'Net Gains

Dec. 21, 2004
E-commerce is poised to follow

Don't spend a lot of time trying to figure out whether commerce on the Internet represents a global business revolution -- or is merely another evolutionary step in the ways your company relates to its customers. The reality is that e-commerce, which Forrester Research Inc., Cambridge, Mass., figures could be generating sales reaching a staggering $3.2 trillion in the year 2003, is both revolutionary and evolutionary. And it's not limited to such headline-grabbing companies as Amazon.com Inc. and eBay Inc., whose Web sites are garnering huge numbers of hits. Or to the e-business unit of Avnet Inc.'s computer-marketing group in Phoenix, which has experienced growth averaging 30% per month since November 1997. Among manufacturers, such companies as Dell Computer Corp., OracleCorp., Gateway Inc., Cisco Systems Inc., and Hewlett-Packard Co. already are connecting in tiny fractions of a second tens of thousands of times a day to other businesses and to consumers. And such blue-chips as Dow Chemical Co., Boeing Co., AlliedSignal Corp., and General Electric Co. are installing sophisticated e-business systems. The marketing (and financial) message they and others are sending to firms that have yet to gain their first electronic customers is, You can't afford to wait until the revolution/evolution debate is settled. Indeed, executives who fail to understand the Internet and bring it into their businesses will find that in five years their companies "will no longer be competitive," warns Julie Schoenfeld, president and CEO of Net Effect Systems Inc., a North Hollywood, Calif., provider of customer-support software. Putting a positive spin on the same thought is Northbrook, Ill.-based Steven J. Johnson, codirector of Andersen Consulting's e-commerce practice. "There really don't appear to be too many limits to scale" for companies that use the Internet to do business with other companies, he observes. The "law of diminishing returns is quickly being replaced by what appears to be the law of increasing returns," he says. Michael McLaughlin, a partner in Deloitte Consulting's business practice in Chicago, estimates there are a half dozen scenarios for the future of business on the Internet. Nevertheless, his bottom line is the same: Business will be substantially different seven to 10 years from now. "The Internet and the use of digital networks will become so pervasive and so ubiquitous, particularly for manufacturers, that we won't understand how we lived without [them]," claims McLaughlin. Forrester Research's year-2003 e-commerce sales projection of $3.2 trillion, a number only slightly smaller than Japan's entire GDP, translates to nearly 5% of all global sales. Meanwhile, about 40% of the 802 CEOs participating in this year's PricewaterhouseCoopers(PwC)/World Economic Forum survey figure that electronic business will account for more than 10% of their companies' revenues during the next five years. And an impressive half of that 40% expect electronic business will exceed 20% of their total revenues. By comparison, 75% of the CEOs surveyed report 5% or less of total business now coming from the Internet. But whether or not Internet-based commerce eventually accounts for 10%, 20%, or an even higher percentage of business-to-business and business-to-consumer sales, there's no doubt that during the next several years e-commerce will dramatically alter the way companies operate. For example, Dow Chemical Co., which is taking an evolutionary and broad-based approach to business-to-business e-commerce, expects it to significantly increase customer options for dealing with the company. Customers may be able to go online to review product offerings, check orders and invoices, pay bills easier, collaborate real-time on product and part design, and integrate supply chains. "I would define e-commerce as electronic touch of the customer," says Richard Payne, Dow's Midland, Mich.-based director of electronic commerce. "Dow is essentially composed of 14 different global businesses. And so what we've tried to do is to look at the needs of those businesses and see if there are tools that we can build that will be utilized across those business units." CEOs responding to the PwC/World Economic Forum survey cite servicing customers more efficiently as their primary reason for expanding their electronic-commerce operations. Significantly, 50% of the CEOs say it's likely that nontraditional competitors will pose a competitive threat by using electronic business as a major channel to reach their customers. "This is about velocity," stresses Net Effect's Schoenfeld. By allowing people to collaborate in ways never before possible, the Internet "creates an ability to come up with new ideas better and faster and [to] move the world ahead faster," she says. "Certain market share could be won before people even know it's at risk." But for Don Tapscott the Internet is much more than a cusp-of-the-millennium, rich, robust, and high-in-bandwidth phenomenon accelerating the development of neat new sales and marketing tools. The Internet is revolutionizing company structure, contends the Toronto-based chairman of the Alliance for Converging Technologies, president of New Paradigm Learning Corp., editor of the just-released book Creating Value in the Network Economy (1999, Harvard Business School Press), and, not insignificantly, said to be the first person to apply the term paradigm shift to business and technology. Those who believe the future of e-business is simply more buying and selling on the Internet are "fundamentally wrong," Tapscott asserts. "We're beginning to see the emergence of fundamentally new models of the firm and of how we create wealth [that] are as different from the old industrial corporation as it was from the feudal craft shop." Highly integrated auto, chemical, and metals companies, for example, are on the way out as such things as disaggregation (and then reaggregation) of value creation, knowledge-rich and service-enhanced products, and something Tapscott dubs the internetworked "e-business community" are on the way in. "The notion of the virtual factory is actually becoming real," he says. Cisco Systems, Tapscott suggests, is a company previewing the future. First, the Internet is the foundation for product design at Cisco. "These products are designed by the company in multiple locations," notes Tapscott. Second, the Internet is a manufacturing platform. "Cisco routers may be assembled in the Cisco plant. But that's a small piece of the overall value creation." Third, the Internet also is a platform for support, service, and sales -- about 70% of Cisco's total sales are Internet sales. Meanwhile, the heady pace at which e-commerce is advancing will put the pressure on railroads, motor carriers, and other asset-based transportation companies to respond to new buyer requirements and preferences, says William Rennicke, a vice president of Mercer Management Consulting, Lexington, Mass. With both consumers and business customers able to connect to suppliers via the Internet, traditional distribution channels are breaking up; the trend to smaller, quicker shipments is accelerating; and the demand for more information at every point in the supply chain is rising, says Rennicke. "Transportation companies," he says, "need to be aware that the value migration now taking place -- from assets to information -- will be lasting and is going to necessitate developing new business designs that can capture profit and create shareholder value." In 2010 jumbo jets, CAT scanners, and complex computer systems still probably won't be bought on the Internet. But a decade from now as much as 30% of all business-to-business buying could be through e-commerce, believes Philip Kotler, professor of marketing at Northwestern University's Kellogg Graduate School of Management in Evanston, Ill. Kotler says that GE already uses e-commerce to buy commodity items and is saving 10% to 15% when compared with non-Internet purchasing. Citing competitiveness concerns, GE declines to confirm or deny the percentages. A company spokesperson, however, does confirm that something like $5 billion of GE's supply transactions could be conducted on the Internet by 2002. By 2003, Forrester Research estimates, U.S. business-to-business trade on the Internet will total $1.3 trillion, 30 times the $43 billion transacted in 1998. And as business supply chains make more use of e-commerce during the next five years, the computing and electronics industries, today's leaders, will be supplanted by the aerospace and defense, petrochemical, motor-vehicle, and utility industries, the research firm forecasts. Dow Chemical's Payne declines to put a dollar figure on the level of e-business his company may be doing three years from now. But he's sure that e-commerce won't be the only way Dow reaches customers and suppliers. For some, e-commerce will be their preferred way of doing business with Dow; for others it won't, he surmises. Payne also is convinced that e-commerce is going to go global. Although e-business has "a U.S. centricity" now, "I would tell you that other countries will likely follow the models that are set in North America. And I would guess that that movement will occur soon after the Y2K compliance issues are behind us." Relatively easy access to PCs, relatively high levels of disposable income, and predominantly English-language content are three reasons e-commerce, especially business-to-consumer e-commerce, is mainly a North American phenomenon now, says Andersen's Johnson. In some of the world's other significant economies -- such places as France, Germany, and Japan -- language is holding back e-commerce growth. Nevertheless, "it will evolve, and it will evolve following a pattern of first [having] access and second [having] content that is useful," says Johnson. "In working closely with our European counterparts, Latin America, and even Asia, [we find that] they're looking to ramp up extremely quickly," says Phyllis Brock, vice president of Nortel Networks' Web business organization, Santa Clara, Calif. "In five years I [don't] see Europe being any different than the States," adds Nortel Networks' John Voglin, director of e-business and Internet systems. "I would say Latin America and Africa still are going to be significantly behind because they don't have the telecom infrastructure. And I don't think wireless is going to be at a point yet to support major business communications." Singapore is not waiting for e-commerce to casually come its way. Last September its government launched a plan designed to develop the city/nation as a global e-commerce hub. It envisions US$2.35 billion worth of products and services being traded electronically through Singapore by 2003 -- and 50% of the country's businesses using some form of e-commerce by 2003. With all the impressive projections of Internet business activity and expressions of high expectations for the future, it's easy to get caught up in e-business euphoria. The reality, however, is that making "the transition from a physical-distribution model to the electronic-distribution or e-commerce model [is] not an easy thing to do," says Andersen's Johnson. Nor is it necessary (or advisable) for companies to run to embrace e-commerce and turn their backs on traditional business channels, he stresses. "What we are suggesting to our clients is to engage, to learn, and to understand how to use this channel and how to really effectively integrate it into [their] mix of business." Nevertheless, if digital-economy guru Tapscott is correct, the growth of electronic commerce, at least in the short term, will in part be constrained by a lack of executive engagement. "There is a real urgency for senior management in manufacturing companies to wake up and get with it," he insists. "The first thing they have to do is to start using the technology personally. If you are not using this technology yourself, you have no hope of comprehending how it can change your business." But e-business promises to be constrained, at least in the short term, by a couple of important and largely unpublicized nonexecutive issues. The first is taxation. In the U.S. the federal government does not (yet) tax e-commerce. And for the next two years or so, state and local governments won't be able impose any new Internet levies -- thanks to a 1998 law that also set up a study commission and gave it 18 months to analyze the taxation issue. The e-commerce tax situation before last fall's moratorium was much like driving down a toll road and not knowing where the toll booths would be, how much the tolls were, and who had the authority to collect the tolls, observes Donald M. Griswold, national partner-technical services for state and local taxes at KPMG LLP, Washington. What's being reviewed right now is "how many times we have to tap the brakes." Significantly, Griswold doesn't foresee the e-commerce car being stopped dead in its tracks by taxation. The moratorium allows time to develop some wise policy: "some certainty, some consistency, some fairness, and, hopefully, some administrative ease." He ultimately may be right. But the tax commission hasn't exactly roared onto the e-commerce highway. Scheduling of its first meeting was delayed for months, caught in a dispute over who should be on the panel. And the experience of a coalition being organized by Ernst & Young LLP to help U.S. companies deal with a complex e-commerce tax issue in the European Union (EU) isn't encouraging. At a San Francisco meeting on Jan. 29, seven international companies actively involved in e-commerce -- with collective sales of more than $40 billion -- expressed interest in joining the coalition. But that's as far as things went -- even though formation of the group was prompted by a request from the European Commission, which manages day-to-day EU operations, for advice on how to apply Europe's widely used value-added tax to Internet trade between U.S. corporations and their EU customers. The second issue constraining the growth of business on the Internet revolves around persistent concerns about security -- the protection of information in transmission and storage, the protection of e-commerce users' identities, and the verification that Internet users are whom they claim to be. "There is still really no good security infrastructure in place," asserts David Osborne, senior vice president and chief technology officer of Micro Modeling Associates Inc., New York, a $48 million consulting firm heavily involved in business-to-business e-commerce. Smart cards and other sorts of authentication are needed, he says. "I think we're at least two years away, and until then people will Band-Aid it." Significantly, security and the related issue of privacy, which includes the rules for disclosing information, are by no means only U.S. matters. Notably, the EU last Oct. 25 put into effect its comprehensive directive of data protection, which prohibits the transfer of identifiable personal data to countries that do not provide an "adequate" level of privacy protection. The U.S. and the EU differ on what constitutes "adequate" protection, in part because they take quite different approaches to privacy. The U.S. relies on a sectoral mix of regulation, legislation, and self-regulation; the EU fancies sweeping legislation. "The EU privacy directive provides a laundry list of requirements for companies that exchange and transport data flows," states Larry Ponemon, the New York-based head of PwC's e-business privacy-and-security practice in the Americas. "The vast majority of the corporations in the United States are not even close to being in compliance. It's like a Y2K problem times a thousand. And so in theory the EU could prevent a lot of American companies from transacting business."

About the Author

John McClenahen | Former Senior Editor, IndustryWeek

 John S. McClenahen, is an occasional essayist on the Web site of IndustryWeek, the executive management publication from which he retired in 2006. He began his journalism career as a broadcast journalist at Westinghouse Broadcasting’s KYW in Cleveland, Ohio. In May 1967, he joined Penton Media Inc. in Cleveland and in September 1967 was transferred to Washington, DC, the base from which for nearly 40 years he wrote primarily about national and international economics and politics, and corporate social responsibility.
      McClenahen, a native of Ohio now residing in Maryland, is an award-winning writer and photographer. He is the author of three books of poetry, most recently An Unexpected Poet (2013), and several books of photographs, including Black, White, and Shades of Grey (2014). He also is the author of a children’s book, Henry at His Beach (2014).
      His photograph “Provincetown: Fog Rising 2004” was selected for the Smithsonian Institution’s 2011 juried exhibition Artists at Work and displayed in the S. Dillon Ripley Center at the Smithsonian Institution in Washington, D.C., from June until October 2011. Five of his photographs are in the collection of St. Lawrence University and displayed on campus in Canton, New York.
      John McClenahen’s essay “Incorporating America: Whitman in Context” was designated one of the five best works published in The Journal of Graduate Liberal Studies during the twelve-year editorship of R. Barry Leavis of Rollins College. John McClenahen’s several journalism prizes include the coveted Jesse H. Neal Award. He also is the author of the commemorative poem “Upon 50 Years,” celebrating the fiftieth anniversary of the founding of Wolfson College Cambridge, and appearing in “The Wolfson Review.”
      John McClenahen received a B.A. (English with a minor in government) from St. Lawrence University, an M.A., (English) from Western Reserve University, and a Master of Arts in Liberal Studies from Georgetown University, where he also pursued doctoral studies. At St. Lawrence University, he was elected to academic honor societies in English and government and to Omicron Delta Kappa, the University’s highest undergraduate honor. John McClenahen was a participant in the 32nd Annual Wharton Seminars for Journalists at the Wharton School at the University of Pennsylvania in Philadelphia. During the Easter Term of the 1986 academic year, John McClenahen was the first American to hold a prestigious Press Fellowship at Wolfson College, Cambridge, in the United Kingdom.
      John McClenahen has served on the Editorial Board of Confluence: The Journal of Graduate Liberal Studies and was co-founder and first editor of Liberal Studies at Georgetown. He has been a volunteer researcher on the William Steinway Diary Project at the Smithsonian Institution, Washington, D.C., and has been an assistant professorial lecturer at The George Washington University in Washington, D.C.


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