Trade" is Forrester Research's term for the new rules of doing
business on the Net.
It means "leveraging technology to satisfy
current demand with customized response,"
but it has implications far wider than that simple phrase. John
McCarthy, Forrester's Group Director of New Media Research,
discussed the future of dynamic trade at this Morino
Institute Netpreneur Program Coffee & DoughNets meeting held
March 25, 1999.
Morino Institute. All rights reserved. Edited for length and
This presentation is based on research contained in the
report Dynamic Trade
copyright 1999 Forrester Research, Inc. All rights reserved.
made at Netpreneur events and recorded here reflect solely the views
of the speakers and have not been reviewed or researched for
accuracy or truthfulness. These statements in no way reflect the
opinions or beliefs of the Morino Institute, Netpreneur.org or any
of their affiliates, agents, officers or directors. The transcript
is provided "as is" and your use is at your own risk.
We are pleased to have with us John
McCarthy from Forrester Research, Inc. (http://www.forrester.com),
the independent research firm based in Boston that has built a reputation for analyzing
technology change and its impacts on business, consumers and society in general. As Group
Director of New Media Research, John is responsible for much of the work that Forrester is
doing in connection with E-commerce and the Internet.
We at the Netpreneur Program are working with Forrester on a project that you will hear
more about over the next several months. From that work we have seen that they have a
great handle on many of the things you need to know to be successful in today's
marketplace. This morning, John will take you through Forrester's work on a concept called
dynamic trade, their phrase for a new business model that Forrester says will
affect all sectors and all aspects of doing business.
Thanks very much. It's great to be
here, especially with such a full house this early in the morning. Hopefully, I'll get
through my comments before the sugar buzz from the doughnuts comes down.
For the next 45-50 minutes I'd like to share with you Forrester's vision for the
Internet and how we see it evolving. There's a fundamental business change taking place
which is going to impact all of you. It will provide a new tool, new ways to get your
message and your products to market, and it's also going to impact the customers you sell
your products to.
Before I get started, however, a funny story. For the last couple of nights I have been
practicing this speech. Now, I have a son who is a little less than one year old and I
have been getting a little worried because, as I walked around practicing the speech with
him, he has never made it past the fourth slide before falling asleep. Then I realized
that even though he's extremely advanced for his age, the topic is probably a little over
As Mary said, the title of my presentation is "Dynamic Trade." It presents
our vision for how the Internet is evolving beyond simply "brochure-ware" and
order taking to create fundamentally new business models and new ways in which companies
will need to compete. I'll share with you where we see the Internet economy today, and how
we see dynamic trade changing the ways in which companies differentiate themselves in the
marketplaceboth for you as netpreneurs and for the customers you are trying to sell
to. As I develop this theme that dynamic trade will redefine the rules of the Internet
economy, I'm going to look at what is driving the Internet economy today and share some of
our research numbers. I'll then drill down into the main part of the presentation and
define what I mean by dynamic trade, its rules and a self-test you can apply to see how
dynamic trade may affect you and your customers.
The Fourth Channel
What's driving the Internet economy is not about technology. We talk about the Internet
as the fourth channel. The first channel is traditional, face-to-face interaction
for customer service, support, sales and marketing. The second channel is written
communication or direct mail, and the third channel is the telephone. When all is said and
done, the Internet is just another channel. It's not an IP connection; it's a channel for
interacting with customers, suppliers and business partners in both business-to-business
(b-to-b) and business-to-consumer (b-to-c) settings.
The real challenge is finding the appropriate mix between these four channels. We see a
lot of companies falling down today in channel synchronization. When Fidelity launched its
Web site three years ago, they didn't equip their call centers with browsers. People
phoned their 800 numbers saying, "I'm looking at your Web site and I'm not sure what
you mean in this prospectus," or, "Which of these funds is most appropriate for
me?" It's things as simple as that. Or take the large cataloguer, whose name I won't
mention. A woman who works for me ordered a pair of jeans from their Web site, then
realized she forgot to put in her apartment number. She tried to work backwards through
the process. It wouldn't let her do that, so she called the company's 800 number. She
spent five minutes going around and around with the person at the other end telling her
that she didn't have a catalogue number because she didn't have a catalogue because she
had placed the order on the Web site. The company hadn't done the appropriate level of
channel synchronization and, in some cases, channel reform.
So, that's how we view the Internet at a very basic level, as a channel for delivering
customer service, for ordering, marketing, promotion and sharing information with business
partners and suppliers.
The E-Commerce Spiral
What are our latest projections
for the size of the Internet commerce market? Worldwide, conservatively speaking, both
b-to-b and b-to-c, we think it will be about $3.2 trillion by 2003. That's commerce where
the actual order for the goods or services is placed over the Internet. For example, if
you go to Amazon.com or W. W. Grainger and place your order with a corporate credit card,
or if there is an Electronic Data Interchange (EDI) transaction over the Internet behind
it. However, if you research the car you are going to buy at AutoByTel, and, even though
there is a pre-negotiated price you sign the contract in an automobile dealership, that
would not show up in these numbers (see figure 5).
What's driving this? On the b-to-b
side, there's an E-commerce spiral. Early suppliers launch their effortsthe Ciscos,
the Dells and other cyber-celebrities. When their customers reap the benefits and the
savings, those customers push more suppliers to get online, saying, "If you want to
do business with us, this is how we are going to do it." As more suppliers come
online, more customers start to realize that the Internet is a way to interact with them,
and that keeps driving the rate of change. Our b-to-b projections are five times our
b-to-c projections, despite the visibility and the high IPO prices of the b-to-c Internet
Click image to enlarge
Still, a similar thing is
happening in the retail environment. Our research with 120,000 consumers shows that there
are about 33 million households online this year, and that by 2003 that number is going to
be almost 61 million households. As more people come online, more retailers come online.
As more retailers come online, they tend to add more categories. For example, Gap (http://www.gap.com) came on with a very simple
catalogue. Now they have Baby Gap and a full range of products. This encourages more
people to come online (see figure 7).
Two other things that have taken place in the first quarter of this year have affected
this fundamental shift in Internet activity. First was the visibility of the retail sales
at Christmas, then, and probably more importantly, almost every CEO at every company
(certainly the public ones) took notice of the share prices and market valuations of some
of these Internet-related stocks. That's what really gets their attention. In our research
this quarter, all of a sudden the CEO was asking, "What is this Internet thing and
how are we taking advantage of it?" It's only going to further accelerate the growth
in these curves.
Buy Low, Sell High
Click image to enlarge
At our conference last November,
we asked an audience like this one for their projections about how much their companies
would sell and buy online (see figure 9). As you can see, a lot of these companies were
pretty conservative about how much they would sell online in 1999. Some 30% said flat out,
"We are not going to sell anything online. We are going to wait and see." Only
about 9% said they were going to sell more than $100 million worth of goods online this
year. When you look at what they say they are going to do in 2001, the number of
participants on the sidelines drops from 30% to 7%, and the number of people who are
selling over $100 million rises to over 30%.
Click image to enlarge
What's really interesting,
however, is that when you compare "how much are you going to sell?" with,
"how much are you going to purchase online?" Right out of the chute, the
number of companies which say they are purchasing nothing drops from 30% to 19%, and those
purchasing over $100 million goes to 28%. When you look at what they are going to do in
2001, the numbers go up significantly (see figure 11). I will submit to you that online
purchasing of simple things like office supplies, business travel, the non-vertically
complex productsnot the stamping machines that General Motors would make metal parts
with, but basic office supplies which is a $350 billion industry worldwideis going
to be the killer app that draws companies to the Internet.
Of course, there is a funny kind of disconnect here. You have to ask yourself the
question, "Who are they going to buy from if nobody wants to sell and everybody wants
To buy online is pretty simple. I give people browsers. I have some pre-negotiated
deals. Maybe I have a supplier create a custom Web page for me. However, to sell online
requires, in many cases, a fundamental reengineering of my business processes. I have to
buy and develop this very sophisticated commerce software. The barrier to entry is a lot
higher; however, it will be like what we saw in a case like EDI. When big companies like
General Motors and General Electric said, "It's going to be EDI for moving the
transaction data back and forth," all of their suppliers suddenly started to toe the
line. The same thing is going to happen with the Internet. We already see large companies
being dragged on to the Internet by their large customers demanding that it's the way they
want to do business.
Think Global, Act Global
There's one more thing I'd like to share with you about what's driving the Internet
economyour projected emergence for the Internet economy on a country-by-country
We see the Internet economy going through two distinct phases, the first being the commerce
threshold. This is where private businesses and governments lay the groundwork in
investments, regulation, legal issues, etc. This is the early incubation and alignment
stage needed so that countries can participate in the hypergrowth phase that
Click image to enlarge
The United States is already
moving out of the commerce threshold period and into the hypergrowth period. Certainly, as
long as the economy stays strong, the numbers will continue to increase. Among the G7
countries, roughly 18 months behind the United States there is a second wave of Canada,
the United Kingdom and Germany, then there will be another wave that includes Japan,
France and Italy (see figure 12).
When does a country go through the commerce threshold? The investments and the
pioneering you get from private industry and government in the early phase, making the
right decisions about taxation, legislation and things of that nature, that's the
threshold that drives the hypergrowth.
To summarize, then, what do we see driving the Internet economy?
Changing customer demands. They want more information. They want more
timely delivery of goods and services. They want a more responsive set of suppliers and
a factor that feeds off of the Internet. One thing we found from our research is that
10-20% of orders from Web sites come from overseas, right out of the chute. Most of them
go unfulfilled because the company is worried about credit card fraud, or because
regulatory issues or existing distribution relationships prevent them from actually
shipping the goods to countries outside the US.
The Internet is becoming increasingly ubiquitous. Hundreds of thousands
of companies today are being connected to the Internetit will be well over a million
by 2003. Consumers are projected to go from 30 million households to over 60 million
households in 2003. Another interesting fact that we uncovered in our consumer research is
that over 50% of the households in the US now have a PC.
A new set of technologies and intermediaries are driving the Internet
economy; in many cases it's from small startups and companies that didn't exist three to
four years ago. On the commerce side, you have companies like BroadVision (http://www.broadvision.com) and Inner Shop.
There are a whole new set of applications that can be deployed within an organization to
help get purchasing online from people like Ariba (http://ariba.com)
and Commerce One (http://www.commerceone.com).
There are personalization packages and customer service packages from people like Silknet
(http://www.silknet.com) and Brightware (http://www.brightware.com). We also see whole
new business models around these intermediaries. MetalSite (http://metalsite.com)
is selling surplus steel on the Internet. So much for the saying that you can't sell big
ticket items on the Internet. National Transportation Exchange is an intermediary that
coordinates and improves the productivity of both the companies that are shipping goods
via trucks and the truckers. In Pittsburgh, Free Markets Online (http://www.freemarkets.com) has a software Internet
application and service bureau for hosting online bidding that I'll talk about in just a
minute. Ultraenergy, another intermediary that's emerging, auctions natural gas. These are
just some of the examples.
Dynamic Trade And Dynamic Change
Now, I'd like to shift focus to develop the theme that dynamic trade will define the
rules of the Internet economy. What do we mean by dynamic trade? We define it very
simply as "leveraging technology to satisfy current demand with customized
Highlight two key parts of this definition. The first is current demand. Not
what customers told us they wanted six months ago, or what the order logs show us they
ordered six months ago, but what they want today and with a customized response. We
are treating each company or each customer at a personalized level (or at least appearing
to) in terms of how we deliver content, the terms and conditions, the configurations that
we show them, etc.
Basically, dynamic trade is a leveraging of the Internet and an evolution of the
The Internet started with "brochure-ware" which gave us access to information
more easily than having to run around to get it. What we have seen in our research is that
once people start getting the information, they are not happy with the "commerce
interruptus" site that says, "If you want to order this product, call the 800
number or stop by our local shop." So, the next level of evolution is that the
company starts taking orders. You would be surprised how many cases we found in our
research where, when a customer places an order online, the company actually prints that
order, faxes it to another part of the organization and re-keys it. I was really
We are finding that the Internet is like a set of dominoes. Once you start putting up
information, the next thing the customers ask for is order taking, then they want customer
self-service. When they place the order, they want to know exactly when it's going to
ship. Is it in inventory? All of a sudden the IT guy is pulling his hair out because this
little stand-alone Internet effort now needs to be integrated with the systems that he is
scrambling to make Y2K compliant. It's a real mess for organizations, but that's part of
We see dynamic trade as being an even higher level of service in terms of its ability
to provide value and to re-craft industries, supply chains and the relationship that
companies have with their products. Dynamic trade is going to change the relationships you
have with your customers and your suppliers, how much information you share with them and
how you treat them in terms of a personalized or customized experience. It's going to
change your business processes. The stovepipe systems and stovepipe processes that are
great for political advancement don't necessarily meet the needs of current demand with a
customized response. They may even get in the way. The way companies are scrambling with
simple things, such as giving browsers to their legal staff so they can review Web site
content is just one small example. The warehouse relationships with a channel are a big
change that companies are struggling with. We can't necessarily disintermediate everybody
because we are used to shipping things up by the tractor/trailer-load, not by the Federal
Express box-load. One of the biggest challenges we see companies grappling with is how to
organize for the Internet. Is it part of IT? Is it part of marketing? Is it a separate
commerce group? When it comes to the technologies they deploy, the good news is that most
companies are looking to new and innovative vendors for Internet dynamic trade, not the
traditional ones they have been dealing with in the past.
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