E-commerce receives all the headlines when it comes to discussing business impact from the Internet. This record setting holiday season of on-line buying added fuel to this claim. But there is a larger change taking place in business due to the Internet, and this comes under the larger heading of e-business.
So what’s the difference? E-commerce is the term associated with consumer to business electronic transactions. E-business is the way businesses restructure themselves and their relationships with other businesses to take advantage of the electronic world. Often e-business is considered the bigger term that includes e-commerce.
It is estimated that e-commerce represents a small portion of the dollars being spent in e-business. Further, e-business is fundamentally reshaping what a company does and how it works with suppliers and customers.
An interesting and important by-product of this reshaping is how “traditional” work may be moved out of large companies, and how this changes employee roles within a company and loyalty to a company.
To gain a perspective on e-business and why it is having such an impact, we need to look back at how business structure got to where it is today.
Henry Ford is well known for introducing the assembly line and changing the price of the automobile so dramatically that it opened a new market. The average person could now buy a car. He also created a “vertically integrated” company. Ford did the mining, steel production, parts production, assembly, sales, financing and service for the automobile.
Time forced changes in this model. One company can’t be excellent at everything. Letting someone else do the mining, and buying steel and parts became an obvious step. The automobile industry along with many others followed this path. There are few fully vertically integrated companies today. I predict there will be less integration in the banking, petroleum, and automobile industries, for example, in ten years.
In the recent past, companies tended to have many suppliers. To ensure best price and on-time delivery, suppliers were often played against each other. There was very little information available to know what all suppliers could offer.
The vertically integrated company had control. If the parts weren’t there on time, the company could make changes to fix the problem.
The supplier model offered better quality and prices, but less control. It is very likely that a company that only makes wires, for example, might be able to do it better and less expensively than the company that needs some wires for its products. The downside became the reliability of getting the parts in the right quantity, place and time. Depending on a heavy handed, often adversarial, treatment to get low price and timely delivery is a limited strategy. In a more collaborative environment, there may be ways of working together to achieve better results for both parties, but this has not been the norm.
The Internet changed the picture in two ways. First, much more information is broadly available. If a competitor offers a lower price, it is not difficult to find. The bargaining position between the customer and supplier has changed. There is a good discussion of this change in Blown to Bits, reviewed elsewhere in this issue.
Second, the Internet has created the opportunity for a much tighter working relationship over distance. Hence, it is no longer necessary to be near a supplier, or to do the work in-house, in order to be able to work closely together. Some of the tools discussed in my column last issue play a key role here.
This has led to companies working with their suppliers with greater “shared destiny.” Contracts are negotiated so that both will succeed. Having this shared destiny means that companies will dramatically reduce the number of suppliers they work with since they can’t work closely with everyone. This creates partnerships within the “virtual company.” We certainly are not fully at this point, as many suppliers would attest, but this is the trend. Even when a part of the job remained in the company, it might be done in another division where the interaction between divisions was also aided by electronic exchange of information.
Increasingly, this supplier network for the virtual company is global. This is true for a couple of reasons.
The first, is the wide availability of information. This information makes it possible to find good quality and price anywhere in the world, not just among the limited suppliers the staff can visit. Since the price of a product, and those of competitors, is more visible to a company’s customers, it is necessary to find lower priced parts wherever they may be in the world in order to keep costs down.
The second global motivation comes from companies looking for expanded markets to sell their products. It is easier to sell a product in a country that participates in making the product. This means that having suppliers around the world will open broader markets.
Thus we end up with a virtual company, selling its products worldwide, managing its environment through electronic data interchange over the web. The components of the virtual company have a shared destiny, benefiting from success at all levels. Companies have long worked with suppliers, so this part is nothing new. What has changed in addition to the shared destiny is the speed required for the virtual company to act as one, and here the technology infrastructure is vital.
In addition to outsourcing, this trend has led to the “breakup” of long standing companies. Most notable may be Hewlett Packard, which recently spun off its measurement company under the name of Agilent, since computing and measurement were different businesses with different cycles requiring different management focus. Perhaps less visible, many companies now spin off “start-up” smaller companies to do niche focused business.
With many of these trends coming because of the Web, how does the senior executive keep up with the changing technology in order to get the strategy right? It may be easy for the “dot com” companies, where the web is their life, but what about large, traditional companies? One leader, General Electric CEO Jack Welch, has selected a mentor from within his company, a young person with outstanding technology skills. This would seem like an idea destined to spread like many other management innovations from GE.
In this virtual company environment, opportunities are plentiful for focused, niche small businesses to work as partners in multiple virtual companies. They must meet the minimum requirement, however, which is generally at least a level of IT sophistication enabling them to work together on-line. What this means depends on the nature of the business. For a parts supplier, it may mean working with a 3D Computer Aided Design (CAD)system and the ability to exchange design and manufacturing information electronically.
While the examples so far have had a decidedly manufacturing flavor, these trends apply to services businesses as well. Niche companies doing credit checks, for example, work with lending companies in financial services.
There are some large unanswered questions in this new IT based business model for virtual companies. These questions are technological, business and people oriented.
In technology we are concerned with creating the infrastructure to allow information to flow easily between a company and its suppliers. This raises the second key question on security. When a supplier may also be working with a competitor, how do these relationships provide access to appropriate data, but not to private, internal data?
Business questions include developing strategic partnerships with suppliers while at the same time being prepared to replace a supplier that is no longer competitive. Another business issue involves maintaining the ability to be a smart buyer, when key functions are no longer performed within a company.
David Gill has identified “loyalty” as a Benchmark ethical value. Where is company loyalty in an outsourcing world? In our fast paced technological world, there are many more jobs than qualified people. Where is the employee loyalty in this world? Have we reached the limit of outsourcing when every employee is an independent free agent?
I will discuss these technology, business, and people questions in the next issue.
Al Erisman is executive editor of Ethix, which he co-founded in 1998.
He spent 32 years at The Boeing Company, the last 11 as director of technology.
He was selected as a senior technical fellow of The Boeing Company in 1990,
and received his Ph.D. in applied mathematics from Iowa State University.