Introduction
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.
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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.
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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.
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By GlobalDataThe 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
facilities
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
US
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.
Conclusion
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.
