly decide whether or not to do business with your firm—electronically or physically. Design and user-friendliness are critical. Technical requirements associated with implementing a Web site can put tremendous pressure on an IT staff whose skills are already in high demand. Moreover, hiring appropriately skilled IS professionals in the current marketplace is difficult, at best. Web development is also very costly: According to Forrester Research, the annual operating costs for a large transactional Web site exceed $2 million. This includes investments in hardware (servers, telephone lines, line costs, firewalls), software (security software, transaction-processing software, Internet service software), telecommunications infrastructure and people costs and administrative costs associated with processing electronic transactions (Webmaster, technical staff, customer service staff, user support staff). Whether an organization chooses to develop a basic information-only site or a full-fledged transactional presence, the capital investment threshold is high. Maintaining a Web site is the single largest information technology investment in many firms’ IT portfolios.

How risky is it for a firm to develop a Web presence? We have found McFarlan and McKenny’s Risk Assessment Framework (see the figure below) to be useful starting point for assessing the degree of Web-development risk. This framework was originally designed to identify three risk factors associated with IT projects: size, structure and familiarity.

SIZE refers to the scope of the project relative to others in the firm (e.g., cost, time frame, number and variety of people and departments involved). For example, a $1-million, 12-month project involving 50 people from five departments may be a major project for a $10-million organization, but relatively insignificant for a $1-billion company. It may be possible to temper this risk somewhat (e.g., assigning a proven project leader, developing a prototype, gaining early user buy-in, etc.). However, in the final analysis, larger projects carry greater risk. In the case of an Internet presence, recent practices suggest that organizations must provide enough capacity to handle at least 10,000 visits, or hits, per day if they are to succeed. For example, Apple Computer’s popular site receives over 1.5 million visitors per day!

STRUCTURE refers to the extent to which project deliverables can be clearly defined in advance. Poorly structured projects tend to be riskier, since the project team is not quite certain what the final system is supposed to look like (e.g., long delays and budget overruns may occur as users continually modify their specifications). Organizations may attempt to reduce this risk by carefully defining outputs in advance. Structure also refers to the formal and informal processes the organization has in place to cope with the change that technology engenders. Rigid, hierarchical organizations with inflexible leadership and a change-resistant culture often fail to fully integrate new technologies of any kind. Similarly, engaging consultants unfamiliar with power, politics, authority and leadership structures typically leads to a less-than-optimal implementation.

FAMILIARITY addresses the nature and extent of the organization’s experience with a particular technology. A given information technology might be old for the industry, but a firm adopting it for the first time is taking a greater risk than if it had previous experience with either the same or similar technologies. This is why, in the face of newer, more advanced technologies, firms often choose relatively poorer, but more familiar, “proven” technologies when developing their information systems (to wit, the difficulties being experienced by some proponents of the Linux operating system, who advocate it as a technically superior replacement for Microsoft Windows). The familiarity dimension is closely link to the skills of IT staff and users. Organizations may attempt to mitigate this risk by hiring expert consultants, or perhaps even outsourcing the project altogether. But as we previously noted, the use of consultants and outsourcing may introduce different forms of risk.

The three dimensions of project risk (size, structure, familiarity) might be imagined as interacting exponentially on a continuum: The greatest risk occurs with a project that is large, poorly structured and involves technology with which an organization’s managers, information systems staff and users are unfamiliar. Addressing one or even two dimensions of risk may not be enough; all three dimensions should be considered when evaluating IT project risk. If using the risk assessment framework seems to create new questions that have not yet been asked, the process is working.

IDENTIFYING E-BUSINESS OPPORTUNITIES

The framework in the figure below provides a typology of e-business opportunities that any organization might consider.

IT project risk is shown on the horizontal axis in a simplified form, ranging from low to high. The vertical axis posits that e-business investments will have low to high returns both for pecuniary dimensions (ROI, increased sales, higher margins) and competitive dimensions (market share, presence, sustainability, competitiveness). This implies a commensurate need for management’s ongoing actions, decisions and control. The resulting four quadrants describe the possible strategic alternatives. The circles overlaid on these quadrants represent four strategies that have been adopted by firms doing business on the Internet.

QUADRANT I (LOW RISK—LOW RETURNS): TOKENISM AND BROCHUREWARE STRATEGIES

As the name implies, organizations that choose to be or land in this quadrant by default typically invest only in the ability to declare that they have a Web presence of some kind. They simply register their firm’s name as a dot-com, create a Web “title page” and go no further. Typically, there are no links to other pages or sites and very little information is provided on the firm or its products. The site is infrequently or never updated, traffic is not measured, user feedback is not sought, and might even be hosted and maintained by a third-party vendor.

Companies typically use token Web sites to proclaim that the organization is modern, contemporary and at the forefront of technology. In other words, a token presence implies a lack of vision on management’s part, a reluctance to invest in an unknown form of business and/or a case of vanity on the part of senior executives. (Notably, some companies register domain names as a pre-emptive move, to block competitors from registering their name or a permutation of their name. These are not necessarily cases of tokenism, assuming the actions are undertaken as part of an explicit e-strategy).

The likelihood of success in developing a token Web presence is very high (a simple page can be created and hosted by an external service provider in a matter of minutes, for a small set-up fee and a few dollars per month). However, the potential return is very low and may very well be negative (an information-poor Web site can diminish the organization’s image, particularly in the eye of knowledgeable consumers).

One step removed from tokenism is the frequently used tactic of creating a simple “living,” simple Web presence that recognizes the inherent interactivity of the medium and provides some interaction, albeit basic, with customers. Brochureware, a somewhat pejorative industry term, refers to using marketing and public relations collateral (for example, product brochures) as the basis for content on a firm’s Web pages. It differs slightly from a simple presence in that the interaction might be more advanced (for example, linked pages and the ability to search). However, advanced transactions, such as purchases over a secure server, are usually not supported.

Why do organizations follow a Brochureware strategy? Very simply, it’s economies of scale. Companies reluctant to invest in medium-specific content can easily adapt what has already been used in other formats. For a small additional investment, a firm can purchase software to enable customers to easily search their Web site for limited information on specific products or operations. Brochureware sites also allow the company to gather information on customers. Airlines have offered access to “special” areas on their Web site to their frequent-flyer members, who can track their points, develop itineraries and claim rewards. Other companies, such as Amazon.com, have used “Cookies” (small bits of information dropped by the Web server onto visitors’ hard drives) to track the number of visits a particular customer makes in a given time period, the specific pages accessed and the number and value of purchases completed. Such information, inadvertently provided by site visitors, allows a company to tailor its offerings and Web presence. For example, Cookie information can show the company that the majority of customers who search its catalogue complete a purchase only if they can get results within a specific time period, say, 10 seconds or less. As a result, the firm might choose to invest in more powerful hardware and software systems to improve response times.

Firms adopting a Brochureware approach often define specific performance targets for their Web sites, usually in terms of the number of “hits,” or visitors. They might also track the frequency, duration, click-through (going from this site to another) and actual purchases resulting from a visit (e.g., some car rental companies offer preferred rates to customers who book their rental through the Web site). These firms position themselves to measure the return on their investment in e-business technologies.

A Brochureware strategy is moderately riskier than a Token strategy. And because a Brochureware site allows a firm to provide and receive higher-quality information than a mere Token site, its potential return is relatively higher. However, compared with other quadrants, the potential return on Token and Brochureware strategies are low, largely due to the number of imitators that clutter the Web. Firms executing this sort of plan may derive some benefits from selling advertising, or by acting as a portal/access site for an industry or market. However, ongoing long-term, profitability will require a more sophisticated, more complex Web presence.

QUADRANT II (HIGH RISK, LOW RETURNS): TO BE AVOIDED!

Brochureware straddles the dividing line between quadrants I and II and may lead an organization to become complacent, potentially exposing it to higher risk, especially from competitors who provide more information or greater functionality. Organizations in quadrant II also face the possibility of competition from virtual-only competitors. For example, when the eponymous Amazon.com, a virtual bookseller with no retail stores, entered the market, physical retailers Barnes and Noble (in the United States) and Chapters (in Canada) were forced to respond with Web sites of their own, lest they lose revenue and market share.

As use of the Internet for trading grows, most organizations in quadrant I risk finding themselves in quadrant II by virtue of their competition. Most virtual-only Internet retailers did not exist three years ago. Three years hence, the consumer will be inundated as newer and better firms emerge. Companies content to remain static in the face of this growth face extinction.

QUADRANTS III & IV: HIGH POTENTIAL RETURNS

Investing in information technology has been compared to pouring money into a hole in the ocean! This analogy is based on the idea that for many organizations, an Internet presence is unavoidable, costly and requires ongoing investment. Companies in the third and fourth quadrants have implemented the vision that e-business will play a major, growing role, albeit a risky, expensive one. They choose to work toward a desired end rather than let events and competitors dictate their actions.

The major difference between the two strategies currently implemented in these two quadrants, Evolution and the Big Play, is the nature of that desired end. The Evolution strategy hedges against high risk by choosing to have electronic channels as a part of a firm’s marketing, logistics and distribution mix, but not necessarily as its focus. Those firms opting for a Big Play strategy are seeking to redefine themselves and perhaps their industry. They are willing to allocate considerable resources and managerial talent in order to turn the Web into their major, if not primary, means of transacting. Firms contemplating this latter strategy often ask three key questions: What will the nature and Impact of e-business be on my firm and industry? When will e-business become profitable? And what business models will succeed? These questions are addressed below.

• e-business Scope. Reliable estimates of the market size for e-tailers (electronic retailers) are elusive. They range from $2 billion to $300 billion. Where catalogue sales traditionally took two to three percent of retail sales, the Internet is expected to grab and hold at least 10 percent, denoting a permanent shift in retail purchasing patterns. Similarly, the business-to-business (B2B) market is expected to be four times the size of the business-to-consumer (B2C) market, with estimates ranging from $350 billion to $1.3 trillion. The challenge, then, is to capture market value. In order to do so, organizations must first and foremost set clear strategic objectives. In the case of e-business, the choices basically amount either to growing market share (an offensive strategy) or protecting existing physical operations (a defensive strategy). The former argues for a Big Play, the latter for a more cautious Evolutionary approach.
• e-business Profitability. e-business profitability is mainly a function of three factors: customer acquisition and retention costs, pricing and fulfillment. Customer acquisition depends largely on “share-of-eye” (the number of consumers you can get to “click” on your site), which in turn depends on listings on search engines and Web-based and more traditional advertising (case in point: the huge rush of dot-com television advertisements during this past Christmas season). Customer retention, on the other hand, depends on shopping convenience, speed, ease of use and the sense of trustworthiness generated by the firm. Fulfillment, the Holy Grail of e-business, refers to the integration of the value chain into the entire organization, from the acquisition of basic resources all the way to customer delivery. Fulfillment has been problematic. USA Today reported that many Web sites experienced considerable delays and system crashes over the recent holiday period [Dec. 14 ’99, B1]. Just two weeks before Christmas, several sites announced their inability to deliver in time for Christmas. Toys “R” Us, for example, stopped taking orders for Christmas delivery via regular mail on Dec. 10; it has since become the respondent in a class-action lawsuit alleging the company knowingly accepted orders for Christmas delivery it could not fill. eToys and KBKids were giving customers until midnight, Dec. 14, to order items in time for Christmas delivery (via regular mail, customers could have chosen express delivery; however, the associated costs often radically negated the savings). Finally, organizations need to embrace dynamic pricing models if they are to succeed in e-business.
• e-business Models. Three main business approaches have been adopted by organizations on the Web: Manufacturer-direct; Virtual Only and Bricks and Mortar extension sites.

MANUFACTURER-DIRECT refers to the establishment of a direct-selling channel on the Web by the manufacturer—bypassing existing franchises or authorized resellers (Nike’s www.Nike.com is one example of this strategy). The benefit is obvious. Bypassing retail channels reduces costs, some of which can be passed on to consumers, most of which are usually captured by the manufacturer, resulting in greater margins. The cost is also evident in channel alienation (indeed, contractual arrangements with retailers may prohibit this arrangement; where such clauses do not exist, payments are often made to retailers as compensation for lost revenue, negating some direct selling gains).

THE VIRTUAL-ONLY strategy is best epitomized by the ubiquitous Amazon.com, or the plethora of “generics” (e.g., cheese.com, gifts.com, wine.com)—sites which group and sell branded merchandise and exist solely on the Web.

BRICKS AND MORTAR extensions aim to replicate the “look and feel” of retail stores (the Gap’s www.gap.com is a clear example of this model in action). According to a recent study by Andersen Consulting, market share for these three approaches, in terms of Internet traffic, amounted to 80 percent for virtual only, 11 percent for manufacturer-direct, and nine percent for bricks and mortar extensions.

QUADRANT IV: UTOPIA

The desired end of any Internet strategy is to have low risks (or at least minimized risks) and high returns. To date, very few organizations have succeeded in moving to this point. While Amazon.com has redefined book selling, it has yet to make a profit and continues to see the value of its stock fluctuate. Examples abound in other industrial sectors as well. One emerging success story might be MySAP.com. The site, hosted and operated by enterprise systems provider SAP, has succeeded in becoming a revenue-generating portal or access site for companies using SAP software to manage business operations. However, this is the exception that might prove the rule. Organizations choosing Evolution or Big Play strategies want to eventually dominate their markets to the point where they inhabit the fourth quadrant (for example, AOL’s recent acquisition of Time-Warner—a marriage of carrier and content). Unfortunately, the extent and intensity of competition, partly the result of relatively low barriers to entry and the attractiveness of the Internet for sales and even distribution, have made this progression difficult.

Is the Internet changing everything? Our observations and analysis reveal that it is. Certainly, luminaries in the high-tech industry would also agree, though their predictions are somewhat self-serving. While the Web appears to be changing market dynamics in terms of the expectations and behaviours of customers, suppliers, and competitors, the fact remains that e-business is still business. The key to success still is a familiar imperative: Provide a sufficiently unique product (or line of products) to a unique and loyal group of customers willing to pay a price sufficient to provide at least a fairly obvious statement, but one which, in the face of the hype surrounding e-business, we feel bears repeating.