KEEPING E-BUsINESS IN PERSPECTIVE As some firms have discovered (usually the hard way), e-business does not fit every business hree years is a long time in should still be implementing sub- the world of e-business. In stantive e-business plans and doing so 1999 bookstores were with a clearer, more viable vision of replete with treatises by the networked future. However,this e-vangelists heralding a view could not be further from real TIMO BY TIM COLTMAN, new"network economy"that would ity. Many firms remain confused ALOPIS. LATUKEFU, AND business and commerce. According technology and have curtailed their DAVID F MIDGLEY to consultant firm Booz Allen implementation plans Hamilton,more than 90% of top There are a number of managers believed these cla tions for such reactions. Having been would be realized by 2001 through process reengineering, enter- now know. prise resource planning, and now e e-vangelists were at best pre- business with disappointing results, mature and at worst false experienced managers are wary of prophets. Since the bubble large IT investments. Moreover, burst in April 2000, despite huge investments in consult- many have become pes- ing advice, managers have struggled simistic about the future with the same set of IT implementa- of e-business. Notwith- tion problems for a decade. Indeed, standing, IT professionalsthe e competitive nec and consulting firms con- business implementation varies con- tinue to promote e-busi- siderably from industry to industry ness and many firms Firms are exposed to wide-ranging (though not startups) levels of competition and any continue to invest in its attempt to establish networked application. A positive alliances tends to be more difficult of the of the lay than for early ch learned hree years might Cisco in networking and Dell in PCs that have Finally, the pro from the tech- may actually be more hyperbole than wreck and now know substance. Multiple failures in B2C, how to build sustainable B2B, and other forms of e-business om have raised rding the this viewpoint, managers I pace at which the networked econ- COMMUNICATIONS OF THE ACM August 2002/VoL 45. No 8
T hree years is a long time in the world of e-business. In 1999 bookstores were replete with treatises by e-vangelists heralding a new “network economy” that would fundamentally change the conduct of business and commerce. According to consultant firm Booz Allen Hamilton, more than 90% of top managers believed these claims would be realized by 2001 [3]. As we now know, these e-vangelists were at best premature and at worst false prophets. Since the bubble burst in April 2000, many have become pessimistic about the future of e-business. Notwithstanding, IT professionals and consulting firms continue to promote e-business and many firms (though not startups) continue to invest in its application. A positive view of the events of the last three years might assert that we have learned from the techwreck and now know how to build sustainable e-businesses. Seen from this viewpoint, managers should still be implementing substantive e-business plans and doing so with a clearer, more viable vision of the networked future. However, this view could not be further from reality. Many firms remain confused about the implications of e-business technology and have curtailed their implementation plans. There are a number of explanations for such reactions. Having been through process reengineering, enterprise resource planning, and now ebusiness with disappointing results, experienced managers are wary of large IT investments. Moreover, despite huge investments in consulting advice, managers have struggled with the same set of IT implementation problems for a decade. Indeed, the competitive necessity driving ebusiness implementation varies considerably from industry to industry. Firms are exposed to wide-ranging levels of competition and any attempt to establish networked alliances tends to be more difficult today than for early pioneers such as Cisco in networking and Dell in PCs. Finally, the promise of e-business may actually be more hyperbole than substance. Multiple failures in B2C, B2B, and other forms of e-business have raised questions regarding the pace at which the networked econAs some firms have discovered (usually the hard way), e-business does not fit every business. COMMUNICATIONS OF THE ACM August 2002/Vol. 45, No. 8 69 KEEPING E-BUSINESS IN PERSPECTIVE BY TIM COLTMAN, TIMOTHY M. DEVINNEY, ALOPI S. LATUKEFU, AND DAVID F. MIDGLEY PEP MONTSERRAT
omy is emerging and ultimately the suitability of e- sumer outlook and behavior. Our discussion here focuses on this last issue. By exploitation of e-business is more apparently e and business for many firms The potential for real, transformative chang examining the economic forces that drive e-business business-to-business(B2B)activities change rather than the technologies themselves, we like Cisco and Dell, the movement of products from k to determine the appropriateness of e-business to detailed designs to basic commodities through a supply the firm. We start by asking two related questions: chain is where the real value in e-business lies Where is e-business concentrated? Why is e-business There are several reasons why businesses are more it is? willing than consumers to communicate, negoti buy, and sell online: Where Is e-Business Concentrated? Prior encounters with revolutionary technological Large companies are generally better equipped to change stress a distinct difference between espoused communicate electronically. Many business transac theories(what is said about the technology)and theo- tions are already conducted at a distance by fax ries-in-use(how the technology is actually used)[1]. mail, or EDI. For example, Dells online catalogue- The actual impact of e-business on the way peopl le based competencies quick response, low-cost ful- shop and the way business is conducted on a daily basis filament system characterized by direct customer (theory in use) contrasts sharply with the way it is interactions and made-to-order manufacturing- referred to by the techno-elite and reported in the pop- easily translated to the Web theor Companies are more cost-conscious. Every dollar Established statistical sources indicate that most peo- saved in procurement is equal to a dollar of profit ple still lack or choose not to have Internet access. Even For example, the opportunity to standardize pro- in the U.S.--the cradle of the Internet-a significant curement systems and capture ngs has beer proportion of the population still does not have access the driving force behind joint exchanges involving home. For those with access, either at home or in the Ford, General motors, and others office, the Internet has proven more of an addition to As corporations develop online strategies aimed at heir livesat times helpful or entertaining, often slow reducing costs and increasing efficiency, network Ind frustrating-than an indispensable feature. For effects have a particularly strong impact Organiza- example, many startups and established retailers have tions that have invested substantially in developing nvested millions of dollars in establishing an electronic IT supply chain infrastructures have a strong incen alternative to shopping for groceries. Yet despite their tive to encourage others to do the same and thus best efforts, a minority of households orders groceries make further efficiency gains from a more complete nline. In reality, many consumers see this task as one network. of lifes small pleasures and have no intention of giving up the physical shopping experience. Additionally, As we enter a new phase in e-business development many products and services must be" experienced, sustainable growth in B2B e-commerce becomes more hat is, they must be seen or touched for us to appreci- likely, shifting attention from the failed business mod ate them. Reconciling the urge to give away your prod- els of startups toward strategies for more established uct to let people experience what you have to offer with firms, particularly branded goods suppliers and physi the need to charge them to recover your costs contin- cal retailers ues to be one of the fundament blems facing busi- nesses in the networked economy Why Is E-Business Occurring As It Is? n short, despite the media attention, e-business We are beginning to see signs of a general maturing of among consumers is still in a formative stage. The few the e-business user community and the social impact of successful examples we have of B2C businesses-say, the e Internet on the lives of ordinary peopl com. Amazon or eBay--are arguably in specialized categories ing clearer. For business, however, the answer to the all- of goods and attract a minority of customers. Experts important question of how to make money is not at all quoted in the New york Times(Apr. 16, 2001)pre- app parent. Despite billions of dollars in investment dicted online penetration will never exceed 15% of firms are still struggling to find the best way to com- book sales. Consumers continue to experiment online plement traditional activities or develop new electronic and many business-related barriers must still be over- lines of business ome-security, privacy, uncertainty, low bandwidth, While we have seen tremendous savings in the time consumer protection, and network access-before we and cost of routine tasks(for example, buying can begin to speak of a revolutionary change in con- ing shares, tracking inventory, and delivery sche 70
omy is emerging and ultimately the suitability of ebusiness for many firms. Our discussion here focuses on this last issue. By examining the economic forces that drive e-business change rather than the technologies themselves, we seek to determine the appropriateness of e-business to the firm. We start by asking two related questions: Where is e-business concentrated? Why is e-business occurring as it is? Where Is E-Business Concentrated? Prior encounters with revolutionary technological change stress a distinct difference between espoused theories (what is said about the technology) and theories-in-use (how the technology is actually used) [1]. The actual impact of e-business on the way people shop and the way business is conducted on a daily basis (theory in use) contrasts sharply with the way it is referred to by the techno-elite and reported in the popular media (espoused theory). Established statistical sources indicate that most people still lack or choose not to have Internet access. Even in the U.S.—the cradle of the Internet—a significant proportion of the population still does not have access at home. For those with access, either at home or in the office, the Internet has proven more of an addition to their lives—at times helpful or entertaining, often slow and frustrating—than an indispensable feature. For example, many startups and established retailers have invested millions of dollars in establishing an electronic alternative to shopping for groceries. Yet despite their best efforts, a minority of households orders groceries online. In reality, many consumers see this task as one of life’s small pleasures and have no intention of giving up the physical shopping experience. Additionally, many products and services must be “experienced,” that is, they must be seen or touched for us to appreciate them. Reconciling the urge to give away your product to let people experience what you have to offer with the need to charge them to recover your costs continues to be one of the fundamental problems facing businesses in the networked economy. In short, despite the media attention, e-business among consumers is still in a formative stage. The few successful examples we have of B2C businesses—say, Amazon or eBay—are arguably in specialized categories of goods and attract a minority of customers. Experts quoted in the New York Times (Apr. 16, 2001) predicted online penetration will never exceed 15% of book sales. Consumers continue to experiment online and many business-related barriers must still be overcome—security, privacy, uncertainty, low bandwidth, consumer protection, and network access—before we can begin to speak of a revolutionary change in consumer outlook and behavior. The potential for real, transformative change and exploitation of e-business is more apparent in upstream business-to-business (B2B) activities. For companies like Cisco and Dell, the movement of products from detailed designs to basic commodities through a supply chain is where the real value in e-business lies. There are several reasons why businesses are more willing than consumers to communicate, negotiate, buy, and sell online: • Large companies are generally better equipped to communicate electronically. Many business transactions are already conducted at a distance by fax, mail, or EDI. For example, Dell’s online cataloguebased competencies—quick response, low-cost fulfilment system characterized by direct customer interactions and made-to-order manufacturing— easily translated to the Web. • Companies are more cost-conscious. Every dollar saved in procurement is equal to a dollar of profit. For example, the opportunity to standardize procurement systems and capture cost savings has been the driving force behind joint exchanges involving Ford, General Motors, and others. • As corporations develop online strategies aimed at reducing costs and increasing efficiency, network effects have a particularly strong impact. Organizations that have invested substantially in developing IT supply chain infrastructures have a strong incentive to encourage others to do the same and thus make further efficiency gains from a more complete network. As we enter a new phase in e-business development, sustainable growth in B2B e-commerce becomes more likely, shifting attention from the failed business models of startups toward strategies for more established firms, particularly branded goods suppliers and physical retailers. W hy Is E-Business Occurring As It Is? We are beginning to see signs of a general maturing of the e-business user community and the social impact of the Internet on the lives of ordinary people is becoming clearer. For business, however, the answer to the allimportant question of how to make money is not at all apparent. Despite billions of dollars in investment, firms are still struggling to find the best way to complement traditional activities or develop new electronic lines of business. While we have seen tremendous savings in the time and cost of routine tasks (for example, buying and selling shares, tracking inventory, and delivery scheduling), 70 August 2002/Vol. 45, No. 8 COMMUNICATIONS OF THE ACM
few of the visionary predictions Prediction concerning the e-business revolu tion have actually materialized Brands will diel users will Indeed,for every domain where a major threat to brands continue to gravitate toward brands as a way to simplify choices cost savings can be identified, making brand strength reduce search costs, and build trust. This view is reinforced in a boston Consulting Group(1999)study entitled "The State of Online Shopping, countervailing areas exist where whose authors conclude. The brand is everything and everything is additional costs have been the brand Middlemen will die! We have seen few examples of successful disintermediation resulting have governed business success for realin t nutr from curre emerging is the principle from e-business investment. This has nothing to do with whether profits largely elationships. An increase in the number ed. The accompanying the middleman"(6) e-business middlemen or"infomediaries"is just as plausible as any table summarizes the predictions nade about e-business and ou the larger the network, the more attractive it is to users. Markets for assessment of the current realit gested that size will po Importance of brand the online firm (5) strength. A common belief was inter-organizational systems will require governance mechanisms and the low set-up costs associated ge firms will leverage their bargaining power to encourage cooperation among channel members. with e-business technology would enable a one-person business to Lower prices Reduced information exchange and coordination costs ha firms to capture a larger part of the customer va make its virtual storefront avail- able to as many consumers as the markets and cheaper, there is no guarantee this will result in lower prices. lower prices [2]. big players--representing a major Speculation about whether prices will go up or fall is something of a red herring potential threat to established brands [8]. This threat would be amplified by the cus- Predictions and reality tomer's use of intelligent agents and comparison soft ware. However, the evidence indicates these predictions Disintermediation to intermediation. The late have yet to reflect reality. 1990s was to be the age of disintermediation. Futurist In an Ernst Young survey on e-commerce, 69% of George Gilder wrote, "[]n every industry-from retail respondents stated that brand names played a significant ing to insurance-the key impact of the computer-nc role in their online buying decisions. Moreover, evi- work revolution is to remove the middleman[6] dence has emerged that many customers do not employ That was the theory, but Compaq provides an exam- exhaustive search strategies; rather they become locked ple of the risks associated with a strategy based on such nto one attractive site [7]. In an overcommunicated beliefs. Compaq Australia attempted to eliminate world, the Internet provides no guarantee of lower reseller margins by going direct to the customer with a arch costs or customer attention. Yet, online users con- more price competitive product. Unfortunately, Com- inue to gravitate toward brands for two basic reasons: paqs success had been largely determined by its close brand names act as substitutes for on gathering channel relationship with resellers. Not surprisingly by helping online buyers locate specific products and when resellers learned of Compag's decision to sel thus reduce search costs; and brands build trust, security, direct to the customer, they reacted by tossing all Com- and expectations regarding product quality. paq products out of the countrys leading retail The key issue for firms is to determine where their Having lost an estimated $100 million in revenus brand strength lies. Existing brands based on emotional Compaq was forced to backtrack(The Australian, Aug associations(for example, the attachment of young girls 24, 1999 and Apr 17, 2001) to Mattel's Barbie doll) are likely to be reinforced rather The Compaq story is one that other firms are loath than threatened by the online medium. Recognizing to repeat. The combination of intermediary power and their strength is built through more dynamic media, proximity to the customer explains why we have seen they will use the static nature of the Web to complement very few successful examples of disintermediation. It other marketing activities. However, brands that convey has nothing to do with whether or not profits are pos beliefs or facts regarding product or channel attributes sible from disintermediation and everything to do with (for example, UPS same-day parcel delivery), face chal- deciding how to move into a new distribution channel lenges from new cyberbrands because attribute-based without jeopardizing existing channel relationships branding may be better suited to the online medium Value as well as price influences purchase decisions and thus the playing field may be leveled and adept intermediaries can exploit new business CoMMUNICATONS OF THE ACM August 2002/VoL 45, No 8 7I
few of the visionary predictions concerning the e-business revolution have actually materialized. Indeed, for every domain where cost savings can be identified, countervailing areas exist where additional costs have been incurred. The most salient insight emerging is the principles that have governed business success for centuries remain largely unchanged. The accompanying table summarizes the predictions made about e-business and our assessment of the current reality. Importance of brand strength. A common belief was the low set-up costs associated with e-business technology would enable a one-person business to make its virtual storefront available to as many consumers as the big players—representing a major potential threat to established brands [8]. This threat would be amplified by the customer’s use of intelligent agents and comparison software. However, the evidence indicates these predictions have yet to reflect reality. In an Ernst & Young survey on e-commerce, 69% of respondents stated that brand names played a significant role in their online buying decisions. Moreover, evidence has emerged that many customers do not employ exhaustive search strategies; rather they become locked into one attractive site [7]. In an overcommunicated world, the Internet provides no guarantee of lower search costs or customer attention. Yet, online users continue to gravitate toward brands for two basic reasons: brand names act as substitutes for information gathering by helping online buyers locate specific products and thus reduce search costs; and brands build trust, security, and expectations regarding product quality. The key issue for firms is to determine where their brand strength lies. Existing brands based on emotional associations (for example, the attachment of young girls to Mattel’s Barbie doll) are likely to be reinforced rather than threatened by the online medium. Recognizing their strength is built through more dynamic media, they will use the static nature of the Web to complement other marketing activities. However, brands that convey beliefs or facts regarding product or channel attributes (for example, UPS same-day parcel delivery), face challenges from new cyberbrands because attribute-based branding may be better suited to the online medium and thus the playing field may be leveled. Disintermediation to intermediation. The late 1990s was to be the age of disintermediation. Futurist George Gilder wrote, “[I]n every industry—from retailing to insurance—the key impact of the computer-network revolution is to remove the middleman” [6]. That was the theory, but Compaq provides an example of the risks associated with a strategy based on such beliefs. Compaq Australia attempted to eliminate reseller margins by going direct to the customer with a more price competitive product. Unfortunately, Compaq’s success had been largely determined by its close channel relationship with resellers. Not surprisingly, when resellers learned of Compaq’s decision to sell direct to the customer, they reacted by tossing all Compaq products out of the country’s leading retail outlets. Having lost an estimated $100 million in revenue, Compaq was forced to backtrack (The Australian, Aug. 24, 1999 and Apr. 17, 2001). The Compaq story is one that other firms are loath to repeat. The combination of intermediary power and proximity to the customer explains why we have seen very few successful examples of disintermediation. It has nothing to do with whether or not profits are possible from disintermediation and everything to do with deciding how to move into a new distribution channel without jeopardizing existing channel relationships. Value as well as price influences purchase decisions and adept intermediaries can exploit new business COMMUNICATIONS OF THE ACM August 2002/Vol. 45, No. 8 71 Prediction State of Current Reality Brands will die! The Internet represents a major threat to brands making brand strength weaker than ever before [8]. Middlemen will die! “In every industry—from retailing to insurance— the key impact of the computer-network revolution is to remove the middleman” [6]. Scale is irrelevant! Esther Dyson, has suggested that size will be less important for the online firm [5]. Lower prices! E-business will lead to more efficient markets and lower prices [2]. In an over-communicated world, the Internet provides no guarantee of customer attention or lower search cost. It is likely that users will continue to gravitate toward brands as a way to simplify choices, reduce search costs, and build trust. This view is reinforced in a Boston Consulting Group (1999) study entitled “The State of Online Shopping,” whose authors conclude: “The brand is everything and everything is the brand.” We have seen few examples of successful disintermediation resulting from e-business investment. This has nothing to do with whether profits are possible. Rather, it has everything to do with the difficulty of working out how to move into a new distribution channel without jeopardizing existing channel relationships. An increase in the number of e-business middlemen or “infomediaries” is just as plausible as any predicted demise. Networks, be they real or virtual, work to a relatively simple logic: the larger the network, the more attractive it is to users. Markets for portal companies (for example, Yahoo.com), hardware and software (for example, Microsoft) all provide recent examples of companies deriving increased value from wider reach. Equally standardization of inter-organizational systems will require governance mechanisms and large firms will leverage their bargaining power to encourage cooperation among channel members. Reduced information exchange and coordination costs have enabled firms to capture a larger part of the customer value proposition. While the cost of getting the right item to the right customer is cheaper, there is no guarantee this will result in lower prices. Speculation about whether prices will go up or fall is something of a red herring. Predictions and reality
models to provide customer value in new ways. Insti- medium designed to reduce deadweight losses. Tech- tutional structures such as intermediaries satisfy com- nology is allowing us to capture a larger part of the plex customer and supplier requirements that can not whole customer proposition. As such, speculation simply be unraveled overnight. Thus an increase in the about whether prices will rise or fall is something of number of e-business middlemen or infomediaries is red herring--they could go up or down depending just as plausible as any predicted demise. the evolution of value in specific markets Economies of scale and scope. Publisher Esther Conflicting worldviews. The way technology is yson has suggested the Internet will change used in the social and business environment will con- conomies of scale in favor of the little guy [5]. As a tinue to change. The question we must ask is whether result, online firms will face less pressure to grow and or not the Internet boom of the 1990s infers an even- benefit from economies of scale tual shift in the way business is conducted towar s This view is inconsistent with the history lessons more networked form. One side of the argument hol ends to produce a simple logic: the larger the network turies--supply versus demand, market competition, the more attractive it is to users. This phenomenon, segmentation pricing, contracting and the nature of referred to as "network externalities, is illustrated in governance in the firm---remain as relevant today as rail,trucking, telecommunications, and banking net- they were when Adam Smith described the workings of works(such as ATM machines). Markets for portal a 19th century pin factory. Thus, although e-business companies(likeYahoo.com)andsoftware(microsoft)willhaveanimpactonmanybusinessesandmakenew provide more recent illustrations of companies deriving demands on managers, the basic rules will not be ncreased value from wider networks altered. This can be summed up as: There is no such For example, the benefit derived from using thing as e-business; there is just business and some of it Microsofts office lot just that it permits word is electronic. processing and spreadsheet analysis More importantl The counter stance is the old rules of business no it facilitates interaction giving users the flexibility to longer apply, a sea change will occur in the way we work from different locations, share files, and collabo- approach how firms operate, as summed up in the rate with others seamlessly. The greater the number of phrase There is no business bar e-business. Here, we people using the product, the greater the benefit to seek to deter whether the users and to microsoft years are a prelude to an eventual revolution or whether Lower prices. Conventional wisdom and economic e-business will take a more evolutionary, less significant theory suggest a combination of increased competition path. This is a key distinction because it influences the nd improved price discovery technologies will create degree of environmental uncertainty and the extent to more efficient markets and reduce the price of goods which managers operate in uncharted territory nd services traded online. However, although the net- worked economy offers potential opportunities for You Say You Want a Revolution lower purchasing costs, the same infrastructure can also Clearly, many people feel the changes wrought by tran- be used by incumbent sellers to collect and process cus- sistors and subsequent technologies of information tomer information in ways that maintain their oligo- processing and communication satisfy the criteria for a oly power. A more positive outcome would be for firms revolution. However, what we must understand is to use this same information to deliver products in a whether what is occurring in the e-business domain is more value-effective way, possibly increasing the final driven by the special characteristics of e-business itself price but enhancing the overall value to customers. or related to changes in business management affecting The main impact of e-business is its ability to reduce e-business. Although such a question may appear mun- the cost of exchanging and processing information, dane, the answer will determine the relevance of cur- thereby reducing the overall costs of customization- rent academic theory and business practice to the either between a producer and a supplier, or a customer supposed new realit and a product/service provider. The potential is not According to Manuel Castells, technological revolu- that the bottle of Coke will be cheaper (although this tions are characterized by their pervasiveness across all might occur in some circumstances), but the cost of domains of human activity; not simply their impact on getting the right item to the right customer will be what is done, but on how it is done [4]-that is, they reduced. Value system change has occurred where par- must change processes in some fundamental way ticular upstream and downstream activities are opened E-business cannot yet claim to have radically changed up or better tailored to customer needs. Thus, what we the way the vast majority of people shop or how most re seeing is the formation of a new transactional business is conducted on a day-to-day basis. Evidence MIONS OF THE ACM
models to provide customer value in new ways. Institutional structures such as intermediaries satisfy complex customer and supplier requirements that can not simply be unraveled overnight. Thus an increase in the number of e-business middlemen or infomediaries is just as plausible as any predicted demise. Economies of scale and scope. Publisher Esther Dyson has suggested the Internet will change economies of scale in favor of the little guy [5]. As a result, online firms will face less pressure to grow and benefit from economies of scale. This view is inconsistent with the history lessons that have shown the size of the firm or the network tends to produce a simple logic: the larger the network the more attractive it is to users. This phenomenon, referred to as “network externalities,” is illustrated in rail, trucking, telecommunications, and banking networks (such as ATM machines). Markets for portal companies (like Yahoo.com) and software (Microsoft) provide more recent illustrations of companies deriving increased value from wider networks. For example, the benefit derived from using Microsoft’s Office suite is not just that it permits word processing and spreadsheet analysis. More importantly, it facilitates interaction giving users the flexibility to work from different locations, share files, and collaborate with others seamlessly. The greater the number of people using the product, the greater the benefit to users and to Microsoft. Lower prices. Conventional wisdom and economic theory suggest a combination of increased competition and improved price discovery technologies will create more efficient markets and reduce the price of goods and services traded online. However, although the networked economy offers potential opportunities for lower purchasing costs, the same infrastructure can also be used by incumbent sellers to collect and process customer information in ways that maintain their oligopoly power. A more positive outcome would be for firms to use this same information to deliver products in a more value-effective way, possibly increasing the final price but enhancing the overall value to customers. The main impact of e-business is its ability to reduce the cost of exchanging and processing information, thereby reducing the overall costs of customization— either between a producer and a supplier, or a customer and a product/service provider. The potential is not that the bottle of Coke will be cheaper (although this might occur in some circumstances), but the cost of getting the right item to the right customer will be reduced. Value system change has occurred where particular upstream and downstream activities are opened up or better tailored to customer needs. Thus, what we are seeing is the formation of a new transactional medium designed to reduce deadweight losses. Technology is allowing us to capture a larger part of the whole customer proposition. As such, speculation about whether prices will rise or fall is something of a red herring—they could go up or down depending on the evolution of value in specific markets. Conflicting worldviews. The way technology is used in the social and business environment will continue to change. The question we must ask is whether or not the Internet boom of the 1990s infers an eventual shift in the way business is conducted toward a more networked form. One side of the argument holds that the fundamental rules governing business for centuries—supply versus demand, market competition, segmentation pricing, contracting and the nature of governance in the firm—remain as relevant today as they were when Adam Smith described the workings of a 19th century pin factory. Thus, although e-business will have an impact on many businesses and make new demands on managers, the basic rules will not be altered. This can be summed up as: “There is no such thing as e-business; there is just business and some of it is electronic.” The counter stance is the old rules of business no longer apply; a sea change will occur in the way we approach how firms operate, as summed up in the phrase “There is no business bar e-business.” Here, we seek to determine whether the events of the past few years are a prelude to an eventual revolution or whether e-business will take a more evolutionary, less significant path. This is a key distinction because it influences the degree of environmental uncertainty and the extent to which managers operate in uncharted territory. You Say You Want a Revolution Clearly, many people feel the changes wrought by transistors and subsequent technologies of information processing and communication satisfy the criteria for a revolution. However, what we must understand is whether what is occurring in the e-business domain is driven by the special characteristics of e-business itself or related to changes in business management affecting e-business. Although such a question may appear mundane, the answer will determine the relevance of current academic theory and business practice to the supposed new reality. According to Manuel Castells, technological revolutions are characterized by their pervasiveness across all domains of human activity; not simply their impact on what is done, but on how it is done [4]—that is, they must change processes in some fundamental way. E-business cannot yet claim to have radically changed the way the vast majority of people shop or how most business is conducted on a day-to-day basis. Evidence 72 August 2002/Vol. 45, No. 8 COMMUNICATIONS OF THE ACM
of a radical change in productivity whereby the eco- Shapiro and Varian 9] observe: Technology changes nomic production function has shifted unilaterally with Economic laws do not respect to information technology, has yet to emerge. However, the salience of specific laws will wax and Social requirements still govern technology (not vice wane and answers to ne w management versa)and current efforts to virtualize commerce and be required to ensure the costly narure of e-business business exchanges have not been sufficiently pervasive development is wisely managed. From an economic or process-oriented to warrant the term"revolutionary. and management perspective, we need to focus on The Internet and e-business alike are complemen- making a clearer distinction between where the Internet tary events linked with the progression of related tech- has simply changed the cost of making specific transac- nology. E-business is not a standalone phenomenon tions and where it has transformed the fundamentals of but part of a wider, more historically pervasive move- the transactions themselves. Auctions, for example, ment. Like all myths, the Internet boom captured only have remained the same for centuries. When I ome elements of reality--as was the case with the online for a piece of Ming porcelain on eBay, the only computer revolution. The popular claim that develop- difference is I am bidding against more people om ment of the transistor alone explains the progress of diverse locations than in a face-to-face setting, Con- computing ignores the significant influence comple- versely, if I am a component supplier operating in the mentary technologies( for example, disk storage, net- auction created by FreeMarkets, the old relationship- work connectivity, video display units, among others) based mechanisms of procurement may be changed had on the development of the working computer. In a forever similar vein, claims that e-business is driving revolu- The real areas of change are those where old institu- ionary business change are misleading and, as we have tions--hierarchies within firms, established supplier shown, only partly correct. Indeed, the most likely path relationships, ordering and payment systems--can bo for the evolution of e-business is an incremental one, co-opted by technology in ways that transform not the automating existing B2B processes and extending the business, but the psychology of the business and the few B2C successes fundamental core of what defines that business. Such e If there is an unpredictable revolutionary character areas of change do exist, but they are far fewer in num- the Internet, it lies in the way people, rather than ber than e-vangelists thought. C businesses,interact. Within nonprofit organizations and associations we have seen many forms of social REFERENCES experimentation--with the result there has been a sea 1. Argyris, C and Schon, D.A. Organizational Leaming. Addison-Wesley. change in the ways such groups communicate. The 2. Bakos, Y. A strategic analysis of dectronic marketplaces. MIS Q. 15.3 ability of associations such as Amnesty International (1991), 295-310 and Human Rights in China to coordinate effectively w ill Tramsform Global Busines. ElU. New York, 1999 and bring influence to bear on governments is a 4.Castells, M. The Information Age: Ecomomy, Socicty and Gulnare.Blackwell remarkable testament to this social revolution Malden. MA. I Dyson, E Release 2.0: A Design for Living in the Digital Age. Broadway Books, A Final Wrap 6. Gilder, G. Life After Television: The Coming Transformation of American Li In challenging the popular myth that e-business is rev- 7. Johnson Ej. Bellman, S, and Lohse, G L What makes a Web site sticky? olutionary, we hope to provide managers with a clear mitive lock-in and the power Law of practice. Columbia Business School understanding of its ramifications for current and(Oct 4, 2000) 8. Kalakota, R and Whinston, A.B. Frontiers of Electronic Commerce. Addison- future generations. Predictions regarding the demise of Wesley, Reading, PA, 1996. brands, middlemen, scale, and imperfect markets have 9.Shapiro, C. and Varian, H.R. Information Rules: A Srategic Guide to the Net- failed to materialize. Advances in information and work Economy. Harvard Business School Press, Cambridge, MA, 1999 elecommunication technologies have yet to change che way major decisions are made in business in any TIM COLTMAN (imc@agsm.edu.au)is a doctoral candidate at the scaled-down ambitions or firms' collapse. These are TIMOTHY M. DEVINNEY(timdeveagsmedu au) is the director of poignant reminders that reorganizing rely Australian Graduate School of Management, Sydney: tegy at the of ALOPIS.LATUKEFU(alatukefu@hotmail.com)isregionalproject e-business performance is rarely easy. Instead, basic manager for the Outback Digital Network, Darwin, Northern Territory principles--such as identifying customer value propo- DAVID E. MIDGLEY(david.midgley insead. edu)is professor of itions and putting together the right people, Marketing at INSEAD, Fontainebleau, France. processes, and technical resources in an effectively managed manner-are still as relevant today. As 02002 ACM 0002-0782/02/0800$5.00 CoMMUNICATIONS OF THE ACM August 2002/Vol 45, No8 73
of a radical change in productivity whereby the economic production function has shifted unilaterally with respect to information technology, has yet to emerge. Social requirements still govern technology (not vice versa) and current efforts to virtualize commerce and business exchanges have not been sufficiently pervasive or process-oriented to warrant the term “revolutionary.” The Internet and e-business alike are complementary events linked with the progression of related technology. E-business is not a standalone phenomenon but part of a wider, more historically pervasive movement. Like all myths, the Internet boom captured only some elements of reality—as was the case with the computer revolution. The popular claim that development of the transistor alone explains the progress of computing ignores the significant influence complementary technologies (for example, disk storage, network connectivity, video display units, among others) had on the development of the working computer. In a similar vein, claims that e-business is driving revolutionary business change are misleading and, as we have shown, only partly correct. Indeed, the most likely path for the evolution of e-business is an incremental one, automating existing B2B processes and extending the few B2C successes. If there is an unpredictable revolutionary character to the Internet, it lies in the way people, rather than businesses, interact. Within nonprofit organizations and associations we have seen many forms of social experimentation—with the result there has been a sea change in the ways such groups communicate. The ability of associations such as Amnesty International and Human Rights in China to coordinate effectively and bring influence to bear on governments is a remarkable testament to this social revolution. A Final Wrap In challenging the popular myth that e-business is revolutionary, we hope to provide managers with a clearer understanding of its ramifications for current and future generations. Predictions regarding the demise of brands, middlemen, scale, and imperfect markets have failed to materialize. Advances in information and telecommunication technologies have yet to change the way major decisions are made in business in any significant manner. Nearly every week brings news of scaled-down ambitions or firms’ collapse. These are poignant reminders that reorganizing to effectively achieve e-business performance is rarely easy. Instead, basic principles—such as identifying customer value propositions and putting together the right people, processes, and technical resources in an effectively managed manner—are still as relevant today. As Shapiro and Varian [9] observe: “Technology changes. Economic laws do not.” However, the salience of specific laws will wax and wane and answers to new management challenges will be required to ensure the costly nature of e-business development is wisely managed. From an economic and management perspective, we need to focus on making a clearer distinction between where the Internet has simply changed the cost of making specific transactions and where it has transformed the fundamentals of the transactions themselves. Auctions, for example, have remained the same for centuries. When I bid online for a piece of Ming porcelain on eBay, the only difference is I am bidding against more people from diverse locations than in a face-to-face setting. Conversely, if I am a component supplier operating in the auction created by FreeMarkets, the old relationshipbased mechanisms of procurement may be changed forever. The real areas of change are those where old institutions—hierarchies within firms, established supplier relationships, ordering and payment systems—can be co-opted by technology in ways that transform not the business, but the psychology of the business and the fundamental core of what defines that business. Such areas of change do exist, but they are far fewer in number than e-vangelists thought. References 1. Argyris, C. and Schon, D.A.. Organizational Learning. Addison-Wesley, Reading, PA, 1978. 2. Bakos, Y. A strategic analysis of electronic marketplaces. MIS Q. 15, 3 (1991), 295–310. 3. Booz Allen and Hamilton. Competing in the Digital Age: How the Internet will Transform Global Business. EIU, New York, 1999. 4. Castells, M. The Information Age: Economy, Society and Culture. Blackwell, Malden, MA, 1996. 5. Dyson, E. Release 2.0: A Design for Living in the Digital Age. Broadway Books, New York, 1997. 6. Gilder, G. Life After Television: The Coming Transformation of American Life. W. Norton, New York, 1994. 7. Johnson, E.J., Bellman, S., and Lohse, G.L. What makes a Web site sticky? Cognitive lock-in and the power law of practice. Columbia Business School (Oct. 4, 2000). 8. Kalakota, R. and Whinston, A.B. Frontiers of Electronic Commerce. AddisonWesley, Reading, PA, 1996. 9. Shapiro, C. and Varian, H.R. Information Rules: A Strategic Guide to the Network Economy. Harvard Business School Press, Cambridge, MA, 1999. Tim Coltman (timc@agsm.edu.au) is a doctoral candidate at the Australian Graduate School of Management, Sydney. Timothy M. Devinney (timdev@agsm.edu.au) is the director of the Centre for Corporate Change and Professor of Strategy at the Australian Graduate School of Management, Sydney. Alopi S. Latukefu (alatukefu@hotmail.com) is regional project manager for the Outback Digital Network, Darwin, Northern Territory, Australia. David F. Midgley (david.midgley@insead.edu) is professor of Marketing at INSEAD, Fontainebleau, France. © 2002 ACM 0002-0782/02/0800 $5.00 c COMMUNICATIONS OF THE ACM August 2002/Vol. 45, No. 8 73
