The Web is changing the way firms do business. From a consumer behavior standpoint, we have seen mounting evidence of consumer readiness for electronic commerce (e-commerce). Rising numbers of consumers and businesses are equipped with PCs and Internet access, poised to bypass paper transactions in favor of electronic information interchange. In the past four years alone, the proportion of households owning PCs equipped with modems rose from 12 percent to 30 percent, and the ratio is projected to rise to 47 percent by the year 2000. Consumers are migrating to electronic space for payments. In 1990, consumers used checks for 86 percent of household payments, compared to 79 percent today. Similarly, 4 percent of payments in 1990 were by electronic debit, compared to 9 percent today.
There is still a great deal of debate over the value of e-commerce. Looking at the same market data, experts have disagreed strongly about its impact. Some see exponential growth in the sale of goods over the Internet continuing. Eventually, they expect e-commerce will become the standard for a substantial portion of commerce. Others argue that, in absolute terms, e-commerce represents a tiny fraction of all commerce. They see immature applications and an unsophisticated customer base. They predict that e-commerce is at best a limited application with questionable long-term value.
Which "experts" are right? E-commerce projection is fraught with uncertainties. No one can truly predict the path that e-commerce will take. While the fundamental laws of economics have not changed, the economics of the physical world must be reassessed in the bits-based electronic commerce world. The web browser was the fundamental innovation that opened the door to the PC to the masses and enabled the early growth of e-commerce. The emergence of webcapable appliances is likely to displace the requirement of PC-based access and has a high potential to push the next major wave of e-commerce innovations. The demographic imbalances on web usage are clearly tilted towards the under 50 crowd. Nonetheless, the most rapidly growing demographic group on the Internet currently is retirees.
In spite of upbeat predictions for consumer-driven e-commerce, business readiness far exceeds that of the consumer (see Alice Rivlin's comments on "The Federal Reserve's Roles in the Payments System" at http://www.bog.frb.fed.us/boarddocs/speeches/19980928.htm). A growing readiness for e-commerce is apparent in the business community, with the largest change in the small business community. In 1995, 41 percent of small business treasury personnel were equipped with a PC and a modem, and just 2 percent were using the equipment for online banking functions. In 1997, 60 percent were equipped with a computer and modem and 18 percent were either using online banking functions or plan to this year. A report from the National Association of Purchasing Management noted that 93 percent of purchasing managers had Internet access at the end of 1997 and another 5 percent plan to get it soon. Business-to-business currently accounts for 80 percent of e-commerce. The OECD estimates that e-commerce reached $26 billion in 1998 and will rise to $1 trillion by 2005.
Business-to-business applications dominate e-commerce today. Supply chain management tools dominate business e-commerce applications. Product information delivery, payment terms, and instructions are sent electronically. This interface can be highly integrated into each party's operations. When a product is purchased off the shelf, a retailer can reorder new inventory automatically as it is scanned at the checkout. The supplier then can deliver daily with whatever is required by the customer. In turn, the supplier can readily model parts inventory for itself so that it holds as little finished goods as possible, and so on down the value chain.
Supply chain management has changed the complexion of industry. Retailers and wholesalers, such as Wal Mart and Baxter Healthcare, have eliminated a large portion of inventory carrying costs. An electronic interface enables a very close relationship with the customer. It is often difficult to see where Wal Mart ends and the vendor begins. Both the customer and the vendor share the risk and responsibility of distribution and lowering costs. They also share the cost benefits.
Intelysis Electronic Commerce, LLC, a provider of Internet-based procurement solutions, recently announced that Ford Motor Company will deploy Intelysis solutions across its $16 billion budget for nonproduction goods. Ford will become the largest company to leverage the Web to streamline its entire global purchasing process, from business cards to staffing services.
Why would Ford consider adopting such a wholesale change to its purchasing model? There are many compelling economic reasons:
1. The Web-based infrastructure provides Ford with a low cost, streamlined spending method that reduces waste, paperwork, time and labor.
2. The process introduces "just in time" resource inputs and thereby reduces the overall cost of the supply chain.
3. Finally, Ford is able more effectively to couple the purchasing transaction with the information about that purchase. This results in more meaningful analytical tools for managing vendors, pricing and purchasing behavior. Ford can leverage its market power as purchasing decisions become less ad hoc and more controlled.
Before the Web, only companies that could afford expensive supply chain management mainframe systems and software applications were able to convert the paper purchasing process into a digital process. Today, Internet-based applications provide the same information value as the traditional mainframe model in a scaleable and relatively inexpensive package. Small companies can act like Ford using a PC and the web browser.
The Web is clearly taking a large chunk of cost out of the value chains of many industries. It is also adding a great deal of value. By coupling the information about transactions with the transaction itself, companies can manage their purchasing and distribution with a greater impact on operations than ever before.
What does this mean in the overall scheme of electronic commerce? It means that the economic incentives for manufacturers, wholesalers and retailers to adopt e-commerce are very strong. As new means of cost reduction are enabled by web technology, companies will naturally adopt them for economic advantage. Eliminating costs on a scale that has just now become possible creates dramatic economic impact on a global scale.
There is an interesting new way to track innovation on both the business-business and business-consumer e-commerce using a web-based tool. Check out http://patents.uspto.gov/index.html, the United States Patent and Trademark Office official patent database site. The site offers a web browser-based search utility. Users can use a number of different search algorithms. For example, entering "Microsoft" into the Advance Search Page generates a whopping 1075 hits (yes, Microsoft is throwing billions into R&D) limiting the search to just 1997-98. The "hits" are ranked chronologically or by "relevance" (if you have entered subject matter content). The latest entry, "Method and system for correcting misrecognized spoken words or phrases," was dated October 28, 1998.
In the last issue I complained that WWW stood for "world wide wait" and indicated that a solution, a new cable modem through the local cable company, was imminent. It was not, but stay tuned. WWW still stands for wait, but hopefully not for too much longer.
Daniel Friel is with the Enterprise Commerce Strategies Division within the Strategic Technology Group of NationsBank, Charlotte, NC. His e-mail address is email@example.com. The author wishes to thank Joanna Flanagan of Bank of America for her special help in preparing this column and also John Sviokla of Diamond Technology Partners for his helpful observations.…