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The Ultimate E-Nigma
No change represents as large a challenge to every chief executive officer (CEO) now and in the years to come as the Internet. Because of the intangibility of the Internet, it is difficult for most executives to "get their arms around it." They can't see it, they can't touch it, and they have no experience with it or anything like it. As a result, most executives have great difficulty assessing the impact the Internet will have on their businesses. It's an unknown, and unknowns can be unsettling. There are very good reasons for this malaise.
THE NEW ECONOMY
In 1999 close to 50 percent of the capital investments in this country were made for information technology, or IT, as it is referred to in the vernacular. This number is projected to increase 10 to 15 percent per year for the next several years. This represents an enormous shift in the country's resources away from the traditional investment in so-called bricks and mortar and to IT. This shift is creating what has become known as the new economy. We are swiftly becoming a "wired" economy which is moving rapidly from "bricks" to "clicks."
The cause of this increasing dependency on IT is the Internet. Here are some statistics that demonstrate the rapidly growing influence of the Internet on businesses and consumers. In the last five years, the dollar amount of transactions conducted on the Internet jumped from a negligible sum to over $1.3 trillion, and this number is projected to increase at a double-digit pace for several years. To date, 80 percent of these transactions are business-to-business (B2B) and only 20 percent are business-to-consumer (B2C). The B2C portion, however, is projected to increase significantly, as the following charts indicate.
LESSONS FROM THE PAST
Let's go back in time to 1885-1886, when the first automobile was introduced. Who then could have foreseen the advent of concepts such as car insurance, autobahns, parking lots, drive-in restaurants, banks and theaters, and laser-read toll systems? The answer is simple: Probably no one. The reason? These concepts were so foreign to most people's modus operandi that they had great difficulty adapting their thinking to accommodate them. In fact, people could hardly bring themselves to give the automobile a name. At first they called it a horseless carriage because it was the first carriage that did not need to be pulled by animals or humans The best they could do was name it an automobile, which literally means "self-moving," not a terribly mesmerizing description.
Now let's examine the year 2000 and the Internet, a concept as alien to today's executive as the horseless carriage was to the owner of the local buggy whip factory. Just as the automobile paralyzed the buggy whip factory owner from doing anything about the automobile because of its "alienness," the Internet is paralyzing today's CEO. And there are good reasons for this as well.
FROM LANDSCAPE TO SEASCAPE
Let's draw some mental pictures. Imagine a landscape with its profile of mountains, valleys, lakes, canyons, and volcanoes, all of which have been shaped by nature's forces-wind, rain, gases, and so on-in that environment. Now imagine a modern city sprouting on this landscape with a host of small, medium, and large buildings, all interconnected by a road and rail system. A business operates in a similar manner. It also has a profile consisting of products, customers, and markets which have been shaped by all the market forces-competitive, economic, political, technological-at work in this business arena or environment. Similar to a city sprouting from a landscape, what emerges from a "business arena" is a business model which is put into place to deploy the business strategy of an enterprise.
Furthermore, just as the natural terrain surrounding a city puts physical constraints on that city's activities, the business "terrain" in which a company finds itself imposes constraints on that company, and those constraints obviously vary from one geographic area to another.
THE TRADITIONAL BUSINESS MODEL UNDER SIEGE
Let's draw another picture. Imagine now that the sea level rose 50 feet around the globe. Most cities on the planet would be flooded to one degree or another, and the landscape would become a seascape.
The tallest buildings would no longer be connected by intricate and restrictive road and rail systems but could be served by an uncluttered and unrestricted flat, open surface water system. Each building could be reached from any other building at any time of the day, over water.
A DRAMATIC CHANGE IN THE RULES OF PLAY
In this new environment, landscape "business practices" are now irrelevant and need to change drastically to accommodate the new seascape environment. Consider the following changes:
- Speedboats can replace slow-moving trucks and trains.
- Tollbooths are useless on water.
Competitors who previously could challenge you only over land now can do so in a different manner, or you could be attacked by new, unpredictable pirate ships.
Among the rules the Internet has changed are the following:
- The traditional value chain has been disrupted.
- Assets may now be liabilities.
- Brand loyalty is no longer an advantage.
- Service may no longer be a differentiator.
- A captive market has been unshackled and given numerous options.
- A customer's switching costs have been reduced significantly.
- Information is virtually "free," thus spreading like a virus and making customers much more knowledgeable.
- Pricing matches minute-to-minute market conditions.
- On-line demand drives production.
And there have been many more changes. The message is that each rule change helps make the Internet an e-nigma. This new e-business model is conceptually alien to the executives of a business rooted in the traditional business model of bricks and mortar. Furthermore, the Internet has unshackled new competitors from the constraints of the traditional business model and introduced business practices that are also alien to these executives.
Traditional relationships between suppliers, producers, distributors, and customers have been turned upside down and inside out, and the new relationships are difficult to comprehend. In other words, the sandbox is getting more and more e-nigmatic.
DENIAL OR PARANOIA
The human being's instinctive reaction to something that is unfamiliar or unknown manifests itself in one of two modes: denial or paranoia. In our view, the CEO population is currently split 50/50.
Denial is also called the ostrich reaction: Put your head in the sand and hope the event passes by. Many CEOs are doing just that. They are avoiding the Internet, hoping that it will be another fad that will pass just like the many other management fads they have seen come and go.
Paranoia characterizes a person who sees ghosts all over the place. Therefore, let's do everything and anything we can think of.
THE INTERNET MIGRATION IS INESCAPABLE
The "flood" that today is putting in jeopardy the traditional business model actually started 30 years ago with the advent of IT systems in the back office, which then migrated to the front office and now has moved into over a billion homes in only a few years. It has been well documented that a new technology becomes "institutionalized" when it reaches a critical mass of 30 million consumers. One billion users is way past the critical mass required and well beyond the inflection point where a new technology starts to accelerate its impact on society. Nothing will stop this migration, and that means that denial will not solve the e-nigma.
Paranoia is not the solution either. The reason for this is simple. The Internet will not intrude on every part of your current business model, but it will infringe on many nooks and crannies of that model. To anticipate where those points of impact will be, one needs to understand the capabilities the Internet brings and how they will be used by your competitors and how they could be used by your company.
However, before attempting to understand the Internet and its various capabilities, one needs to understand the business strategy of the enterprise. Unless the business strategy is clear and unambiguous, it will be difficult to determine the role the Internet should play.
TWO KEY QUESTIONS
The advent of the Internet should cause two questions to make their way to the top of a CEO's list of priorities:
1. Is our business strategy Internet-ready?
2. Do we have a coherent Internet strategy that supports our business strategy?
The future of every company today rests with an affirmative answer to both questions. Unfortunately, experience indicates that very few companies could confidently answer yes to either of those questions, much less both. In fact, experience shows that most companies would answer no to the second question and no or, at best, maybe to the first.
Not only would most companies reply that their business strategy is not ready for the Internet, many executives would question whether there is a coherent business strategy in place at all. This occurs because many organizations suffer from a malaise we call "strategic fuzziness."