crash course in the evolution of business models
find the bottleneck, and own it
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What are your thoughts on Net market-makers?
Are they just places to browse or will people actually buy from
them? Is that a viable
If by “Net market-makers,” you mean B2B exchanges such as
those trying to sell telecom, I think B2B exchanges will flourish, but
they have to do much more than facilitate the exchange¾the
exchange is the simple part. The
other part, the value-add of service around that, is the whole
solution to everything from delivery and knowing where the delivery is
to payments and inventory adjustment.
That means every B2B exchange or every eMarketplace is going to
have to tie into the legacy systems of these different companies.
I see all these big names of the auto industry or the travel
industry, whatever, getting into this and, yeah, that's fantastic, but
now you're talking about legacy systems across all of these major
companies which have had systems for 30,000 years, plus the suppliers.
It doesn't work easily. I've
been involved with a project with the Department
of Commerce in DC, and they basically say that they don't
understand how to measure the economy anymore.
We've done a lot of interviews with heads of eBusinesses and
major companies, and I’ll pass on their comments to you because it's
probably very relevant to what most of you are doing.
They said that the impact of the Internet on their big
customers is zero. Absolutely
Because it's such an important customer that they already had
EDI relationships in place. They
monitored them and have existing customer relationships.
The Internet's changed nothing because they don't want to
destroy that relationship.
What the Internet has done is open up thousands of new, smaller
relationships. You can
see more and more companies creating the “my Dell,” to personalize
it, because many small businesses have crappy systems to begin with
and a crappy decision-making process.
If you put that stuff in place and let them turnkey it, it's
going to be unbelievable. Oracle
is expecting something like 35% of their sales within four years to
come from a small office/home office channel.
IBM says that 50% of the IT market is untapped for them, and
they’re using that channel to customize services very effectively. That's the growth area.
It’s not with the big companies, which will happen slowly.
The big growth is in areas that were not cost-viable for you
before, and we see it happening in everything from consumer goods to
electronics to IT services. There’s
universal opinion around that, and I think that's the real challenge
for the B2B exchanges.
Would you discuss the impact of Internet integration on the
services industry, such as law, accounting, consulting, etc.?
I think consulting is a very interesting model.
Clearly, the issue is how do you charge for knowledge and
advice? Every business is
going to be facing that challenge.
Take stockbrokers, for example, where we used to be able to
charge for the transaction and give the knowledge away for free. What is happening in every one of those areas is that the
simple or petty problems, such as doing the simple wills if you’re a
lawyer, used to be the bread and gravy for many of those firms and
they are disappearing to Web sites.
Now it's a $50 upload rather than a $500 charge to do
incorporation papers because it's a template.
You just put in the company name and plug and chug.
They're not going to get money for the simple stuff.
Another way that accounting firms and law firms are using the
Internet, as I was saying earlier, is that it’s the cheapest form of
customer interaction. I
don't have time to go see the client, but I can send them alerts and
have an ongoing dialogue. Can I have access to their books, remotely, and start to do
pro forma statements in an ongoing fashion for them? It will totally change the cost of that customer dialogue and
hopefully bond them much more closely to you.
My name is Rose Wang of Binary
Consulting. I see
credit cards and electronic banking infrastructure being bottlenecked
in Europe and Asia for eCommerce growth.
Do you agree with that and what do you see as an alternative
strategy for them to get the eCommerce explosion that we've seen here?
The issue for most developing nations, and even nations like
Germany, is that card penetration is very, very low.
They just don't use them.
In my opinion, the answer’s probably smart cards, and it may
be the cell phones themselves. Cell phones are able to track calls and the time of those
calls, so there's no reason why, with some kind of embedded scanner,
that they couldn't just make micro payment purchases through the
phone. They have that
capability. There are
SIMM cards and smart cards that go into the phone, so I think you'll
see some kind of smart card/debit card option evolve.
There’s something similar in this country, an automatic check
clearinghouse. Even at eBay, something like 20% of transactions don't clear
because people don't send the checks.
It’s even a huge problem in this country.
I look for alternative systems like Atrix or possibly smart
cards. The smart card
applications they use in Singapore are unbelievable.
You don't use a passport anymore, you have a smart card that's
scanned. I think we just
don't understand smart cards in the US.
Do you think there's a similar kind of alternative strategy
developing for the B2B world?
There's one company doing it in the States.
I can't remember the name, but I think there will be people who
will probably try things like short-term financing payment and
clearing. They'll handle
that financial transaction and it will be specialized, just like the
commercial banks were, but on the Net.
Since we're in DC, I think another huge area is
business-to-government with its own payment and paperwork process.
If you think about the footprint of government in developing
nations and in Europe, where it is potentially even more burdensome in
terms of reporting and due diligence, there are huge opportunities for
greasing that path.
I’m Mark Rosen with ShopYourWorld. I believe it's a shift to the integrators that matters.
I think the debate between Amazon and FedEx misses the point
because you're still focused on stovepipes.
The Amazons can't hack it because they still have the
inventory. They're still
the old-fashioned model of buying from little men, and FedEx is still
focused just on the logistic pieces.
It's about the physical and the electronic and connecting
international manufacturers and buyers.
I agree with you about the integrators.
The issue is, will it be a new player that's the integrator or
will it be one of the existing players that nabs the next step.
I think there's huge value in integration of intermediaries.
The issue is existing player versus new player, and that's
going to vary by skills, industries and everything else.
I’m Lou Morsberger with Merchant Feedback Systems.
In your vision of continuous customer interaction, it would
seem that a naturally favored producer in most categories of goods,
such as a Sony or General Motors, could almost have a lock on every
market. Will more and
more industries start to look like software where there's a huge
switching cost for the consumer to move from Microsoft to another
producer? Can you comment
on categories of goods where the benefit is not to the producer?
If there are tons of manufacturers and tons of competition, I
do not want to bond myself to one; I want some intermediary that will
let me switch across them. Then
the job of the intermediary is to make sure that whatever I purchase
is compatible with the systems integration channel.
For certain types of transactions that are very lumpy, that's
where the manufacturer can jump back in.
If you look at something like appliances, however, the real
battle is around service. Best
Buy or Circuit City or Sears is saying, “Buy the service contract
from us.” That's how
you link the customer in. That's
how you know when they need a new washing machine or a new freezer. Meanwhile, General Electric says, “Hey, buy it from us.”
You see different people entering into the equation at
different points of continuous customer interaction, depending on the
nature of the product. All
that I point out is that the Web makes it very, very cheap, and, if
you have embedded technology, the manufacturer may have a potential
inherent advantage in some cases. I'm sure there will be others coming
in on top of that, however, trying to do the switching process.
We're just seeing the beginning of these kinds of offerings.
name is Jeff Frank. My
manufacturing firm makes a product that we sell directly over the
Internet. To us, this was
a very simple business model. We
went out of our way not to sell retail, so we don't have them
complaining about the competition.
We have a product that we sell to commercial, non-retail
customer. They can mark
it up and sell it to retail, or we can sell it directly over the
Internet and save the customer 20%, still making triple the normal
margin. Now, 30% of our
sales are directly over the Internet, and my question is, why does
this seem to be such an unusual approach?
Why aren’t manufacturers looking to this direct model?
I think it's some of the factors I highlighted earlier.
Your company is fairly new, I assume, so there's a huge issue
around legacy understanding of the marketplace and where you would
look for these kinds of products to begin with.
Clearly, coming in today from certain commercial sectors, the
Web may be a very ample place to look.
If you have existing chains of information, intermediaries and
consultants who are using this channel for a decision-making purchase,
part of what you have to do is re-educate the marketplace so that the
decisions are occurring here, electronically.
Each channel has unique characteristics, and you look where the
bottleneck is in your channel. The
intermediary points may be very different for you. There are very few things I can tell you that are universally
applicable. It's all
situational, but these are the factors you have to look for.
Your bottleneck may be in a very different place from other
industries, and the newness of evolving industries may make it much
more suitable for you.
mario morino: wrap-up
morning. I want to thank Jeff for what I thought was an excellent
thought provoking. I'm
going to try to summarize why I think it's of great relevance to what
you face in trying to create the businesses you are building.
More than anything else, as sophisticated as his presentation
was, Jeff was really getting at the importance of understanding the
fundamentals of your business. If
there is a criticism I would make, in general, about many of the
approaches we see today¾and
have seen for five years now¾it
is a lack of appreciation for the businesses fundamentals.
Without naming the firms, I can give you two cases that I think
are a phenomenon of the last five years that we probably won't see
again. These two
businesses both got VC funding in the region, both had IPOs and both
are just incinerating as fast as you can pick up the paper.
If you went back and looked at their businesses and their
industries, there never was an opportunity to have a margin on their
products. It was obvious
from day one, but they didn't see it, their VCs didn't see it and,
because of the hype around the Net, a lot of public investors never
took the time to understand that the margins were so low in their
markets that there was just no further gain to be extracted.
I challenge you to look hard at the fundamentals that Jeff has
laid out. The point he
made about the impact of technology¾fast,
cheap, more reliable, solving more complex problems¾that
couldn't be more true. You
could have inserted those same words in all the presentations we used
to do as early as 1976.
But there is a difference. Nothing, at least in my career which
started in 1964, is as profound as the change you see today.
It’s more profound than the introduction of the computer
itself because, as a society, we weren't as acclimated to
understanding the potential before us.
Now, technology has permeated society to such a large degree
and so many more people are able to understand it, that you see many
differences. Unlike any
of the other technical innovations, at least to the Industrial
Revolution, the wild card is the individual nature of the Internet.
It changes all four of those issues of speed, cheapness,
reliability and complexity. The
ability to assemble, either as consumers or to aggregate power as a
populist movement, is something we've never witnessed before in any
medium. Irrespective of
the business models we see, the client can aggregate faster than ever
before and shift the power.
I think we're going to see a slew of changing business models
because we're still in an early stage and nowhere near the maturity of
its impact. We’ve seen
several phases already. If
you go back to1992, when the Internet was approaching critical mass
but had not hit the commercial space, the Net itself was the element
of change. By 1993 and
1994, everybody was focused on creating Web sites for the lateral
movement of data, and that became a force of change.
By the mid 1990s, up to 1997, you were seeing channel
disruption for the first time. Channel
reconfiguration became the opportunity and many people never made the
switch from developing Web sites to realizing that the purpose of
those sites was to deal with channel issues and channel disruption.
Next, you saw the issue of collapsing the supply chain, which,
again, is lateral movement, causing collapses in the system.
It broke out huge cost savings for organizations and
speed-to-market on supply chain condensation.
Then came the eCRM movements, overhauling your electronic
consumer relationship management array.
Today, that is almost an industry in and of itself.
I came out of a meeting yesterday morning where the conclusion
was that the challenge today is the management of multiple channels.
It's not just putting IT services in; it's how do you manage a
multi-channel strategy so an organization can deal with their clients
from a B2B model. I just
rattled off four or five business model changes in the past few years
that are profound to the commercial marketplace and therefore to the
client marketplace. It’s
absolutely embryonic compared to what we'll see over the next 10
I think opportunity abounds.
The new business models create FUD¾Fear,
Uncertainty and Doubt¾and
I think there is enormous opportunity in the large organizations
because they don't get it yet. The
ability to go into the global 300 is absolutely astounding because
they're still remarkably challenged.
Although a few of them may understand this in visionary ways,
you have entire legacy-based organizations that are still having great
difficulty responding to these changes.
When you look at opportunity from your perspective as
entrepreneurs, I would suggest that there are two very large pictures.
One is, when you understand and can map out the changing
business models as well as Jeff did here, then you have to ask
yourself, how does my product or service capitalize on that business
model change or on some niche market of that change?
If there’s a good answer, you have a clear opportunity and
that's where you should direct it.
The other opportunity is that there is a global Fortune 1000
that is still struggling with this issue and will continue to struggle
for the next 10 years. The
opportunity to go in as interpreters and advisors is absolutely
remarkable. The sector
made up of eBusiness advisors has been hit lately, but that’s
because we're actually not sure where the sector is.
What's happened is that the sector is not bad at all¾it
is remarkably strong¾but
you're seeing the sector go mainstream.
That's all that has happened.
What we knew as “the Internet space” is becoming the
classic IT services space with a premium on the top, and that premium
is in being the first to take advantage of the models of channel
distribution strategy or organization.
People are having an enormously difficult time trying to
understand how to get their product to a changing marketplace where
the power has shifted to the client.
This phenomena of a power shift to the consumer dictates the
price for the product being used.
Jeff’s other point that I'd like to touch on is how the
decision has moved outside the channel.
At my old firm, Legent, we had the benefit of having Max Hopper
on our board. Max was the
guy who put the Sabre system together
way back at American Airlines.
I had the pleasure of asking him about the changes in terms of
system design when you saw all these fundamental shifts on the
network. What I'm talking
about here is the enormous complexity we now face in delivering a
technology-enabled solution to a client.
Max said that when they first did Sabre it was very
challenging, but simple in concept because they were writing a system
to provide a ticket where everybody who touched the ticket was an
American Airlines employee. That
was phase one. Phase two,
which was more prominent, was when that network opened up to encompass
travel agents throughout the globe.
That caused a significant change to the design in scope, in
technology, in industrial strength engines, etc., and there were legal
issues, you may remember, about whose tickets got posted first,
However, American Airlines was still such a dominant supplier that
they could dictate system control.
It changed massively when it was broadened to the whole leisure
and travel industry where the client reigns supreme.
They went from American Airlines in the '70s to travel agents
in the '80s, to clients in the '90s and the amount of effort it takes
to deliver that solution is probably a magnitude of hundreds of times
greater. That’s why, as
companies, you have such enormous opportunity.
There are clearly niche opportunities and market opportunities
to develop around the new business models, but do not underestimate
what Enterprise America, Enterprise Europe and Enterprise Asia will go
through to make this transition in the next 15-20 years, as well as
the new markets that have opened up because of the scalability that
Jeff talked about and the effects on small and mid-range businesses.
Look at what the markets will now demand, such as information
in real-time. For
example, just before I came up here I received an email announcement
about all the IPOs that have been pulled in the last 48 hours.
As entrepreneurs, the number one point is that you have to clearly
articulate your business model and show a compelling understanding of
how that model responds to change. That will go a long way in helping investors and others have
great confidence in your approach.
If you look at America Online
or Capital One, they saw a new business model and became a dominant
provider with it. There
will be more companies like that.
The second point is to become part of the system of
organizations that will help organizations understand this change.
There is a constellation of companies that are basing huge
investments around mining the global 1000.
In both cases, when you look at your business models, know
whether you are capitalizing on a new business model, or whether you
are a support agent or intermediary that's going to help other people
advance that model. The
ability to articulate that to the venture world and to your
prospective clients is going to become remarkably important.
It probably already has been to the realization of market
valuations, on how money will change and whether or not you'll get
funding going forward.
Jeff, your words couldn't have been more timely and they have
tremendous relevance to this group.
Thank you very much. Good
luck, everyone, and thanks for being here.
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