E-commerce - Some Implications
The media is full of articles extolling the potential benefits of e-commerce. However, these are largely from the perspective of consumer sales. A poll by ComputerWorld of 100 senior systems managers found that 36 percent had diverted resources to internet projects. This was done purely as a result of top management reading a media report on e-commerce technology. This is hardly a strategic rationale. Sales of mid-range and enterprise systems have been boosted by the demands of companies rushing to develop e-commerce facilities. In short, the hype surrounding the potential of e-commerce is driving organizations to develop e-commerce capabilities, often without considering the strategic implications. This article will explore some of the potential implications of the much anticipated explosion in e-commerce activity.
The current scenario
It is now commonplace for major manufacturers to require suppliers (and increasingly customers) to be able to implement Electronic Data Interchange (EDI). The key benefit is a reduction in paper based transactions in favor of electronic ones with a corresponding saving in transaction processing costs. Based on the real costs of processing, the savings are obvious.
The effects of the web-based technologies have already started to make themselves felt. Lower cost internet technology based networks (those using the TCP/IP protocol) are replacing the more expensive Value Added Networks (VANs) that initially enabled EDI. The initial organizational benefits are operational cost savings. Using the web-based approach, however, additional services can easily be added to those of simple transaction processing.
Examples of how additional customer services can be provided on the back of e-commerce applications abound. Aircraft unable to fly while waiting for spare parts can cost airlines up to $40,000 an hour. Boeing (US) has set up a web based on-line spare parts service, which allows airlines to check up on part availability directly. The system links to Boeing's IMS database to identify the closest 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 Federal Express and United Parcel Services' own web enabled parcel-tracking facilities. This high level of customer service helps to build better customer relationships.
The adoption of similar customer services in a competitive environment would encourage greater customer retention.
With the acquisition of a new customer estimated to cost five times as much as retaining an existing one, there are major bottom line implications here. There are however further key differences between traditional EDI and the new web-based facilities, which are highlighted in Figure 1. The major implication is the provision of a more open market place. Direct communications with product consumers are possible over the internet.
FIG.1 Traditional EDI v web-based
Source: European Initiative on e-commerce
Dell Computers stand out as probably the most successful current on-line selling operation, with sales of $2 million per day. Its system allows customers to configure personal computer systems on-line before placing orders. 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 system offers. The customer gains the benefits of being able to tailor orders for individual PC systems 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 number of suppliers, evaluate the alternatives, and then place cumulative departmental orders to gain volume discount. Unfortunately, due to the nature of the market, by the time the order is activated at the agreed contract price, the same configuration is available for less (even from the same supplier). The traditional corporate buying process not only slows down the purchasing cycle but also purchases cost more. In addition, because of the paper based transaction process, additional costs are incurred.
Dell's system offers similar facilities to all customers whether they are multinational organizations buying thousands of computers a year, or private individuals buying one. The only difference is that the pricing structure favors corporate buyers.
What prevents other organizations from emulating Dell's success? Dell has always been a direct sales operation. The lack of retail outlet overheads allows Dell to be highly price competitive. Many companies trying to offer products or services on the internet provide no price benefits because of a natural reluctance to alienate existing distributors. This results in some products being offered at higher prices on the internet than through traditional distribution channels, despite lower cost structures. This restriction does not apply to new competitors entering the market. New market entrants with no distribution network to restrict their activities can, instead, compete on price and service. This allows them to potentially undercut established providers.
With the market for internet sales estimated at $200 billion by the year 2002 in just the UK, new entrants are continuously enticed 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 alone accrue profits. Amazon.com (the largest internet bookseller) had on-line sales of $27.9 million for the second quarter of 1997 -but lost $6.7 million. Major experiments in on-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 and hence potential access to the internet is still limited to a minority of total consumers. Numbers are, however, growing rapidly. Indeed, some European countries have already overtaken US levels. In the Netherlands, 38 percent of its population has a PC, and 22 percent of these have internet access. Adoption of the technology has been perceived as slow. However, when comparisons are made with the adoption curves of other technology-led products, this is not true. Credit cards and Automated Teller Machines (ATM's) took nearly ten years to be widely accepted, and television took 25 years.
The second factor affecting the UK is the cost of on-line access. Although Internet Service Providers (ISP's) provide connection via a local number, there is still an on-line incurred cost. In the US, by comparison, local calls are usually free, which encourages internet usage.
Perhaps parallels on the likely impact of internet technologies can be found in the financial services sector. Private banking customers already expect to use ATMs for cash withdrawals. Direct banking is common place with many companies offering telephone banking services. However, there are now new organizations entering the UK banking sector who have no branch network and offer internet based banking services. One such company, now entering the European market, already has over 500,000 customers in the US. How long can the UK-based banks continue to carry the high overheads of the branch networks and remain competitive? Banks have diversified into financial services but these products will soon feel the impact of on-line service providers. Insurance, retirement plans, stock market trading and so on can be handled over the internet at a lower cost, quickly, and conveniently.
Private consumers are very concerned about issues 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 that of 930 respondents, 70 percent cited worry about internet security as the major reason for not 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 recently adopted 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) are springing up to 'police' use of personal data by e-commerce organizations.
There is increasing evidence that many potential customers gain product information on-line and then order by more conventional means. This greater availability of competitive information has implications. Agco (better known in the UK as Massey Ferguson) utilizes web technology to provide product information to European based dealers via its own intranet. One of the by-products of providing this service is that customers have become increasingly aware of price differences across national borders. For example, a farmer living near the Belgian border might cross the border to a neighboring country to take advantage of such a price difference and then simply drive his purchase home. In the past he would probably have assumed that prices were uniform. The net effect of greater customer information is likely to cause a depression of margins, as consumers directly compare prices from alternative suppliers before purchasing.
Use of new technologies in the UK has historically followed the lead of the US. There are indications that acceptance of e-commerce by consumers is growing. Figure 2 shows the growth in e-commerce in the US by product type.
Fig.2 Growth in e-commerce in the
Source: Forrester Research January 1998
By comparison with the overall retail sector in the US, these numbers are small. However, the growth rate is high and as with any innovation, early adoption is slow but will grow rapidly with a potential explosive exponential growth to follow.
Some products and services are fundamentally more suited to e-commerce than others. According to Forrester Research, worldwide ticket sales for travel and entertainment alone could be worth $8 billion by 2001. 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 can also 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 possible for music to be downloaded direct to your own system after purchase.
The number of small to medium sized companies with internet facilities is growing fast. It has doubled in the last year to 31 percent. Consumers have very limited mechanisms for differentiating between different on-line service/product providers. This will allow new and smaller organizations to compete directly with larger established multinationals.
Finally, how long will it be before a major manufacturer breaks rank and uses the internet to sell directly to the end consumer by-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 could be delivered directly to their door at large discounts against the traditional retail price.
The manufacturer could improve margins due to the difference between wholesale and retail prices. At the same time, undercutting other competitors who provide margins to members of their distribution chain. Even if existing producers resist such temptations, manufacturers from non-EU countries could use this to enter the market, even if they were required to set up a manufacturing operation within Europe.
Nobody can accurately predict exactly when the widespread adoption of e-commerce will take effect. However, there is general acceptance that it will happen. Organizations need to consider the implications for their own competitive environment. Companies should prepare for increased competition from new entrants into their marketplace. These may not all be direct competitors but will, at a minimum, compete with their customers and suppliers impacting upon the market structure.
There are major implications for existing distribution channels. For some products and services, these may extend directly from producer to consumer, by-passing conventional distribution methods. Organizations set up to take advantage of e-commerce will have low overheads and are likely to compete primarily on price. This will erode margins generally, as consumers will expect conventional retailers to match internet prices.
International barriers to competition will be eroded. It will be as simple to buy products from across the globe as from the next town. International price differences will be impossible to maintain. The long-term effect may well be worldwide harmonization of tax and duty. Certainly, quality standards and safety legislation will become standard. A number of stages in the development of e-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 of these stages they currently work and what action is required for them to progress.
Finally, e-commerce will not go away. The only question is how long until it impacts your organization. The following quote perhaps best summarizes the situation:
"If you are not planning to generate a
larger part of your revenue from electronic markets, you are going to be left with a much
smaller market to compete in."
Walid Mougayar, Cybermanagement Inc.
Roger Baty is principal lecturer in Marketing Information Systems (MIS) at the University of Central England, with a particular interest in the development of e-commerce. Baty has worked for Unisys and British Telecom and was a senior lecturer at Coventry University.
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