E-COMMERCE - Old ways going to the dogs.

In July 1997, at its annual meeting, the London International Financial Futures Exchange was taking stock. The Liffe board announced its belief that its open outcry trading system was “the fairest and most efficient” and would remain the dominant trading platform for the foreseeable future. One year later in July 1998, the game was up. The days of open outcry trading at Liffe and elsewhere across world were coming to an end. In the summer of 1997, Frankfurt’s Deutsche Terminboerse (DTB) introduced an electronic trading system and competed directly in the trade of Liffe’s flagship contract, the 10-year German Bund futures contract. Liffe’s share of the trade in this contract fell from 75 percent to 10 percent in 12 months, and it withdrew from this market. The facts are simple. Open outcry trading costs three or four times as much as electronic trading. This was never a secret. Liffe is now fighting for its life and hopes to have an electronic trading system, Liffe Connect, in place by the beginning of 2000. It is possible that Liffe will survive, but by no means certain. At the time of writing shares in Liffe have fallen 75%. The floor traders, many of whom earned around $250,000 per annum, are looking for other work. So, if you want to know how long it takes for a business to be destroyed by a nimbler electronic competitor, now you know. It can take a whole year. There are three types of knock-out punch the Web can deliver; they come under the headings: geography, ignorance and time. Trampling on geography The Internet makes it possible to create a widely dispersed organisation – a so-called virtual organisation, which has a computing and communications infrastructure residing partially, or entirely, outside the organisation. A major benefit of such a system will be to release an organisation from many of the constraints of its location. For example, most organisations can only recruit staff that live within a specific catchment area, are constrained in their ability to market to potential customers outside their geographical and cultural area, and are similarly constrained in their choice of suppliers. Reducing these constraints causes five changes. 1. For some roles within an organisation, it will be possible to recruit and employ staff in a vastly wider geographical area, reducing the cost of staff and/or improving the quality. This trend is already visible among computer technology companies, many of whom have placed some R&D activity in regions where talent is available at a low price, like India or China. Similarly, technology has enabled companies to deploy call centres in areas where staff costs are low, although this has been more local, with call centres located in the Mid West in the US, and in Scotland and Eire in Europe. The Web will extend this trend to other areas of employment. 2. Establishing a presence in new markets will become less expensive and will be achieved far more quickly. There are many anecdotes of florists, delicatessens and specialist shops of various kinds establishing a whole new customer base ‘accidentally’ by doing nothing more than setting up a Web site. A more interesting and telling example is that of the ‘hernia holiday’ in the UK. One centre offers package deal for round $2,800 including flights, accommodation and an evening of theatre in London’s West End. The equivalent operation in the US costs roughly twice as much as it does in the UK. 3. Establishment costs, office space and associated infrastructure costs fall. In a typical office where the workload permits teleworking, the occupancy of desks falls by half. Office space is reduced and ‘hot-desking’ implemented, with staff occupying any free desk when they come in. Additionally, the reduction in geographical constraints can make outsourcing more feasible. 4. Supply costs fall. Many organisations are already benefiting simply by purchasing products and services over the Web. There are some very obvious areas such as purchasing aeroplane tickets, booking hotels, and buying computer equipment and software, where the Web provides better value. This can be extended to a review of all supply costs in the light of what is available over the Web. All organisations are recommended to do this. 5. The general level of competition increases. All the opportunities described so far also work in reverse. Competitors will be able to hire in different locations and reduce supplier costs. What is more, new competitors will be able to enter your established market from anywhere in the globe and they may offer tough competition. The death of ignorance Commercial decisions, whether taken by an individual in buying a car, or taken by an office manager in selecting office furniture, are nearly always made with an incomplete knowledge of the facts. Ignorance is a factor both for the buyer and the seller in most commercial transactions. Neither can know with much certainty whether they bought or sold at the most favourable price, nor can they know whether the most appropriate goods and/or services were agreed upon. In many areas of the economy, this problem is diminished by the presence of brokers or intermediaries, which facilitate commercial transactions by providing knowledge or expertise in a specific area. Their value is that they know the market, but they may bring more than knowledge to the transaction. They may arrange finance, delivery or carry out the import/export paperwork. In other words, they may also know a process or know how to involve all the necessary parties to a given transaction. In some areas of the economy there are no intermediaries and caveat emptor holds sway, but the cost of a transaction is very high. For example, the purchase of any expensive item, such as a large and expensive metal pressing machine, an industrial printer or a large computer or packaged software system involves a good deal of effort. It can involve a comparison of vendors and products, testing and proving, finance, planning and installation costs and so forth. Even if no third party gets involved, much of the cost of the transaction comes from the need to understand aspects of the purchase. Web sites can and do take the place of the middleman or third party. As electronic commerce has expanded, this disintermediation has become common and it will continue to proliferate, rewriting the established rules of business as it does so. The reduction of the constraint of ignorance causes four changes: 1. Brokers and other intermediaries will see their businesses contract and disappear. Alternatively, brokers may become retailers and the retailers will be marginalised. It is important to understand that the word “broker” is often applied to the company that owns and manages the relationship with the customer. This is particularly the case in the insurance market where the insurance broker is actually the insurance retailer. Note also that wholesalers are intermediaries in the supply chain, but if they choose to sell directly and circumvent the retailer then the facilities that they have (warehouses and delivery capability) may be better assets than those retailers have for a Web-based business. There is also the possibility that some business areas may disappear altogether. One of the first things that you notice when you surf the Web is that most companies advertise job vacancies on their Web sites. The incremental cost for them to do this is very small and it significantly reduces a business cost. Consequently, it is quite possible that the current business of the job agency will disappear completely, because it will be just as fruitful for the potential employer and employee to publish and subscribe using only the Web as intermediary. Job agencies will have to add much greater value than simply connecting the buyer to the seller, as will the lonely hearts clubs. 2. The consumer will be better educated and better informed and therefore more discriminating. Already there are Web sites that exist just to provide pricing information. Visit www.compare.net and see for yourself. This particular site provides pricing details for consumer goods in the US. Also worth a visit is Bottomdollar.com, which describes itself as a Shopping Search Engine. There are also specialist comparison sites like SmartShip, which provides competitive shipping prices between the likes of UPS, DHL and FedEx. It asks a user for the ‘to’ and ‘from’ zip codes of their package and its weight. It then shows a chart of current prices to ship the package, listed in order by several shipping couriers. It also provides a tracking service once the package is sent. In the health sector, the Web surfing patient is already far better informed than patients have ever been, and is making greater demands on health care professionals. Doctors are already grumbling about ‘cyberchondriacs’, patients who surf the Web for information about the symptoms of obscure medical conditions and then come to believe that they are sufferers. 3. Businesses will become more responsive to their customers. In 1995, Professor Nicely posted a statement on the Internet that there was a flaw in the Intel Pentium chip. The story was picked up by the computer press and CNN picked it up from there. Intel eventually bowed to media pressure and offered to replace every flawed chip, necessitating a write-off of $475m. Intel had concluded that it was highly unlikely that any applications would be affected, but it had no option but to pay the price of its error. Customers have always complained, but when their complaints are being published in Usenet groups they quickly become common knowledge, and responding to legitimate complaints is the only viable course of action for a supplier. The positive side to this is that the customer cares more and the Web allows the customer to become involved in specification or even product design. 4. Some businesses will become commodity businesses and the number of players in that particular market will reduce. Currently there are 43 stock, futures and options exchanges in Europe and every European country has its own exchange in the same way that each country has its own airline. It’s an expression of national pride rather than an economic necessity. The situation is unsustainable. Small exchanges offer no advantage to the buyer, seller or issuer of shares and other paper instruments. Consequently there are mergers in progress. Medium term expectations are that there will be six or seven regional bourses throughout Europe, but this will surely reduce further. The rationalisation of markets will probably happen very quickly once the UK adopts the euro. In a commodity market, guaranteed quality and transaction costs are everything. This leads us to recognise a trend that is perhaps already visible, but which will become increasingly obvious. Businesses will either move in the direction of commodity selling or in the direction of customisation. A book, a video, a music CD, are commodities and there is very little value that the retailer can add. But cars, clothes and holidays can be customised. This tendency is so strong that it can be formulated as a law of differentiation: In eWorld, a product either becomes a commodity or it becomes a customised item. Customers are already attracted to the Web because they can satisfy their requirements either more effectively and more quickly, or at lower cost. The Web already provides the most efficient market for the vast majority of goods and services. Time measured in dog years An increase in the speed of a business process usually delivers competitive advantage. In the world of computing, the same general pattern is visible, because faster computing usually means faster business processes. But until now, there has usually been some element of latency in the processes in which computers have been involved. For example, while there are some very large sales order systems, the business process usually involves a written, faxed or telephoned order, and rarely involves the customer using the computer system directly. Someone comes between the customer and the computer and injects an element of delay into the process. The side-effects of this are not immediately obvious until you consider business on the Web. Customer-facing systems on the Web do not involve any immediate human buffer, and thus transactions happen faster. Indeed, popular wisdom claims the Web runs in dog years, roughly seven times faster than the non-virtual world. This effect ricochets through the supply chain and end-to-end business processes take place more quickly. The Web changes the business constraints imposed by time in three ways: continuous operation, enabling companies to sell around the world, around the clock; faster speed of commercial processes, collapsing supply chains and enabling customers to become involved in the processing of orders more directly; and a trend towards soft products, which are tailor made and specified over the Web by customers. In any event eCommerce is moving forward rapidly. Up to now, retailing businesses have been successful, especially selling items such as music CDs, airline tickets, books, computers and other commodities. Specialist retailing has also been successful. On the other hand, many efforts have been unsuccessful, particularly many subscription services and sites based on an advertising revenue model. Losers in electronic commerce out number money makers by more than two to one. The ground may be very fertile, but it is not so easy to plant and harvest. This is an edited extract from eRoad: Everything you always wanted to know about e-commerce but were afraid to ask! by Robin Bloor. Bloor Research is a leading European analyst organisation, which distributes research and analysis to IT users via retained bespoke research services, online subscriptions, and one-off projects. eRoad is available from Bloor Research on 01908 373311, priced £275. Customers are already attracted to the Web because they can satisfy their requirements either more effectively and more quickly, or at lower cost. The Web already provides the most efficient market for the vast majority of goods and services.