The Big Bounce

Dot-coms dropped the ball, but the lessons they taught are keeping e-business on a roll. In fact, a new focus on technology's ability to drive new revenue is putting bounce in the industry

Does the demise of so many dot-coms spell the end of e-business? In a word, no. In fact, we remain steadfastly on the path of the greatest business transformation since the Industrial Revolution, and, ultimately, we'll thank the failed dot-coms for serving as the catalyst.

But first, let's agree on some terms.

A dot-com is a venture capital-backed start-up that uses Internet technology to dethrone traditional players in an industry. Think of consumer e-commerce titan Inc.'s challenge to venerable booksellers like New York-based Barnes and Noble Inc. And let's not forget business-to-business dot-coms, like San Jose-based Inc. This upstart received more than $80 million in financing to create an Internet marketplace to take on the $140 billion hospital supply industry.

E-business, in contrast, goes well beyond applying Internet technology to existing retail, distribution or other business models. Instead, it requires broad-scale asset redeployment and process changes, which ultimately serve as the basis for a company's competitive advantage in the Digital Economy.

San Jose-based Cisco Systems Inc.'s use of the Web to manage its supply chain is a prime example. The company reported that its e-business model more than halved cycle times, plus saved another $170 million in material and labor costs.

Similarly, Charles Schwab & Co. in San Francisco has slashed transaction costs by as much as 80% by shifting brokerage transactions from traditional channels like retail and phone centers to the Internet.

Most pure dot-coms, in contrast, haven't fared nearly as well. Last year alone, 140 dot-coms failed, according to San Francisco-based Iconocast Inc., which tracks Internet start-ups. Yet there are several significant lessons that traditional companies looking to launch or grow e-business initiatives can learn from these fumbles.

Lesson No. 1:

It's all about business. Always has been, always will be.

There's a scene in the movie Titanic when the ship's captain asks about the stricken ocean liner's likely fate. The ship's builder answers that there is nothing to be done: It will sink. "It is a mathematical certainty."

Early on, we used similar "mathematical certainty" methods to focus Fortune 1,000 executives on the business fundamentals required to succeed in the Digital Economy.

To illustrate, consider this hypothetical case: A Web retail start-up,, seeks to generate $300,000 in sales in its first year. If the company realized average transaction value of $30, it would need to close 10,000 transactions to generate its target $300,000 in revenue. These 10,000 transactions would be a function of the Web retailer's conversion rate - the percentage of visitors who actually purchase something. In the past 24 months, e-commerce sites experienced an average conversion rate of 1%. That means would need to attract 1 million visitors to reach its first-year revenue goal.

Let's further assume that relied solely on online advertising, like banner ads, which have a 1% to 2% click-through rate, to drive traffic to its site. With that click-through performance, the company would need to purchase between 50 million and 100 million ads to net its 1 million visitors. At an average cost of about 3 cents per banner ad, it could cost as much as $3 million to generate modest sales of $300,000. Layered on top of that would be another $3 million in expenses for things like site development, maintenance and the cost of goods sold. The example is oversimplified, but you get the point.

Don't be dismayed. Business fundamentals aren't meant to deter valuable investment in new digital channels, like the Internet or wireless commerce. Rather, fundamentals play a pivotal role in preparing companies for leadership. A focus on business fundamentals drives an integrated results-oriented approach critical to leadership in an e-business arena.

Lesson No. 2:

It's also about relationships, not transactions.

Forget technology's gee-whiz factor and focus instead on its role in advancing relationships, from customers, employees and suppliers to business partners and shareholders.

Consider GE Aircraft Engines (GEAE), a division of Fairfield, Conn.-based General Electric Co. that launched a customer Web site in January 2000. This private, password-protected site, also known as an extranet, can be accessed by GEAE's customers. Using the extranet, big customers like Atlanta-based Delta Air Lines Inc. and Houston-based Continental Airlines Inc. can electronically place orders for more than 250,000 parts, check inventory, pay bills and even view pictures of ongoing repairs and maintenance.

Sure, GEAE's customers can buy parts online - recall the "transaction mantra" of the dot-coms. But even more important, every time a customer logs on to check inventory or review invoices, GEAE gains additional business value measured in reduced cycle time for critical parts and lower costs to service customer orders.

GEAE also increasingly tightens its relationships with its customers. For example, data available on Delta's private Web page at GEAE enables Delta executives to make informed decisions about how and where to stock aircraft replacement parts to minimize flight cancellations resulting from maintenance problems. Major U.S. airlines typically stock between 150,000 and 300,000 aircraft parts, which cost $800 million to $1.5 billion annually to warehouse. Under GEAE's e-business model, Delta's ability to maintain jet engines in a cost-effective manner will become more and more reliant on the information, services and knowledge provided to the airline via its supplier.

At GEAE, the extranet brought in more than 10% of the company's $10.7 billion in 2000 revenue. In addition, GEAE expects that cost savings will tally $100 million. Perhaps even more meaningful is that, thanks to new selling tools and techniques built into the Web site, GEAE expects to bring in an incremental $1 in revenue for every $4 of customer transactions it converts from the physical world to the Web site.

The bottom line: E-business value is created when companies continue to advance valuable relationships while converting all or some of those relationship steps into a digital format.

Lesson No. 3:

Real business value goes beyond cost savings.

There is no turning back for companies that have already reaped the financial benefits of e-business. Charles Schwab, for example, cut costs by more than $400 million in 1999 - approximately 10% of its revenue - by shifting physical-world transactions to online.

The next step for companies and their customers is to change the terms of competition. Self-service applications are a prime example. If you're selling a potential customer on your manufacturing capabilities, don't be surprised when the customer's evaluation of your capabilities stretches to your company's Web-based ordering, tracking and customer service capabilities. The reason is that if you haven't invested in these applications, your customers' cost of doing business with your company increases.

Lesson No. 4:

Today's customer data is tomorrow's competitive corporate asset.

Realizing financial return on investment alone doesn't guarantee e-business success. Dot-coms have also taught us the extraordinary value of new assets created in a Digital Economy.

A prime example is Seattle-based's customer database, which the dot-com wisely leverages to drive new revenue by presenting return customers with personalized suggestions of books and music to buy. The assets created by e-business, be they a customer database like Amazon's or the engine performance database developed and shared within GEAE's extranet, are the new jewels of the E-Business Age. IT is at the core of these new assets, which is why technology decisions made today will position the leaders of tomorrow.

E-business isn't just another flavor-of-the-month craze, like total quality management. Despite the battle wounds inflicted by these well-intentioned business fads, we can safely say e-business represents the most significant change in more than a century. Remember Henry Ford and his production line? When, since then, have we seen 10% shaved from the cost structure of a Fortune 50 corporation like Charles Schwab?

Ultimately, the dot-coms should be thanked. They made the world pay attention to the extraordinary business potential of a new communications technology. What remains to be seen is how well companies translate their early e-business lessons into greater cost savings and ongoing competitive advantage. roi

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Copyright © 2001 IDG Communications, Inc.

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