InformationWeek
Defining The Business Value Of Technology
December 7, 1998
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"E-commerce is like the market in China for U.S. companies," says US Web's Laube. "Most probably aren't making a profit there yet, but they're in China because of huge market potential. The returns will be a few years in coming. You have to have deep pockets and be willing to stay with it."
MYTH NO. 5: The Web levels the playing field.AKA: Startups Can Instantly Compete On The Same Footing As Long-Established Companies.
With a few notable exceptions, such as Amazon, E-Trade, and online greeting-card maker Blue Mountain Arts, the biggest E-commerce players are big, established companies: Cisco, Disney, Dell, Microsoft, Charles Schwab. Companies that want to be successful at Web commerce need the marketing clout, brand identity, and scale to do back-end fulfillment and customer service--and above all, they need the capital (see Myth No. 2). That's why so many startups are either merging (like music retailers CDNow and N2K) or are being bought by big physical-world competitors (note Reel.com's acquisition by Hollywood Video).
A popular line on the conference circuit is, "On the Internet, no one knows you're a dog." But over time, another one-liner holds more weight: Size does matter.
Size, in most cases, means brand power, trust, and consumer confidence. "In theory, anyone can enter any market in E-commerce," says Paul Gaffney, VP of commercial sales at Office Depot. "But the Internet hasn't changed the way you earn credibility, not one iota. That's through actual performance. It has leveled the playing field for exchanging information only. We're the largest in our industry, so it's a fundamental economic law that no one should be able to beat us on price."
Another aspect of the level playing field myth is the assertion that the Internet gives small companies instant access to global markets. Access is one thing; leveraging it is quite another. "Large physical-world companies have a huge advantage in overseas markets if they leverage their brands online, whether they're Boeing, Eastman Kodak, or Pepsi," says Randy Meyer, VP of financial services and E-commerce at Compaq. Adds Gartner's Satterthwaite, "There's a low barrier to doing E-commerce, but a very high barrier to becoming one of the leading choices."
In business-to-business E-commerce, the Web admittedly does open the door for small companies to bid on contracts and sell to large companies. This truism is usually posited in comparison to EDI, whose prohibitive cost, inflexible formats, and technical complexity locked small suppliers out of relationships with the Boeings and Wal-Marts of the world. There are cases where this maxim holds true. Doing business with more small suppliers is a goal of Los Angeles County's ambitious Web-based procurement initiative, says procurement director Chrys Varnes.
But the Web also makes it easier to do business with the largest suppliers and customers. So E-commerce is actually causing some companies' purchasing departments to reduce their number of suppliers and buy more from the largest ones in order to get bigger discounts and better service.
That's a stated goal of Chevron, one of the largest companies to launch Web-based procurement. Chevron is moving portions of its staggering $10 billion a year in supplies and services procurement to the Web using software from Ariba Technologies. "We have 200 global suppliers, and we want to channel as much business as we can to those companies to drive our costs down," says Jerry Jacobson, manager of purchasing strategy at Chevron. Indeed, the reduction or elimination of "maverick buying" from unauthorized suppliers is a goal of Web-based procurement initiatives at Bristol-Myers Squibb, Ford, GE, and other companies.
MYTH NO. 6: It leads to disintermediation.The theory was simple: The Web provides an instant global sales channel to all producers of goods and services, so why use conventional distributors, resellers, and other middlemen when you can sell directly? Well, it simply hasn't happened, for three main reasons: the actions of producers, the actions of distributors, and the rise of dozens of new intermediaries on the Web, giving rise to the second-generation buzzword "reintermediation."
The only trend partially validating this myth is the fact that some producers that always bypassed reseller channels, notably Dell, have done very well selling on the Web. (Dell sells $10 million worth of PCs per day on its Web site--triple what it sold online last year.) But most successful E-commerce players are using the Web to enhance their existing distribution channels, not circumvent them. Even Cisco, one of the most successful E-commerce practitioners, makes 70% of its online sales to resellers, not end customers.
Other examples abound. Consumers can't buy a motorcycle on Harley-Davidson's Web site, but the manufacturer's dealers can access a Harley extranet whose features include a repair-parts information database and speedy processing of reimbursements for warranty repair work. General Motors' BuyPower Web site lets customers configure and order cars online, but the sale is directed to a dealer in the customer's area. The only companies that can buy direct from Parker Hannifin's Compumotor unit are the very largest customers, such as Boeing and Universal Instruments, that have already bought direct before. In these cases and countless others, the goal is to aid the channel, not bypass it--at least for now.
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Illustrations by Hank Osuna
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