HOW TO LINK E-BUSINESS STRATEGY TO YOUR BUSINESS FUNCTIONS
Hamilton Consultants White Paper
June 28, 2000

Whatever may be said about the possible overvaluation of Internet stocks and the feasibility of Internet pure-plays, there can be little disagreement that the Internet has transformed the way most companies do all or some of their business. Its impact has been so powerful because it is not just a new sales channel, or a new tool for streamlining internal processes, or a sophisticated fulfillment system; it is all of the above and more. The possibilities of the technology have proven to be bounded only by the limits of how people can think to apply it.

Limitless possibilities are an exciting thing. They are also a dangerous thing. While the bloom is still somewhat on the rose, we continue to hear more about the billions being made on the Internet than the billions being lost. That may be changing, but huge sums of money continue to be thrown into e-business initiatives-some of them strategically sound, some of them not. The quest to gain the "first-mover" advantage and the fear of not getting left behind have driven many to make business decisions that have proven to be ill-advised.

While the value of being a first-mover and the danger of getting left behind are real, these and similar impulses should not drive a company's e-business strategy. Instead, strategy should be driven by an analysis of the marketing and operational needs and requirements that an Internet-based solution could serve. In short, the question should not be, "What can we do on the Web?" but rather should be "Where is the potential e-business leverage to our key business processes?"

As the first step in the process of answering this question, Hamilton segments various business processes into three groups of "links" or interactions.

These links represent a highly generalized, yet comprehensive view of the range of interactions experienced by a business. More importantly, they segment business activity into three areas of potential e-business initiatives. With this basic structure in mind, a company can proceed to identify specific activities within those links that offer the greatest opportunities for e-business applications. This white paper will discuss these links, some of the ways e-business could impact each link, and some of the benefits that could be derived from e-business in each area. The paper will also offer a few examples of successful-and in a few cases, potentially unsuccessful-applications of e-business based on this structure.

Supplier Links
Supplier-to-customer electronic links have existed for decades in the form of EDI over value-added networks (VANs). These one-to-one messaging and payment systems were both rigid and costly, but they were precursors for the coming "supply chain" applications of the Internet. The Internet has reduced the cost and increased the ubiquity of electronic transactions, but has also created opportunities for new types of transaction environments. Following the flourishing of auction and reverse-auction sites in the B2C and C2C environments, the B2B world has begun to embrace transaction models that extend beyond the one-to-one scenario. In fact, it is the many-to-many model (which does not exist in the consumer world) that has attracted the most attention.

In the many-to-many model, multiple suppliers and multiple purchasers participate in what has become known as an "electronic marketplace." Obviously, this model works best in an industry in which several buyers have a consistent need to purchase a fairly standardized set of commoditized goods. In addition to providing the buyer with the possibility of lower prices, electronic marketplaces also offer substantial opportunities to improve inventory management. Part of the concept behind these marketplaces is that they provide an environment to do more than just exchange money for goods. What they propose is a high degree of integration and information transfer between supplier and buyer. Under such a system, a buyer can check the status of an order in "real-time," and schedule production runs accordingly. Even further, a buyer can communicate production information to suppliers and actually work to schedule the suppliers' production to be timed accordingly. Thus, an electronic marketplace offers an opportunity to optimize supply chain management by reducing the cost of goods sold and reducing excess inventories.

For the past several months, it has been difficult to read business and IT publications without finding an article about the creation of a new electronic marketplace. Substantial attention is being paid to this concept across a wide range of industries including automotive, steel, electronics, convenience stores, and real estate management. Substantial attention is also being paid to these endeavors by investors: the dozen publicly-held e-marketplaces are valued at a total of $110 billion, with many more heading towards an IPO.

Most recently, two specific e-marketplace initiatives have received a lot of press: the Newco exchange formed from the merger of GM's TradeXchange and Ford's AutoXchange, and the first (probably of many) electronics-industry exchanges formed by twelve companies including Hewlett Packard and Compaq. It is instructive to look at these two efforts to understand the strategic issues-positive and negative-that they raise.

The automotive industry exchange has grown, in our estimation, out of a series of sound strategic decisions. The industry itself is perfectly suited to take advantage of the opportunities for increased efficiency that the e-marketplace represents. Ford and GM interact on a daily basis with thousands of suppliers delivering an enormous range of fairly standardized products. Ford alone has some 30,000 suppliers with whom it does $80 billion in business annually. Moreover the production and delivery of the products by the suppliers represents a major constraint in automakers' own production process. Increasing the efficiency of the supply chain, then, could lead to substantial cost savings. On its own exchange, Ford had planned to foster a vigorous and quick exchange of information "about demand forecasts, design requirements, and production schedules." The result could be "inventory reduction across the chain" and a 10%-20% savings for the automakers, according to Ford and Oracle forecasts. GM, prior to the merger, was planning on handling all procurement through the exchange by 2001. As a result, they were looking to cut purchase order costs from $100 per order to $10. Additionally, by linking up suppliers with inventory information, plant production schedules, and even data on sales trends from GM dealerships, GM hopes to electronically execute the entire process through delivery of the automobile by 2003. The result, according to Goldman, Sachs & Co., could be a cost savings of $3,700 on every car.

The merger of the two exchanges into one mega-marketplace should also be seen as a good strategic move. One of the primary concerns currently being expressed about the boom in e-marketplaces is that they require a critical mass of suppliers and buyers to function. As a result, it is difficult to foresee multiple exchanges flourishing within a single industry. Moreover, industry-wide systems integration promises significantly more operational efficiency opportunities than would two or more competing marketplaces. On the other hand, the merger also highlights a nagging concern about the fundamental feasibility of e-marketplaces: to what extent will buyers and suppliers be willing to share information in a competitive environment?

Similar opportunities and concerns exist for the participants in the electronic industry e-marketplace led by HP and Compaq. However, there is some question as to whether this initiative (and a similar effort led by IBM) is being driven by thoughtful strategic analysis or by the lure of the e-business bandwagon. We believe that in many cases, it is the latter. Even some analysts agree "that companies are just jumping into the fray" in order "to meet [Wall Street] expectations and grab a piece of what's expected to be a huge e-business market."

In the case of the electronics industry, additional factors lend even more support to the concern that there is a "spend first, plan later" mentality driving these companies' actions. Unlike the automotive industry, where the primary buying criterion for the vast majority of products being purchased by the auto manufacturers is price, in the electronics industry, other factors are equally important and may even take precedence. Makers of computer chips, for example, tend to compete not on cost alone, but rather on technological quality and quality of service. Consequently, "systems companies [won't] want to change their chip suppliers from day to day just based on price." A price-driven marketplace could lead to quality and reliability problems down the road.

There is, of course, enormous additional opportunity at considerably less risk for those companies that provide the technological means for suppliers and buyers to interact. A Hamilton client has found such a niche not in the B2B world but in the business-to-government environment.

Like other "hot trends" in e-business, the electronic marketplace is surely destined to burn brightly for a short time, consume substantial amounts of capital, and ultimately settle into being a profitable e-business strategy for a few survivors. Undoubtedly, those survivors will be the ones for whom the initiative actually meshed with a business strategy. For those that fail, the effort will represent a substantial loss of resources. Perhaps this loss is part of the "new economy." We, however, believe that it is a loss that could and should be avoided.

Internal Links
The business activities that can be thought of as Internal Links call for a liberal definition of "e-business." In our view, such a definition is appropriate for three reasons:

• Internal Link activities require technological and capital resources that could otherwise be applied to the two other areas.
• These activities can generate cost savings in their own right.
• These activities indirectly impact the bottom-line through improved sales force efficiency, and improved billing and fulfillment.

The fundamental initiative for almost any Internal Link "e-business" activity is an intranet (although that is changing now with the explosive growth of ASPs). A company's intranet can provide a framework for the exchange of timely product or marketing information, the sharing of important customer data, the processing of billing and fulfillment requests, or for the delivery of training.

The results of these efforts can be lower operating costs and lower capital requirements, but they can also produce benefits like better customer service, better equipped sales forces, and more efficient order processing and fulfillment. These latter benefits are difficult to capture in traditional ROI analyses, but can be significant nevertheless.

A few years ago, "intranet" was a real buzzword, and a great number of medium and large companies decided they needed one. In a survey of almost 1000 business with over 500 employees conducted in Spring, 1997, 85% indicated that they would be deploying some form of intranet within twelve months. As with other electronic initiatives, however, those companies that have found the intranet to be of substantial value are the ones that developed applications that actually were designed to respond to a specific business need.

At AT&T Global Services, for example, the sales force was frustrated over their inability to get timely information that they could use in meetings with current and potential customers. The solution to this was the creation of IKE (Information and Knowledge Exchange), an intranet that provides product and industry information. IKE was originally intended to serve around 4,000 salespeople. As of early 1999, the application was being used by more than 14,000.

Previously, sales reps had trouble getting the information they needed to develop strong client relationships because the database search capabilities were too limited-queries did not allow for much flexibility. With IKE, information can be obtained in a variety of ways. A more associative search interface makes obtaining information a much more intuitive process. Also, news articles about selected client companies can be "pushed" to sales reps via e-mail. As a result, reps can better position themselves as "strategic" salespeople because the industry and client information they receive keeps them up-to-date and credible. They can take a much more consultative approach to selling by initiating contact with prospective customers through conversations about how new developments could impact their business.

The initial cost of the $1.8 million implementation of the intranet was paid back within a year as a result of the shutting down of legacy systems. The $500,000 ongoing annual maintenance costs are balanced by "an estimated ten to twenty percent efficiency gain." To put it in simple terms, IKE allows the sales people to focus exclusively on selling. By arming them with the best information available in a timely manner, the sales rep gets to sink or swim on his/her own sales ability-which is the way a good sales person should want it.

Another way companies are using their intranets is as a delivery mechanism for distance learning. The benefits of online versus classroom-based training are fairly obvious: savings in time and money as a result of the elimination of travel to and from training sessions, which at least on expert believes can be as much as 50% in time and cost.

Moreover, for companies in rapidly changing high-tech industries, it is vital to be able to constantly update and refresh knowledge. A leading technology-based company client of Hamilton's makes extensive use of online resources to provide just-in-time information to reps, as well as to deliver actual training. Their intranet provides detailed information on all of the company's hundreds of products for businesses. Additionally, it is where reps can find information such as data on which buildings are "lit" with fiber, reports that can help them qualify prospects, and order placement and tracking forms and applications.

Currently, the delivery of training is of two kinds: CBT (computer-based training), and interactive distance learning. In the former, sales personnel take self-paced, Web-based "courses," usually introducing and/or reviewing a specific product or service. At the end of each course is a test that attempts to assess the extent the user's learning. The online courses are tailored for specific levels of knowledge and experience. Reps are able to view the recommended curriculum for their level.

Interactive distance learning is conducted through NetMeetings, and is currently limited to training on order and billing applications. According to a sales training manager, interactive online training "works best when the training involves making actual keystrokes." Participants in the session can interact in "real-time" with a trainer who can offer demonstrations and respond to questions. The training session therefore simulates the actual process of filling out the electronic form, while eliminating the time and expense of trainer travel. Under these circumstances, the online simulation may even be a more effective delivery system than classroom-based training, since the trainer can monitor all the participants at the same time. While there currently is no information on the ROI for these activities, the company believes that these training options are indispensable. There is absolutely no thought of not providing this kind of training; it is simply part of the cost of doing business in a technology-driven industry.

Many other companies share this attitude towards their intranet investments. In the case of a Hamilton client in the oilfield services industry, an intranet-based application was developed as a way to "work smarter" through the automatic integration of information. The application allows project managers and engineers in the field to develop solutions in "real time" by creating a "virtual office" where graphically rendered data can be uploaded and immediately examined by the whole project team, comments can be added, and alerts can be automatically sent out to set in motion the next stage of the project. The application not only allows the company to work more efficiently, but it gives them a competitive advantage as well. Because the information integration happens in "real time," recommendations can be presented in a fraction of the time it used to take. On a simpler level, many other businesses obtain similar operational efficiencies through the ability to share and analyze graphically intensive information like CAD-CAM documents in engineering, and product designs in manufacturing and the high-tech industry.

All intranet applications, of course, are not for all companies. A relative lack of concern about precise ROI calculations is a direct result of the confidence that the intranet applications being deployed are strategically important to the company. This confidence can be attributed to the fact that the applications were designed to meet a specific need-providing vital information to sales reps, timely and efficient training to support a high-tech product line, and the immediate integration of complex information. Without a strategic or organizational goal as the driving force behind any such implementation, the effort is destined to fail. The failure won't be a "crash and burn" as is seen in the other two areas of e-business, but rather will be a withering from disuse. The costs, however, would not be minimal. The cost of maintaining an intranet can run two to five times the initial deployment cost within three years.

Customer Links
Customer Links are often the most visible and exciting applications of e-business, but they can also be the most disastrous if poorly conceived. As we have seen, Supplier Link and Internal Link activities offer substantial opportunities for cost savings, improved effectiveness of internal operations, and even, indirectly, some opportunities for revenue growth. Done poorly, without the foundation of a sound strategy, these activities can also lead to severely wasteful expenditures. Thus far, however, none of the activities in these two areas can touch the highs and the lows of playing in the area of Customer Links.

The numbers that testify to the risks (both positive and negative) of customer-focused e-business have been reviewed so many times that they now seem like ancient history: Amazon.com's $1.64 billion in total revenue in 1999 and a $17+ billion market capitalization, and Cisco's $37 million in daily online sales, on the one hand; and on the other, Amazon's $720 million in net loss in 1999, much-hyped clothing retailer Boo.com's meteoric collapse despite $135 million in venture capital financing. These, of course, are merely the extremes. Many billions of dollars have been gained and lost by companies of all shapes and sizes. In the months to come, we are certain to see more of the same.

The concept of "Customer Links," however, comprises much more than just online transactions between a seller and a customer. Companies, for example, can also interact with their customers by providing product and service information and customer service online. In fact, much attention has been paid recently to the importance of the latter activity as online companies focus on developing stronger relationships with their customers.

The fundamental strategy behind customer link activities is to make it easier to do business. This is the case even for Internet pure-plays, whose very existence is predicated on the greater convenience they offer compared to their brick-and-mortar forebears. The early online sellers made it easier to do business simply because they offered a quick way to buy without having to leave the office/house and without having to wait on hold on the telephone, as was the case with some mail catalog buying, for example.

Now, however, companies have made it easier to do business with them across a whole range of activities-pre-sale, sale, and post-sale. As mentioned above, customers can access significant amounts of information about product and services, whenever it is most convenient to do so. A company can also improve the buying process itself by personalizing or at least highly simplifying the customers' shopping experience. Following the sale, customers can track orders electronically in "real time." And throughout the process, companies can provide online customer service support in a variety of ways. If the overarching strategy of these activities is to "make it easier to do business," the basic goal is to develop more loyal and more profitable customers.

Two interesting examples, John Hancock Insurance and Nordstrom Department Stores, have deployed customer link initiatives to accomplish this goal. The fact we are focusing on companies that are brick-and-mortar institutions is deliberate. Similar, or even more dramatic initiatives have been implemented by "virtual" Web-based companies. Hancock and Nordstrom are interesting because they face the challenge that all successful business created before 1995 are dealing with-how to use the internet effectively as an adjunct to existing customer acquisition and retention efforts. Both of these companies have, like the successful companies discussed in previous sections, developed these initiatives out of specific business needs. They developed an understanding of what would make their customers more loyal and profitable and implemented activities that would achieve this goal.

John Hancock Mutual Life Insurance Company operates in an industry that has only now begun to explore customer-focused e-business. A few years ago in their long-term care insurance (LTC) business, they saw an opportunity to use the Internet in a way that could respond directly to the high-maintenance needs of their biggest customers. The cornerstone of Hancock's strategy to win and develop lasting relationships with these customers has always been active account management. In 1997, Hancock added a significant feather to its cap by winning an LTC contract with Harvard University. Because Harvard was so attractive a customer, John Hancock sought out ways to solidify their relationship and avoid losing the account they had fought so hard to win.

The result of the desire to "lock in" Harvard as a long-term customer was the development of a John Hancock extranet specifically for university employees. The extranet site is essentially a "private" section of the Hancock Web site; Harvard employees are accessing a John Hancock site, but are made very aware of exclusivity through the prominent display of the Harvard logo. At the site, employees can "search for specific information on the Harvard account, get rate quotes, and download application forms." In this way, the extranet was particularly applicable to the LTC situation. Prior to the development of the site, Hancock would have provided information about the LTC account through mail newsletters, and enrollment kits. With the extranet, however, the company could provide detailed information about a complex product, present important updates to the account, and supply the basic information and paperwork mentioned above-all in one, easy-to-access location.

The site was a quick success. Soon after it appeared, Hancock was getting "more online hits than calls [from Harvard employees] to [their] customer toll-free line." Moreover, employees seemed to be getting substantially more out of the experience than they would have from a phone call: when they "logged on, they stayed on for an average of forty-five minutes." The site allowed them to "get the type of information they wanted, when they wanted it, in the format they preferred."

From an account management perspective, though, the fact that the site was so popular and useful was only half the story. By creating a tool that was immediately embraced by Harvard's employees, Hancock created an enormous barrier to any other company stealing away the account. In effect, Hancock made it so that a company would essentially have to promise to create their own Harvard extranet in order to be taken seriously. Moreover, they positioned themselves as the kind of LTC provider that can deliver these kinds of valuable, customized services to their most important customers.

Compared to the dollars and sense of revenue generated from the sale of a book or a CD, the value of this extranet relative to its (substantial) cost is difficult to quantify. Harvard may have remained with Hancock for many years even with "normal" account management. Given the size of the account and the sound strategy that lay behind the initiative, however, developing the extranet was clearly a solid business decision.

At Nordstrom, the customer-focused e-business initiative was more straightforward and, at least initially, less strategic: Get online. The "ascension" in 1995 of six second and third generation Nordstrom executives in their mid-30s brought an awareness of the opportunities of e-business and desire to move the company forward technologically. The company firmly believed, however, that in order for Nordstrom's online arm to flourish, it had to carry on the hallmarks of the brick-and-mortar institution-a comfortable shopping experience and legendary customer service.

The vision for the site was a "hybrid of catalog and store sales." The fact that it would offer the catalog's efficiency of shopping remotely is fairly obvious. The key to the success of the endeavor, however, was that Nordstrom aimed to combine that efficiency with a highly interactive, responsive online environment that was meant to evoke the salesperson/customer relationship experience at the store.

On one level, the "layout" of the site was designed to mirror that of the stores. Merchandise was organized into "On the job" and "Off the clock" sections that echoed the "lifestyle sections" of the actual stores and both shopping venues offered segregation by gender. Likewise, the ability to "drill down" into merchandise categories and/or search for specific products mimics the in-store experience of walking to, for example, women's shoes, or asking a sales person how to find a specific item. Finally, when Nordstrom.com spawned Nordstromshoes.com, the new product-specific site offered the option of "shopping" in manufacturer "boutiques" for the brand-conscious buyer.

The online site went beyond the real-world, however, in its ability to offer visitors a "personalized" shopping experience. Registered users can save their shipping information as well as the names, addresses, favorite colors, clothing and shoe sizes of people to whom they regularly send gifts. Information entered about important birthdays and other events can trigger e-mail reminders to shop for gifts. Registered users also have access to their complete order history and to the status of pending orders. The shopping experience is further optimized through complex inventory management that, for example, removes items from the Web catalog before they are in danger of going out of stock, and monitors shopping and buying patterns. Finally, the Nordstrom tradition of exceptional customer service was carried to the Web by eliminating one of the biggest headaches of shopping online: all online purchases were allowed to be returned to any real Nordstrom store.

Other online retailers are moving even further in online customer service by working to meet the remote shopper's constant desire to "talk to a real person." Some sites, such as Shopnow.com, an online superstore and e-business enabler, have implemented real-time text chat to respond to online customer queries. Some, including Shopnow, are moving towards developing Internet telephony capabilities that would enable an online customer to talk directly to a customer service rep without having to disconnect from his/her modem.

Conclusion
As we look back over the examples discussed above and review our own project work, we see the makings of a blueprint for e-business success. The blueprint is built upon one of the most basic tenets of management: identify gaps and resolve them using the most applicable business solution. In terms of e-business, this model has two important ramifications. The first is that a business needs to begin the development of an e-business initiative not by "deciding to do e-business," but by analyzing its own strengths and weaknesses. The second is that the business also needs to understand how to craft practical business solutions out of the ever expanding range of possible e-business activities. Truly successful e-business activities-ones that are "win/win" in terms of revenues and costs-emerge out of these two analytical processes.

Supplier-focused e-business initiatives become "win/win" when they both improve supplier service and lower the cost of doing business with suppliers. Improvements in supplier service can lead to increased revenue by decreasing cycle time and increasing output or by facilitating more efficient just-in-time manufacturing, for example. The cost of doing business with suppliers can be lowered either through lower prices dictated by a more competitive marketplace environment, or through more efficient fulfillment systems.

Internal-link initiatives, like supplier-link activities, will not generate revenue themselves, but can lead to revenue growth opportunities. "Win/win" scenarios are therefore those that increase internal efficiencies related to revenue generation and reduce the cost of support systems. Online training and better and timelier information dissemination, for instance, can lead to a more efficient and effective sales force that is able to produce more and bigger sales. These initiatives to positively impact sales are likely to lower support costs as well. Online training and the electronic dissemination of marketing information should reduce or even eliminate travel costs for training, and the cost of researching, printing, and distributing paper-based information.

Customer-link activities obviously focus on revenue generation, but successful e-business applications in this area will not be defined by sales alone. A "win/win" approach will focus on increasing profit-i.e., more revenue and lower costs-by attracting the right customers, keeping them loyal, and reducing the cost to serve them. Customer extranets lock in loyalty by demonstrating a commitment to customers and raising the barriers to switching. While initial costs may be high, long-term profitability is increased through retention and through a dramatic reduction in the cost of disseminating information. In a similar fashion, web-based customer service does not directly impact revenue, but when done right, it can provide a competitive differentiator that will keep customers loyal and could reduce costs as well.

We believe that the future of most businesses depends on taking advantage of the opportunities offered by e-business. This requires decisive action. Analysis paralysis can cost a company dearly if it has to play catch-up to gain back market share from a first mover. We also believe, however, that right now there are too many companies trying to take quick advantage of too broad a range of opportunities. Moving too slow or moving too fast lie at the extremes of a range of activity. In between those extremes lies efficient, thoughtful analysis, strategic decision making, and success.

1. Robert d. Hof, “A Bloodbath,” Business Week E-Biz (April 3, 2000), 138.
2. Alorie Gilbert, “Exchanges Get Into Gear-Ford and General Motors Are Preparing to Open E-Commerce Marketplaces, Brining New Questions-and Opportunities,” Information Week 760 (November 8, 1999).
3. Ibid.
4. Others dispute the $3,700 figure, but acknowledge that the savings could be “significant.” Julia King, “GM Retools for E-Commerce that Goes Well Beyond Cars,” Computerworld 34 (April 17, 2000), 17.
5. Margaret Quan and Charles J. Murray, “Online Exchanges Face Uncertain Road to Web Heaven,” EETimes 1112 (May 8, 2000).
6. Ibid.
7. Sage Research, Inc., Intranet Trends: Second Wave. A White Paper prepared for CMP Media, Inc., Enterprise Consulting Group (1997), 1.
8. All information about this case comes from: Jay Winchester, “They Like Ike,” Sales and Marketing Management Magazine 151 (January 1999), 72.
9. Diane Rezendes Khirallah, “A New Way to Learn?” Information Week 787 (May 22, 2000), 22.
10. Ibid.
11. All information about this initiative comes from Mary E. Boone, “The Extranet Effect,” Sales and Marketing Management 149 (October 1997), 40.
12. All information about this initiative comes from David Hadala, “From Retail to E-tail,” Sm@rt Reseller (February 2, 2000).
    
    
    
    
    

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