Academic journal article The McKinsey Quarterly

Electronic Commerce (Finally) Comes of Age

Academic journal article The McKinsey Quarterly

Electronic Commerce (Finally) Comes of Age

Article excerpt

Independent developments have accelerated the pace of on-line transactions

One thing is clear: brokers and existing vendor - supplier relationships are vulnerable

You could be too if you don't understand the economics of the electronic marketplace

A new breed of intermediary is taking advantage of the economics of information. One of them may already be at work in your market, insinuated between you and your customers.

New entrants such as Industry. Net, IBEX, and Auto-By-Tel are using electronic networks to jump into the value chain in markets from software to industrial goods. The Internet's World Wide Web, along with the many private networks now emerging, allows these intermediaries to match buyers with sellers and deliver products and services at much lower cost and asset intensity than would be possible within a physical value chain.

Opportunities for buyers, sellers, and new intermediaries to create value in electronic channels are by no means limited to start-ups. Established companies are also moving to capitalize on the economic benefits and marketing reach of e-commerce technologies. Banks are moving to shift their customers to electronic channels - and cross-marketing related financial services such as brokerage and travel along the way. Retailers including Wal-Mart and Kmart have announced on-line sales programs. Some of these shifts are being driven by the entrance of new intermediaries; others are designed to discourage new entrants.

These moves indicate that electronic commerce - defined as the electronic exchange of information, goods, services, and payments (Exhibit 1) - has finally come of age.

Companies still mulling over technological issues - like how to establish a web site - and wondering when or if to include electronic commerce in their plans, may be missing opportunities or threats that are now emerging. Just about any industry is a fertile field for benefits to be captured or for new intermediaries to take hold. More than opportunity cost is involved: for established players in such industries as financial services, electronics (including software), publishing, industrial goods, entertainment, healthcare, and retailing, electronic commerce holds the potential to place revenue streams at risk.

In payment systems alone, a portion of the $33 billion in transaction revenues may be up for grabs as payments are transferred from the physical to the electronic value chain. We estimate that for every percentage point shift to electronic payments, anywhere from $50 million to $300 million in payments revenues, could be captured by payments processors companies that may or may not be the existing financial institutions who currently capture those revenues and the related spread and float income.

Established players of all stripes are often at a distinct disadvantage when it comes to competing on these new terms. Their existing products, culture, business practices, channels, and customers can all militate against seizing new opportunities particularly if these involve cannibalizing current revenue streams. But they can compete in electronic commerce provided they have a solid understanding of what it is, how new intermediaries are using it to reduce costs and to grow revenues, and what structural changes will arise as their industry migrates from the physical to the electronic value chain.

Exhibit 1

E-commerce applications

Business-to-business services      Business-to-consumer services

Traditional E-commerce             Messaging services

* EDI and EFT                      * E-mail
* Messaging/E-mail                 * Fax
* Fax

Online information services,       Online information services,
eg Lexis-Nexis                     eg America Online, CompuServe

Electronic marketplaces/           Electronic marketplaces/
transactions, eg Industry.Net,     transactions, eg Internet home
electronic malls                   shopping

E-commerce comes of age

Electronic commerce used to be the preserve of large companies that could afford to build or lease the necessary proprietary networks. …

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