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Rules Of The Internet Economy
So, what are these new rules of the Internet economy being defined by dynamic trade?
1. Customer service eclipses product.
2. Real-time demand drives production.
3. Pricing matches market conditions.
They are each equally weighted in terms of their importance, but, in some cases
depending upon the vertical marketplace, they will apply a little differently. Now, I'm
going to drill down into each in more detail.
1. Customer service eclipses products.
Click image to enlarge
I am not talking about repair
and warranty work, I'm talking about the value-added services you provide to make the
customer want to do business with you or that make them feel special. The classic example
is in the auto industry where the sale of cars is the result of over-capacity. The
educated customer understands the invoice and the competition, so the value of the product
is dropping. Dealers and manufacturers are trying to add customer service value on top of
the product. The first thing they are giving you is a free oil change for some period of
time. That's a value-added service. Then they are giving you roadside assistance as a
value-added service. Some automobile manufacturers are already building in the GPS system
with driving instructions and databaseactually using content to differentiate the
sheet metal. Some of them are looking at providing email connections in the car. They are
extending the value proposition and trying to differentiate themselves with value-added
service that they put on top of the product (see figure 21).
How are they doing this? In a couple of ways. The first is custom self-service. The
best example is Dell Computers (http://www.dell.com),
one of the cyber-celebrities. Dell's Premiere Pages provide custom Web pages for their
business partners, providing them with value-added information about what's going on.
Probably the most compelling example of custom self-service I have seen comes from, of all
places, the insurance industry which is traditionally viewed as a laggard in its use of
technology and innovation. I spoke with one large insurance company which provides an
extranet to their business property and casualty companies. Those customers can get online
within hours of an earthquake or the projected landing of a hurricane and see how many
facilities they have in that area, what the coverage of those facilities is and potential
issues that they might have. They are using the Internet and information access to provide
custom self-service, a different kind of value-added service.
Another thing we see happening in some purchasing environments is that people get used
to having access to information from a Web site in real time, so overnight shipping comes
into play. Then they are going to companies like Office Depot and saying, "We want
you to manage our office supplies for us as a value-added service." Or they are going
to Boeing and saying, "Manage my spare parts inventory as a value-added
Something else we see here is subscriptions. Probably the most innovative use of
subscriptions today is Gateway's Your:)Ware (http://www.gateway.com)
where, instead of having to agonize over spending $1,500 or $2,000 on a PC that will
become "obsolete," you sign up for a $60 a month subscription that gets you the
machine and Internet access for two to three years and you can upgrade at the end of that
period. They are using subscriptions in the same way the automobile companies have used
leasing to get you over sticker price shockkind of like a crack model getting
you used to paying on an ongoing basis forever.
2. Real-time demand drives production.
Shift, now, to the second rule of the Internet economy, real-time demand drives
production. Going back to the automobile industry, let's say Ford produces 40 green
minivans and ships them to a dealership in Bethesda. The people coming in really want
white minivans, but the dealer has this really good salesperson who manages to move the
green minivans. Ford thinks, "Great, we need to produce more green minivans!"
The reality is that people wanted white ones. With the integration and flow of information
that's going to take place through leveraging the Internet, you are going to see real-time
demand driving production. First, supply chains are going to open up. Our research shows
that over the last 10 years companies have focused on tweaking their internal processes.
For the next 10+ years, the game is going to be externalizing those processes and sharing
information with suppliers and business partners.
The classic example here is Adaptec (http://www.adaptec.com),
a company that makes network and disk controller cards for personal computers and servers.
They had a fundamental quandary facing them. They compete with Intel which owns
fabrication plants for making the custom chips that go on these boards. Adaptec deals with
third party suppliers. They were trying to make the decision whether to invest in a new
fabrication plant or to leverage their processes. Well, we have gone from a model of
"economy of scale" to one of "economy of focus." Adaptec wanted to
focus on what they did well. Working with their suppliersby bringing their engineers
together, tweaking their business processes, tightening those relationships, leveraging
some fairly simple technology like email to move order and specifications back and
forththey brought down their time to produce those chips from 70 days to 52 days. In
the process, they saved hundreds of thousands of dollars in inventory turns and the cost
of handling the materials. The really big thing was that they had their cycle times down
to within a day of Intel, without spending $1 billion on the fabrication. Leveraging the
communication of the Internet opens up the supply chain.
The second thing we see happening is that final assembly moves closer to the customer.
The classic example of this is what's happening in high-tech. In the old world, IBM made
PCs in Boca Raton, Florida, and shipped them out to their dealers. The dealers opened the
carton, opened the machine and put in the options that the customer really wanted. Now,
IBM ships those machines in a plain cardboard box on a pallet. The consumer's carton is
actually still folded up. The dealer puts in what they want, packages it up in the nice,
blue IBM carton and moves it out. Another example is Coles Meyer, one of the major
supermarket retailers in Australia, which is changing the way it buys fruit at the market.
Instead of buying it "green as green can be" because it's got to go to the
warehouse and then sit on the store shelves, they are buying fresh fruit that is already
ripe, packing it right at the fruit market and shipping it directly to their customers.
"Final assembly," both in manufacturing and retailing environments, is moving
closer to the customer.
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If you look at the results of
research we did in early 1998 on the information that companies were sharing with their
supply chain partners, and what they expected to share in the year 2001, you can see that
there is at least a doubling across the board (see figure 25). Some of it is very basic,
such as order status and marketing materials. Texas Instruments (http://www.ti.com) justified their multimillion dollar
Web site budget solely on a customer service point of view. Instead of mailing
documentation that people call up and ask for, they email it to them as a PDF file, saving
them $6 on postage alone, plus the handling costs.
3. Pricing matches market conditions.
The Internet will bring to bear a lot of pricing pressure, but it's not all necessarily
downward pressure, as you will see in just a minute.
The first thing we see happening is the use of auction and bid software as a key
enabler, driving pricing to match market conditions. I spoke earlier about Free Markets
Online (http://www.freemarkets.com) which
has a bidding system and service bureau they provide for everything from coal purchases
for a large West Virginia steel plant, to an RFP bidding process for printed circuit
boards that has sites around the globe in Singapore, Hong Kong, Taiwan, Japan, the United
States and Europe. On average, Free Markets Online is saving its customers anywhere from
3-30% over what they would have spent to purchase goods in the traditional world of
information pockets and barriers.
e-bay (http://www.ebay.com) is already selling
surplus MIG fighters online. They've had phenomenal success, but there are also a lot of
b-to-b auction sites that are perking up. I mentioned Ultraenergy which is auctioning spot
market natural gas, and MetalSite (http://metalsite.com)
which is selling metal. There is a group in California which is trading pollution rights.
The other thing is embedded systems. M-wave out of Utah has technology that the power
companies are looking at to manage devices in the home that are consuming power. One of
the dark secrets in this country is that 20% of our power capacity will come offline in
the next 20 years as the power plants that were built in the 1960s and 1970s reach the end
of their lifecycles. The power companies are required to figure out peak demand, then have
enough capacity for 20% over that. Instead of building new, massively expensive power
plants, they are lowering the peak demand. They want to put these smart devices in
people's homes so that on a hot day, they'll give you an extra 10% discount if they can
turn your air conditioner from 72 degrees to 74.
Another interesting example is Coca Cola (http://coke.com)
which has a pilot program in Australia where they are putting IP connections in their
snack and soda machines. The first thing they want to do is manage the inventory in those
machines. It's very expensive for them to go out and fill a machine that's only half
empty, so they are using the connection to monitor how much is in the machine. They have
also equipped the machines with LCD panels above the tabs so that they can go to variable
pricing. On a hot day, the prices go up. On a cool spring day like today, they are
probably going to stay steady. On a cold winter day in January, they are going to go down.
Another side of this is that, if Coke is selling well but Minute Maid isn't, they can
raise the Coke prices and lower the Minute Maid price so that when they go out to refill
that machine, it's completely empty.
Click image to enlarge
These are just some of the
examples companies are already playing with for using Internet technology and dynamic
trade. We did some research in March of 1998 in which we talked to 50 companies that were
auctioning b-to-b and b-to-c goods and services (see figure 28). They had done about $7
billion across the board in 1997 and were planning to do $50 billion in 1998. It's not all
surplus stuff. Some people are actually moving new product using the auction site as a
channel. I'm sure that Volkswagen would have loved to have had this technology about a
year and a half ago when they launched the Beetle and there was supply constraints. In
some cases, yes, the Internet is going to bring a lot of downward pricing pressure, but in
others, when there is tight supply and overwhelming demand, prices are going to go up.
Click image to enlarge
The Evolution Of Business
What I'd like to do now is share with you a comparison we have done between traditional
business, early Web business and dynamic trade across six categories (see figure 29).
The first category is speed. We have gone from weeks to days to minutes as we
meet current demand with a customized response.
Product attributes went from being seller-selected (Ford made it, shipped it and
you got it in green), to becoming buyer-selected as that final assembly moves closer to
Price goes from list to market-based as we leverage some of these technologies
like auction and bidding systems.
Production was presale, now it becomes post sale, and it's configured to exactly
what you want.
Customer relationships went from standard, to targeted, to fully
customizedthe whole concept of one-to-one marketing that we talk about, both in
consumer and b-to-b.
Lastly, the strategic asset in the old world was location, whether it was in
retailing or locating your factory near your suppliers or a cheap source of labor. In the
days of the early Web, it was visibility. Now it becomes your customer database.
In the Internet economy, the companies that do well are going to be the ones that have
the technology, the culture and the processes to effectively capture, manage and exploit
data from their suppliers, customers and business partners.
I want to share with you some early examples. The first two are the poster children of
dynamic trade, Dell and Cisco. I have talked about Dell already. Michael Dell said
something to me about a year and a half ago when I was interviewing him that has stuck
with me: "We are trading inventory for information about our customers."
One of the funny things about Cisco (http://cisco.com)
is that despite wrapping themselves in the Internet blanket, and it's a key part of their
identity, they really got involved in the Internet because they had a huge problem. Some
90% of their paper-based orders were being rejected at the factory as unbuildable
solutions. They moved their ordering online to improve the failure rate of their order
processing system. They have also put their whole customer service database online for
their technical support people, resellers and customer channels. Before that, their
customer satisfaction rating was 3.8 out of 5. It has gone up to 4.3 in the 18 months
since they put up the database and began tuning it over time.
American Airlines' Net Saaver (http://www.aa.com)
program, where they email inexpensive fares for the coming weekend, has over three million
people signed up. They've had to limit it because they can't find a server big enough to
pump the mail out. The interesting thing that they told us is that, on average, 3-4% of
the people who get the email take advantage of it. The best part is that the technology
didn't cost them a dime because their hotel and rental car partners subsidized it. They
figure that if you get on a plane to Washington, DC, from Boston or London for the
weekend, you are going to need a place to stay and a car. Email is one of those very
simple applications on the Internet that I think is going to have a huge impact in
examples like this.
National Transportation Exchange (NTE) is a company that didn't exist three years ago.
It's an intermediary that brings shippers and truckers together. One of the interesting
things I learned in interviewing the CEO is that the average truck you see on the highway
is 50% empty because of their funky pricing model. It's cheaper to buy the whole truck
once you get over a third of a load, so most of these trucks are empty or half empty. It
is also a brutal business. If you think high-tech is bad, the average trucker makes about
$25 a trip in profit. NTE is bringing 100 shippers and 200 truckers together, providing a
system where, if a trucker is going from Boston to Washington with a load, NTE will help
them fill that load on the return, called the back haul. They really make money if they
can fill a truck both ways. NTE handled 60,000 loads last year. On average, the truckers
made an extra 10% in profit and the shippers saved 15% on their shipping charges. That's
an intermediary with a win/win situation, as opposed to somebody being bypassed and put
out of business as we usually hear in the press' horror stories.
Saab, Hyundai, Subaru and all of the major US automobile manufacturers are putting up
extranets to their dealers. Ford (http://www2.ford.com)
has a pilot going on where they have kiosks in the showroom of their Oklahoma dealerships.
You use the kiosk to configure the car at the show room, pay for it and they deliver it to
your door 15-21 days later, custom built with demand matching production. The auto makers
are building these extranets to share marketing material and let them order spare parts.
The other thing that they are looking at is IP-enabling the cars because, as the cars
become more reliable and the warranties go longer, the dealerships are losing their
traditional source of revenue which was repairs. Some of them are going to fraudulent
warranty work. By putting an IP connection in the car, somebody in Detroit can approve the
work that has to be done.
Or take Office Depot (http://officedepot.com)
which wanted its Web site to go after small to medium-sized business with a more
customized, personalized experience. You can create your own personal catalogue of your
favorite brands of pen, paper, supplies, etc. so that you don't have to look at the whole
catalogue when you visit. You just click off your custom shopping list.
W.W. Grainger (http://www.grainger.com) is
an industrial supply company with 189,000 product codes in their site, everything from
rubber gloves for handling waste to paper clips. We were just talking to some of the snack
food people and you can even get your chips and dips from Grainger. They offer three sets
of pricing, right off the bat. If you buy at the site, and you buy a lot, they give you a
discount in real-time based on the volume and the existing volume discounts for their
Dynamic Trading And You
How is dynamic trade going to impact you and your customers? There will be different
shock waves and different impacts across different industries. Some will be at ground
zero, some will be further away from the blast zone.
Click image to enlarge
We created a self-test so that
you can rate yourselves and your clients on how these issues will impact your industries
(see figure 32). To any of these questions, a response of "3" is high,
"2" is medium and "1" means low impact.
1. The first question, how commoditized is your market? If it is highly commoditized,
give yourself a "3". If the clients you are selling to are highly commoditized,
give them a "3".
2. How perishable is the inventory? American Airlines, for example, is highly
perishable inventory. Once that plane takes off, the inventory disappears whether
somebody's in that seat or not. Give them a "3".
3. How capital intensive is the industry?
4. How configurable are the products? In financial services, for example, you have
highly configurable products.
5. What's the customer's perceived investment level?
6. Is service going to be one of those things that pushes them to make a buy decision?
7. Are there threats from new kinds of competition? For example, is the business being
deregulated, or other things of that nature?
8. And lastly, how volatile is the channel? Channel conflict is one of the biggest
issues we see companies grappling with. Increasingly, they are realizing that they don't
necessarily want to sell direct because they are used to shipping product in 10 and 20
pallet lots, not individual lots.
Total up your responses. If the markets you are serving score 17 or higher, dynamic
trade will be make-or-break for you and your clients. Airlines, telephone companies,
high-tech, financial services and logistics are the high impact industries. A score of
14-16 means dynamic trade will have a high impact on you, but not as immediately. Durable
goods, retail, health care, media advertising and utilities are some examples. Scores of
13 or lower mean there will be less of an impact, probably out to your customers, but
there are still huge opportunities back to your supply chain.
A classic example is Boeing (http://www.boeing.com).
It's highly unlikely that Boeing will take an order over the Internet from USAir for a 747
that costs $250 million. But Boeing is already leveraging dynamic trade and providing
value-added services to build relationships back to customers on top of the spare parts
End, page two of two
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