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March 1, 2000 *3,400 subscribers* Volume 2, Issue 3
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Moments in Transition
Ash Vasudevan
Manager, Strategic Alliances
This is a bridged version of CommerceNet Research Report # 000-04, February 2000

"Fortunes are won and lost in moments of transition, and the Internet is all about a moment of transition."

Tom Meredith, CFO Dell Corporation

The Internet is changing relationships in both B2B and B2C spaces in previously unimaginable ways, giving rise to new business models with exciting value propositions that will render existing business models obsolete. The new business revolution will not be constrained by geographical borders, and there are no signs that it will subside anytime soon. Here are some of the transitions presently emerging in the global competitive landscape:

Consolidation and Cooperation: Mergers and acquisitions are on the rise. Recent statistics indicate that the overall value of M&A activity increased from $200 billion in 1990 to $1.7 trillion in 1999, with Internet-related deals growing from $162 million in 1990 to an estimated $250 billion[1].This is certainly a time of major transition, one that is bound to permeate through both B2C and B2B markets. Incumbents trying to preserve the status quo had better watch out: the kid skating around the parking lot may be planning to acquire the company.

Clearly, firms are now in an environment of continuous discontinuity, facing multiple uncertainties on an ongoing basis. They face technological uncertainty (Which technology is likely to dominate the market?), demand uncertainty (How and when is consumption likely to change?) and competitive uncertainty (From whom and from where is our next competitive threat likely to emerge?). In this environment, firms must invest in alliances, because competition is no longer between one firm and another; it is between one constellation of firms and another. For instance, when Microsoft announced its intent to establish a small business portal, one alliance network of Winstar Communications and another of Excite@home promptly set up portals of their own. 

Cooperation has become an integral part of creating and building competitive advantage. As we enter the new millennium, global alliance networks spanning industries and even countries will aggregate in a natural response to emerging market opportunities, in order to gain greater leverage in the market.

Building relationship capital: Many aspects that differentiate companies today -- such as price or anytime access -- will inevitably become commodities amidst the intense competition of the global digital marketplace. Creating, building and sustaining competitive advantage will depend largely on the ability to offer customizable products and services that customers will value. Business models based on price will not survive; models based on relationships will. In the coming years, businesses will rise and fall like the tides, but firms like Amazon and AOL will endure because of the relationship capital they have amassed.

Emerging spaces and new rules: Firms in both B2B and B2C spaces must constantly reevaluate the sources of competitive advantage. They must clearly understand the current and emerging centers of wealth creation: technologies and business models that transform "the user experience as opposed to the user interface"[2].

Developments in wireless technologies will remove spatial constraints that now limit Internet transactions. Yankee Group predicts that this year the customer base of wireless communications will increase by 21% to 105 million. IGI Consulting Group reports that by 2005 there will be 830 million wireless Internet devices world-wide.

This trend will create profound changes in the way businesses delivers information and the way consumers receive it. One-to-one business models offering personalized decision environments will become standard. Net appliances capable of communicating with multiple platforms will be best positioned to exploit emerging business opportunities. But incremental improvements or even breakthrough technologies will not be enough; value propositions must provide significant upside potential for both investors and customers. Businesses must focus with laser-like intensity on exploiting current market opportunities while maintaining a broad vision of the possibilities for wealth creation that discontinuous market shifts allow.

Demographics and diversity: Global demographics are changing. By 2020, the median age of the population is expected to reach 50. Over 13 million adults over the age of 50 now have Internet access. At least 90% of senior citizens on the Internet have window-shopped online, and 78% of them have made an online purchase. The number of women online has increased by 32% since 1998.Korea already has 10 million Internet users, while the Chinese went from 2.1 million in 1998 to 8.9 million in 1999, a 324% increase. IDC estimates that the Latin American online market will generate $8.1 billion in revenues by 2004.

When changing demographics such as these intersect with new developments in information technologies, countless opportunities for generating wealth are created. Industries that are likely to benefit from these include financial services, recreation, and health care. Jupiter Communications estimates that the online health industry alone will grow to $10 billion by 2004.

Friction points: A friction point, much like friction in physics, is any entity (intermediary) that resists the flow of a transaction from its origin to its destination.

A common notion today is that as technology continues to improve, richer and better connections will reduce the need for intermediaries between buyers and sellers. Some pundits predict that this will ultimately lead to frictionless commerce. But exchanges between buyers and sellers are rarely direct and efficient. Instead, intermediates come and go, such that the relationship between buyer and seller may already be non-linear.

Even as some intermediaries are eliminated by establishment of one-to-one transactions between buyers and sellers, other intermediaries enter, trying to create new niches in the chain of activity, and introducing more friction points. In any B2C or B2B market, new intermediaries promise to deliver some specialized form of service, ostensibly enabling consumers to make better judgments. Intermediation naturally evolves around the intersection of ideas and information that were sparsely connected before. These spawn yet other communities of ties, resulting in the cross-pollination of ideas and information, which gives rise to more new solutions.

This process can often be disruptive. Consider Paypal (http://www/paypal.com), which came into the apparently saturated payment processing market with a simple, innovative and very attractive value proposition: settle person-to-person debts in seconds over any distance using credit cards and e-mail. The innovation lies in the apparently simple combining of two ubiquitous technologies to tap a huge market that is totally fragmented. This is clearly a case of intermediation that disintermediation was expected to eliminate.

Creating and/or eliminating friction points in the chain of activity offers the potential to create and/or destroy wealth. The real payoff comes in envisioning the next generation of friction points and building new communities, before the emergence of commoditization and disintermediation. But friction points are not fixed points on a strategic map; they are dynamic, not static. To identify them, we must ask questions like these:

  • Who owns the customer data, the customer interface, the physical access points to the customer?

  • Who creates and/or disseminates information?

  • What are the empty holes (sparsely connected networks) and how can a community be established around them?

  • Who and what carries the digital traffic?

  • Who will own product applications and services?

  • What platform will be integral to building a range of products and services? Who will own that platform?

  • Who and what are likely to profoundly impact the social, physical, and information architecture embedding the end-user?

  • Which business process is likely to be impacted by the disintermediation/reintermediation swing in your industry?

  • What is the impact of the friction points outside your immediate competitive space? Is it a weak signal indicating that a profound market shift is underway?

  • Where is your company relative to the changing friction points? From your perspective, is it a premonition of things to come, or an opportunity waiting to happen? 

The challenge for strategic planners is to identify and exploit the next generation of friction points before their competitors do.

Changing centers of wealth creation: On the asphalt highway, speed kills, but on the information superhighway, the opposite is true. Speed of action is critical to the survival of any firm. Because technology is evolving very rapidly, sustaining a competitive advantage in the transmission of information will be difficult. Where competitive advantage can persist is in identifying and exploiting friction points.

Just as brick-and-mortar retailers have focused on location as a friction point, e-tailers should focus on capturing spaces in the value chain that enable them to better exploit emerging trends. For instance, if your location lets you deliver a product or service faster and cheaper than your competitors can, you have a sustainable source of advantage.

A recent article in the San Jose Mercury News[3] describes new intermediaries intent on capturing the last mile from the warehouse to the doorstep. Offline shopping will not completely go away -- if anything, hybrid business models combining offline and online experience will emerge as winners. Amazon.com may be the dominant brand, but not just because it is an e-tailer -- it has combined online expertise with superb offline logistical capabilities in warehouse and delivery systems. As Mark Resch, COO of CommerceNet observes, "It is logistics, stupid."

A recent report in Business 2.0 further validates this trend. Just when you thought that offline retailers were being decimated by their online competitors, Gazoontite.com, Bluemercury.com, and GMBid.com have either built or bought major retail outlets[4], while Gateway Computers plans to build 300 more brick-and-mortar outlets.

Supply-centric to Demand-centric Models: Despite the reach of the Internet, we still hear of supply-centric business models with inadequate attention to the demand side. This highlights a core distinction between customers and firms: customers think in terms of activities, while firms think in terms of products.

Consider a grocer retailing through brick-and-mortar stores as well as over the Web. A firm-centric perspective would say that the retailer has two customer touch points, but a customer-centric perspective finds a far greater number. Beyond the retail store and the web-site, customers can also get information about the retailer from search engines, bulletin boards, chat rooms, research outlets, e-magazines, comparison shopping sites, etc. What we see depends on where and how we look.

The relationship between creating shareholder value and customer value is clear: provide customers the solutions, services and products they value. Watch for successful business models in both the B2B and B2C space that enable a realignment of the marketplace and market space. A realignment revolution is coming to your industry. If you miss it, you will fail. If you lead it, you will win. To get the lead, you need to trigger an earthquake in your competitive space that causes realignments, disintermediation and reintermediation, and radically improves the value proposition.

Ecological architecture of the wired home. We are witnessing the widespread diffusion of various technologies for the home. In the past, these technologies were demarcated by their level of interactivity. The microwave was a passive recipient of commands, the refrigerator was just a repository, while the telephone has always been interactive. The VCR, however, has impacted our viewing experience by removing time restrictions.

In the new ecological architecture of the homes of the future, devices will be interactive, and will be capable of communicating with each other and with technologies outside the home. Interoperability will need to be built into the core of every entity (biological or otherwise) so that computing and communications become ubiquitous and dramatically enhance the user's experience. This confluence of chaos, interactivity and connectivity, together with rapid innovation, will dramatically transform not only our means of communication, but our entire lives.

1 "A Marrying Kind of Year", San Jose Mercury News, January 31, 2000.

2 "Strategy and Business" Interview with John Seely Brown, 1999.

3 "High-Speed Internet Delivery", San Jose Mercury News, January 17, 2000.

4 Hodges, Jane, "Bricks for Branding", Business 2.0, February 2000, 95-98.

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