Evolving the E-Business - London Business School



Evolving the E-Business

Professor Michael Earl

Centre for the Network Economy

CNE WP02/2001

Evolving the E-Business

Michael J Earl

Introduction

Even discounting for the hype of the IT industry, the rhetoric of business writers and the succession of wakeup calls from governments, few corporate leaders will doubt that e-commerce is here to stay. Even the collapse of dotcom start-ups and the volatility of Internet stocks cannot undermine this premise. Variously called e-commerce, e-businesses, the new economy, and so on, incumbent companies as much as dotcom start-ups are learning fast about the challenges of doing business in the information age.

Indeed, if we stand back from the continuous and daily experiential learning of companies who have embraced the internet and associated technologies, we perhaps can perceive a series of stages of business understanding and development that most organisations go through – an evolutionary journey where not only lessons are learned in each stage, but where also each stage leaves behind critical imperative.

This article suggests the typical six-stage journey that corporations are likely to experience (Fig.1). It also proposes six consequential lessons for both becoming and sustaining an e-business. The article therefore is both descriptive and prescriptive. The underpinning model is interpretative, based on observing, working with and researching corporations seeking to make the transition to e-business and on studying new start-ups whose raison d’etre is e-commerce. The six stages are “ideal types”, stylistic phrases which capture – even caricature – the experiential learning of these companies; thus they are not necessarily definitive periods of evolution from old economy to new economy corporations. However we do find most companies identify with the model.

The spirit of the article is sense-making; the purpose is to help companies anticipate the challenges ahead and recognise ongoing necessary, but not necessarily sufficient, conditions for success in e-business.

Stage One: External Communications

Round about 1994/95 the cry “let’s have a home page” began to ring out across corporations. The realisation that the Internet was a potential communications channel to external stakeholders – investors, analysts, customers, potential recruits etc. – was matched by the , perhaps tacit, recognition that the software and protocols behind the World Wide Web provided an interesting and not too difficult means of designing and publishing corporate public relations material. It was not long before “….” addresses appeared in traditional advertisements and HTML programmers were in demand.

The visions behind creating such websites rarely extended beyond external promotion and communication. Perhaps the only interactive nature was a provision for emailed questions to corporate departments from external stakeholders. For some corporations, the motive was little more than signalling that “we are a modern company”. Oftentimes the web presence was owned – informally and unofficially – by the department who first sponsored it or the department with most content on it. Before long, however, pages were developed containing annual financial statements and the annual report, recent notices in the press, the company’s products, how to contact the company, job vacancies and recruitment details, frequently asked questions and perhaps some lifestyle or entertainment content.

Then some fascinating and quite political issues arose. Who approved the site and the way the corporate logo was presented? If this site is projecting our brand, is it purveying the right message? Who is responsible for keeping the content fresh and updated? What is the balance between richness of content and speed of access or download? Is the site standing up to the increased volume? Who should really own the site?

Today such sites are often pejoratively described as brochureware. Indeed corporate communications departments started to take on responsibility for them because in effect they were the corporate brochure and somebody needed to oversee design, provide funding and manage quality.

However, maintaining and improving these web pages is a non-trivial issue. Both corporate executives and web surfers will recognise or quote sites that have outdated financial results, contact telephone numbers that are invalid, job vacancies that are filled or not yet posted, pages that are tired or do not link backwards or forwards, press releases that stopped two months ago and so on.

In other words, the critical success factor in Stage One – the External Communications stage – is content refreshing. As one dotcom entrepreneur, who seeks to capture transaction customers with rich and relevant information, commented, “content does not renew itself”. The lesson that is left from stage one, however advanced the corporation becomes in e-business, is the need for perpetual content management.

Stage Two: Internal Communications

Beginning in 1996, but continuing into 1998, there was a sort of “deviation” in the journey of E-business, but one that left behind another crucial lesson. What happened in several companies was that the IT department started to catch up with the Internet and World Wide Web. Stage One often had been pioneered by media and marketing departments with or without help from the IT function. However, I T professionals soon saw the promise of these new technologies, but typically saw them more as a technology solution than a business opportunity.

This was well demonstrated in a workshop held at London Business School with leading edge UK companies on “Doing Business over the Internet”. The participants, mainly from IT departments, opined early on in proceedings that trading on-line was not the key opportunity. Rather it was building intranets – using Internet and www techniques to build internal communications channels. For some the opportunity was about eroding Microsoft or Lotus Notes strangleholds on desktop platforms. For others it was about designing consistent and user-friendly front ends to email, groupware, administrative support systems and so on. For still others, the opportunity was about creating bulletin boards, forum pages, directories and knowledge-based materials for the whole corporation.

Most of these ideas were not invalid. Intranets have raised the information and communication capacity of organisations. An integrated, familiar front end to frequently used internal applications does appeal to end-users. Knowledge management applications have evolved from this rather techno-centric stage. And sometimes having internal access to the same information - or brochureware – that is provided externally is well received! In fact as companies later trade on-line, it is important that the external channel is also visible internally.

What was soon learnt, however, was that just as in business systems generally integrity matters. Not only was security an issue – which led to intranets being segregated from extranets and the internet – but data consistency across systems, synchronisation of database updates and perhaps above all compatibility of message formats, standards and releases between the component intranet applications mattered.

This lesson of architectural integrity was one IT professionals could appreciate easily. However it was to carry over into the next stages of the journey as another condition for success in e-business.

Stage Three: E-Commerce

By 1996, some companies had been experimenting in small ways with buying and selling on the Internet, but these were often local, unofficial experiments – except in the case of dotcom start-ups who were the principal pioneers of business to consumer, and business to business, e-commerce.

One or two years later, some start-ups had become household names, for example E*Trade or and early mover incumbents had begun to launch what they often called their internet strategies or their first co-ordinated attempts at buying or selling on the World Wide Web. Schwab had launched E.Schwab and in the UK companies such as EasyJet and were promoting electronic channels and services to complement their traditional forms of distribution.

E-commerce was the name we quickly coined for buying and selling on-line. The spirit of this stage is “let’s do business on the web” and the drivers are first mover advantages of learning, customer acquisition, pre-emption, and brand-building or sometimes more simplistic rationales such as image creation or “not being able to afford not to”. By the first half of 2000, companies seemed to be in a race to announce new initiatives and multimillion-dollar initiatives in e-commerce. The going rate in the UK seemed to be anything from £100m to £500m.

Stage three is still to begin for many companies and is still unfolding for others. This is partly explained by the normal imitation lags that underpin the classical curve of the diffusion of innovation. However, most companies can take some years to learn about e-commerce and be confident about their new channel strategies.

There is a host of issues to work through. How do you promote your e-commerce channel? In other words, how do you inform customers or suppliers that they can trade with you on-line? In the case of start-ups, how do you identify and attract customers – a challenge which explains much of the infamous cash burn rates of dotcoms as they spend heavily on advertising. If you are selling on-line, what pricing policies do you adopt and how do they relate to pricing in your traditional channels? If you are buying on-line, which products and services are suited to electronic market trading and where will you wish to retain traditional buying relationships? How many and what sort of infomediaries and affiliates will you work with and how quickly are you willing to cannibalise physical channels? Above all, what is your electronic brand proposition in selling or your “unique purchasing proposition” in buying? In particular, how do you create and maintain trust and what sort of interactive relationship are you building – What Evans and Wurster (1999) call brand as belief and brand as experience?

The bottom line is that in incumbent companies the stage of e-commerce is concerned with working out channel strategy. Rarely is this a question of selecting either electronic or traditional channels but of the balance and relative positioning of both and allowing customers choice. For start-ups, some may discover the same lesson; new suppliers of both physical and digital products and services sometimes discover they need high street presence as well as virtual channels. Those who are purely on-line companies still have to work out – and experiment with – many of the detailed channel decisions listed above, especially of course developing, testing and understanding the new paradigms of online buying and selling.

We therefore can capture the challenge and residual lesson of stage three as formulating electronic channel strategy.

Stage Four: E-Business

Many companies – and even more so customers – are discovering a critical lesson. Building an online channel on top of inadequate or inefficient business processes achieves only one goal: it broadcasts and magnifies the fact that a company’s back office systems or operational processes are really bad. So the fourth stage of e-business is about re-engineering or redesigning business processes to match customers’ expectations in the new economy.

Consumers already will recognise the signs of business processes that are not synchronised with the demands and expectations of e-commerce; goods that do not arrive on time; emailed requests that do not receive responses; clumsy handling of returns; inability to track order status; network access that breaks down … and so on.

Voss (2000) has demonstrated that often the service levels provided by start-ups outperform those provided by traditional businesses. This is often because incumbent businesses have legacy processes, legacy systems, legacy partnership agreements and legacy supply chains. Even if these operational capabilities were re-engineered in the early 1990s, the performance metrics that were established were ‘old economy’ norms. Companies did not anticipate the expectations online customers now have of speed of service and fulfilment, of information and confirmation, of personalisation and customisation, and of security and privacy.

Some exemplar e-businesses, however, very clearly recognise the value of sound and redesigned processes. Jeff Bezos, founder of , suggests, “In the offline world companies spend 70% of their resources on marketing and 30% on providing a good customer experience. In the online world it’s the other way round”. Michael Dell, founder of Dell Computers, observes that “the whole idea about virtual integration (of the supply chain) is that it lets you meet customer needs faster” and Adam Hamdy and Guy Mallison, co-founders of , recently stated that “our priorities are clear. We have to get our systems and operational processes in place before we commit to other significant items of expenditure, particularly on marketing the service”.

Indeed some traditional companies too are postponing going on line (stage three) until they have re-engineered their processes and replaced their legacy systems. In other words, some managements have anticipated stage four and now regard it as stage three.

However, most firms learn the hard way or treat stage three as inevitable, evolutionary, experiential learning and then accept the cost (and slowdown) of reverse engineering of processes and reverse architecting of their technology base. The lesson of stage four is that high performance processes are not optional.

Stage Five : E-Enterprise

In the era of business re-engineering, some companies realised that management processes as well as business processes could benefit from being redesigned (Rockart, Earl and Ross, 1996). They were not synchronised with the newly designed business processes, they were not fully supported by new technology and information systems, and they were often based on old ideas of organisational design.

Web-enabled online business puts new pressures on management processes. Dotcom start-ups show us why. Decision-making increasingly is “by wire”. Transactions can be monitored and analysed real-time. Information can be collected online. New ways of representing and analysing these data are being developed. And we are about to witness new ways of communicating across the enterprise using wireless and mobile technologies.

All this means we can track, analyse and understand consumer behaviour and operational performance continuously. We can do real-time test marketing and modelling of both new business ideas and channel strategy decisions. Indeed as some business to consumer start-ups are demonstrating, if dynamic pricing, fulfilment options and customisation facilities are offered, then decision-making by wire is a sine qua non. So is the ability to communicate decisions by wire to those in the company impacted by the decisions as quickly as possible. So stage five also provides a new impetus to stage two.

In short, as incumbent businesses advance through the stages of e-business, they seek to behave like the dotcoms of today and stage five is labelled “e-enterprise” because it is about decision-making becoming entrepreneurial and communicating decisions across the enterprise. In many ways this stage is the dawn of cybernetic models of management promised some decades ago. The critical success factor, of course, is recruiting, developing and empowering people who have the skills to use information and act on it. They can be thought of as “infopreneurs”. More graphically, perhaps, the need today is for information literacy as much as computer literacy.

Stage Six: Transformation

Stage models generally suggest an end of the journey which represents variously equilibrium, pervasive assimilation, maturity – or some other representation of nirvana or eldorado! This model is no exception; however there is an important caveat.

The label “transformation” implies that a company has successfully negotiated the journey of e-business. The challenges of the previous stages have been met and the new business and management models required for the new economy are embedded. Indeed they have become the norm and managers talk about now dropping the “e” of e-business.

In many ways, that is the goal. However, what we probably all recognise is that nothing stabilises anymore – if it ever did! Market forces drive continuous change. The social, political and economic environments do not stand still. And in the digital economy, new technologies keep arriving to pose new threats and opportunities. We already see that “mobile commerce” enabled by WAP protocols, mobile appliances and 3G communications will not just be a replication of pc-driven e-commerce. In the last 50 years’ history of information technology in business, rapid obsolescence has characterised any models of either application or delivery.

Thus while the aspiration in stage six is to be “comfortable with the new economy”, comfort can only be based on acceptance that our business and management models have to be dynamic. Michael Dell puts it eloquently, “I get scared when I hear people say ‘the model’ because I know that nothing is ever 100% constant”.(Magretta, 1998).

The acid test of the transformation stage is whether an organisation has built a capability for continuous innovation and renewal – even reinvention. So the critical success factor is building a learning organisation where everyone takes responsibility for change and adaptation.

Using the Stage Model

This six stage model is an ideal model; not only does it not fully represent organisational reality, it may not even be an approximation! However, even if it is a construct or fiction, companies do seem to be able to place themselves in a stage particularly when the characteristics summarised in Table 1 area articulated. Most, by Spring 2000, assess themselves at the intersection of stage two and stage three. Some incumbent are facing up to the challenges of stage four and a few of the longer established dotcom start-ups are displaying the characteristics of stage five. Clearly multi-business corporations can be at diverse stages. Finally, businesses find they have to revisit some stages as they did not learn and apply the lesson of each stage.

Having positioned your firm, the model potentially helps in identifying upcoming issues and thus provides a framework for planning and orchestrating the journey to e-business. It should be clear that executive responsibilities shift through the stages. The first three stages often are led functionally – from corporate relations through IT to marketing and/or purchasing. From stage four onwards, leadership has to come from the top although strategy and business development may well come from deep down in the organisation. However, once top management recognises the criticality of the lessons left by each stage it should be clear that neither delegation nor abdication of e-business leadership is recommended.

Fig.2: The Lessons from Each Stage

Indeed the six lessons in Fig.2 represent a robust and essential agenda for evolving the business. This may be the principal benefit of the stages framework as a prescriptive model. However, the descriptive element of the framework perhaps demonstrates and explains why these “rules” for evolving the e-business really matter, for both dotcom start-ups and incumbents.

References

Evans P. and Wurster T.S. (1999), Getting Real About Virtual Commerce, Harvard Business Review, Nov-Dec 1999.

Magretta J. (1998), The Power of Virtual Integration: An Interview with Dell Computers’ Michael Dell, Harvard Business Review, March – April.

Rockart J. F., Earl M. J. and J W Ross (1966), Eight Imperatives for the New IT Organisation, Sloan Management Review, Vol.38, No.1, Fall, pp 43-55

Voss C. (2000), Developing an E-Service Strategy, Business Strategy Review, Vol.11, Iss.1, March.

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Fig.1 Evolving the E-enterprise

Table 1: Evolving the E-Enterprise

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