Place to Space: Migrating to eBusiness Modelsby Peter Weill, Michael Vitale
Place to Space is the essential e-business playbook that will give leaders the insight and confidence they need to operate successfully in both place and space. The book explains how traditional companies can adapt their bricks-and-mortar legacies to complement and bolster their online ventures. Based on extensive research into dozens of e-business/i>
Place to Space is the essential e-business playbook that will give leaders the insight and confidence they need to operate successfully in both place and space. The book explains how traditional companies can adapt their bricks-and-mortar legacies to complement and bolster their online ventures. Based on extensive research into dozens of e-business initiatives, this book provides the first systematic, practical analysis of eight viable e-business models; an adaptable hybrid model for competing against online pure plays; and revolutionary schematic tools for analyzing current business models and evaluating promising new web initiatives. Through illuminating case studies of Lonely Planet, General Electric, CDNow, Reuters, and others, the authors show how each model works in practicefrom how it makes money to the core competencies and critical factors required to implement it.
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Read an Excerpt
AN E-BUSINESS revolution is taking place today. Much of the focus by the media, Wall Street, and business authors has been on radical new business models being simultaneously developed and market tested by highly publicized start-up firms. However, existing businesses will do much of the really hard work and make most of the profits in this revolution. E-business will require existing businesses to migrate from place to space. Not all parts of the business will migratesome will stay behind, continuing to make profits in the "Old World" and funding the "New World" initiatives. This migration includes making challenging leadership decisions about which e-business models will succeed and how they will integrate with current channels to the customer. Many of the assets (e.g., brand, cash, relationships, market share) of successful place-based businesses will serve equally well in space, but some liabilities are painfully apparent (e.g., lack of e-savvy leadership, corporate cultures resistant to change, reward systems incompatible with e-business, potential channel conflict, nonintegrated information technology infrastructures). This book focuses on the key challenges facing successful established businesses migrating from their traditional marketplace business models to a combination of place and space.
The look was unmistakable, combining fear, greed, and power under threat. The look appeared on the face of the chief operating officer (COO) of a large bank as we neared the end of a three-day facilitation with thirty senior managers to determine the bank's retail e-business model for the next three years. The group included both young executives, who had typically been with the bank for less than five years, and a handful of senior bank officers, including the COO and the head of retail banking. The group had recently returned from a daylong breakout session, where small groups created their vision of the future e-business model. The first group had just presented a compelling and visionary description of a full-service provider business model (see chapter 5) for the financial services industry. In this model the bank owns the relationship with the customer and knows more about that customer than any other player in the financial services industry. Via customers' personalized Web pages, the bank offers a full range of financial services including both the bank's own products and a wide range of products provided by other firms, including insurance, stock trading, mutual funds, financial advice, and funds management. The bank captures and keeps customer information and transaction histories in a central database used to identify product and service offerings relevant to individual customer segments. When a customer need is identified, the bank offers the customer a range of prescreened products from approved providers via a personal banker or personal Web pages.
The group brought its proposed e-business model to life with an example. A couple applying for a mortgage from the bank is offered insurance from three competing providers. The details of the three policies are compared in a table on the couple's personal bank Web page, which includes independent third-party rating agency assessments of each policy's attributes. The couple chooses an insurance policy from Delta Mutual and electronically reads and authorizes the insurance application form. Delta issues the insurance application automatically, since the couple's Web site is populated with only preapproved policies. Even though the couple chooses and clicks on Delta Mutual in the table, they complete the insurance application while still remaining within the bank's Web site. Most of the data fields in the Delta Mutual form were completed automatically from the bank's database, requiring the couple only to check and authorize the details. On completion of the application process, the couple's personal page on the bank's Web site summarizes their total financial relationship with the bank, including the new insurance policy, their investment portfolio categorized by asset class, cash position, and stock watch list.
In this business model, the bank owns the relationship with the customer as well as the data and the transaction related to their mortgage. The bank facilitates and then records details of the transaction to select and purchase an insurance policy. The bank stores data about this transaction and all other transactions made by the couple in the bank database, increasing the level of customer intimacy. The Delta Mutual insurance company owns the insurance transaction with the couple and the data relating only to that transaction. The insurance company does not own the relationship with the couple, and the bank provided only the minimum data necessary to complete the transaction, thus preserving the bank's ownership of the customer relationship.
Spontaneous applause erupted at the end of the presentation, followed by a highly animated discussion and question session. The small group had already thought of many of the issues raised, but some additional challenges were identified and solved by the executives, who grew increasingly excited by the business model. At this point the COO stood up and we saw "the look." The COO praised the new business model and the creativity of the group but then said the idea was not implementable. To succeed the bank would have to launch an autonomous business unit with a completely different human and technical infrastructure operating in a very different culture. The COO said that creating this new business model within the current organization was doomed to failure "since we would eat our own young." The COO said the bank's existing leadership, organizational form, skills, information technology (IT) infrastructure, and, most important, reward systems would prevent the success of the new model. The idea was killed.
The COO puzzled and disturbed us as facilitators. We thought the new business model was inspired and worth the development of a detailed business case or even a pilot. The new business model offered the bank the opportunity to evolve from its traditional high-cost "bricks-and-mortar" business model to an innovative "clicks-and-mortar" model combining physical and Internet distribution. Certainly, the new model would cannibalize parts of the existing business, but it would be the bank's own new business model, not a competitor's, that would quickly capture the bank's existing business. The new model offered a strong value proposition to particular customer segments as well as potential growth and innovation. The economics were also compelling, as the typical bricks-and-mortar models were operating at cost-to-income ratios of between 50 percent and 60 percent, whereas the group estimated 35 percent for this clicks-and-mortar model.
More importantly, the new e-business model placed the bank in potentially the most powerful position in the evolving financial services industry. Owning the three customer assets highlighted in the proposed business model for the bank brings different types of leverage. Owning the customer relationship brings the leverage of influence. The customer looks to the relationship holder for trust, recommendations, and tailored advice. Owning the customer data brings the leverage of insight, as the firm has detailed information about the history and needs or likes of the customer. Owning the customer transaction generates the leverage of customer revenue from fees for service. The power of the proposed e-business model is profound in a future where the fees for financial transactions are steadily reducing and revenue will come from assets under management or the services implicit in owning the relationship.
The look on the face of that COO motivated us to write this book. We have seen that look on the faces of many good managers. The book is targeted at the senior managers of existing, successful businesses under threat from e-business and required to respond and lead. The book provides an analytical tool set for managers thinking through potential e-business models. Gone are the days when organizations could afford to have lengthy planning cycles resulting in large documents and detailed plans. E-business allowsindeed requiresfirms to run experiments to determine quickly if a strategy is successful. If the market response is positive, firms need to seamlessly transform that strategic experiment into an integrated and industrial-strength product offering, and they must behave as if they intended the experiment as a major strategic thrust!
Defining e-business is like searching the Internet: You often don't get it all and the landscape changes day by day. For us, e-business means doing business electronically by completing business processes over open networks, thereby substituting information for physical business process. This definition is broad, encompassing business-to-business (B2B), business-to-consumer (B2C), and consumer-to-consumer (C2C) interactions. Our working definition of e-business is:
Marketing, buying, selling, delivering, servicing, and paying for products, services, and information across (nonproprietary) networks linking an enterprise and its prospects, customers, agents, suppliers, competitors, allies, and complementors.
The essence of our definition is the conduct of business and business processes over computer networks based on nonproprietary standards. The Internet is the exemplar of a nonproprietary network used today for e-business. Given its low cost and universal access, the Internet will be the major infrastructure for the foreseeable future. However, new access technologies already on the horizon (e.g., use of wireless application protocol from mobile telephones) will supplement the Internet, and who knows what will follow. Whatever the technology, the essence of e-business is completing business processes over easily accessible computer networks that will all become nonproprietary over time. The business conducted may or may not include payment, but it is inherently commercial in its nature. We differentiate information that is not paid for from products that are paid for and may be digital (e.g., music, research). For example, e-business includes free information-seeking activities, such as "window-shopping" using an online shopping robot, that often precede a transaction that is later completed offline.
E-business will move businesses from place to space. The familiar tools of the marketplacecash, checks, paper documents, storefronts, and face-to-face meetingswill be less important. Growing in importance will be the marketspace, where information in all its forms becomes digital and the cost of replicating and distributing this information will approach zero. The digital economy will be a knowledge economy, in which a firm's value chain is electronically interconnected. Firms will have a number of electronic allies who help to promote, sell, find, distribute, integrate, and generally increase the demand for the firm's products and services.
E-business must often integrate with traditional commerce. For example, electronic channels to the customer in the bank's full-service provider model will include proprietary automatic teller machine (ATM) networks and interactive voice response (IVR) phone-banking systems. IVR, ATMs, and the existing systems in bank branches are fundamental to the bank's business model and raise significant challenges for the bank to integrate IT applications and customer data across multiple infrastructures and channels.
In an e-business world, small companies can act like large companies, potentially able to reach many customers across geographies and time zones. Large companies can act like small companies and personalize the customer experience through better use of richer information. E-business will continue to significantly reduce the transaction costs of sellers, and thus it will increase the penetration of the seller's message into the market. At the same time e-business reduces dissemination costs by automating transactions. Conversely, customers can more easily compare prices and features from a number of sellers, challenging sellers to meaningfully differentiate their products. Trust and branding will become more important. The first industries to be fundamentally altered by e-business may be banking, education, retail, travel, and stock-broking, but no industry will remain unaffected.
Motivations for Existing Businesses to Evolve
The senior management of the bank was motivated to hold their e-business strategizing session by three trends: growth of the e-economy, rise (and perhaps fall) of the dot-coms, and a handful of exemplar success stories about existing businesses evolving to an e-business model. Assuming our readers are similarly bombarded and familiar with these three motivations, we briefly summarize the key points (with references for further reading in the notes), leading to a discussion of why the migration is so difficult. We then introduce our atomic e-business model framework to assist firms such as the bank to determine their new e-business models.
Huge Growth in E-Business
The growth of e-business has already been staggering, and this growth is just an indicator of things to come. Now that half of the American population has Internet access, and access in other parts of the world is growing at exponential rates, one of the building blocks of e-businesswidespread accessis becoming a reality. The rapid growth of e-business is partly due to the Internet and its open nonproprietary communications protocol (TCP/IP) and partly due to the development of the World Wide Web (commonly known as "the Web"), which has adopted a standard method of representing information (hypertext markup language, or HTML).
How Big Is the E-Business Economy?
There are many estimates of the size of e-business. The Organization for Economic Co-operation and Development (OECD) predicts U.S.$330 billion in e-business in 2001-2, and U.S.$1 trillion in 2003-5. These estimates are speculative, but if the 2003-5 forecast is achieved, e-business will be equivalent to 15 percent of the total retail sales of the seven OECD countries. Figures from the IDC (www.idc.com) put Internet commerce at $218 billion in 2000, growing to $774 billion in 2002. The IDC concludes that including both the Internet IT infrastructure and Internet business infrastructure (e.g., marketing and content management) triples the figures to over $600 billion in 2000.
From this and other recent survey data, we draw some interesting and challenging conclusions:
Approximately half of the revenues of the e-business economy are attributed to investment in Internet protocol infrastructure and applications to enable e-business, rather than actual e-business.
The Internet economy is already significant in terms of both jobs and revenues. Large firms account for much of the activity in terms of revenue generated, investment in e-business infrastructure, and employment.
Although much attention has been paid to disintermediationfirms bypassing intermediaries or agents to go directly to the consumerintermediaries (see chapter 7) account for around 20 percent of e-business revenues. Indeed, some of the most innovative business models are intermediaries such as intelligent search agents (e.g., the intelligent search agent www.jango.excite.com) and specialist agents (e.g., www.insweb.coma free service that helps you shop for insurance).
Most of the attention has been on B2C e-business, but most of the dollars are in B2B e-business.
Internet commerce is already significant, as it accounts for approximately one-third of the total revenue of the Internet economy. However, two-thirds of the dollars in the Internet economy are spent on technology plus the intermediary foundation to enable e-business. This large proportion of spending on infrastructure is not sustainable, but it is typical of new technology waves in which, historically, spending on infrastructure precedes revenue generation but eventually pays off handsomely. In the short term this significant investment in infrastructure reduces profitability but gives the promise of a huge payoff.
The growth of e-business is just beginning, and the major infrastructure investments are now being made. Once more of the infrastructure is in place, e-business applications will grow exponentially.
Ninety percent of Fortune 500 firms have Web sites, but only 5 percent of those sites make profits today. This will change and more profits will be made as e-business infrastructures mature. Even if profits (or even sales) don't eventuate, firms will need to provide Web sites to enable customers to learn about features and to compare their products and services with those of others. Failing to have an attractive, informative, up-to-date Web site will place a firm at a disadvantage, since customers compare products either directly or via intermediaries such as shopping agents (see chapter 7).
Growth in Dot-Coms
Much of the recent media excitement, attention, and share price speculation has focused on the dot-coms, which we define as startup companies that operate predominantly in space, often pioneering and market testing new business models. Some of these business models are new (e.g., intelligent search agents), whereas others have operated in the traditional place but are much more attractive and effective in space (e.g., online auctions). The following list is made up of some well-known examples, which we will discuss later in the book, of publicly held firms experimenting with these new e-business models. The numbers in parentheses are the market capitalization increases from the initial public offering (IPO) to valuations as of May 2000.
E*TRADE (www.etrade.com), a direct-to-customer model (6,124 percent)
eBay (www.ebay.com), an online auction intermediary (34,333 percent)
Yahoo! (www.yahoo.com), a portal intermediary (228,667 percent)
Preview Travel (www.previewtravel.com), a comparison shopping-agent intermediary (2,133 percent)
iVillage (www.ivillage.com), a women's network and virtual community (267 percent)
Amazon (www.amazon.com), a hybrid direct to customer, intermediary, virtual community, and content provider (35,600 percent)
Reuters (www.reuters.com), a traditional financial information firm evolved to become an exemplar of a content provider. Reuters announced they would become an Internet company on February 8, 2000, and its share price increased by 55 percent within a month of the announcement.
There are many theories about whether these astronomical stock market valuations were justified; their descriptions range from "irrational exuberance" to "black magic." We believe that, as in any investment booms, valuations are based on expectations of growth, which will eventually translate into earnings. More modest price-to-earnings ratios now exist for most of these firms. The current rates of growth in revenues of these firms, admittedly off small bases, lead investors to expect continued revenue growth of 100 percent or more per year. The dilemma and frustration for traditional firms, some of which deliver very respectable increases in revenues and earnings each year, is that their share prices are flat or even declining. This frustration is a powerful motivating force for traditional firms to migrate their business models to e-business.
A small number of existing firms operating profitably in place have evolved to e-business success stories. Here are some of our favorite motivational spectacular success stories and why they are important:
Dell Computer Corporation's online sales increased from $7 million a day in 1997 (12 percent of revenues) to $40 million a day in early 2000 (about 50 percent of total revenues). Dell (www.dell.com) was simultaneously able to reduce the cost of sales and deliver more tailored customer service via their more than thirty thousand Premier Pages for corporate clients. Dell is an exemplar of the direct-to-customer business model (chapter 4), which bypasses the distributor and retailer and establishes a direct relationship with the customer.
Ernst & Young (www.ey.com), an eighty-five-thousand-person global consulting firm operating in thirty-two countries, introduced Ernie, an online business consultant. Ernie provides answers by experts to client questions electronically within two days, and it offers unlimited access to a database of previously asked questions and problem-solving tools, including the Ernie Software Selection Advisor. To deliver good answers Ernie uses a template to help users frame good questions. We don't expect products like Ernie to replace face-to-face consulting for major issues. However, for many smaller but still important questions (e.g., questions about the termination entitlements of an employee), online consulting is very convenient for the client and frees the consulting partner to focus on higher-leverage work. To succeed, leadership and investment are required to identify, codify, and digitize knowledge, as well as to change decades of consulting status quo.
Cisco (www.cisco.com), often described as the "poster child of the Internet," designs and sells the "plumbing" of the Internet, including a wide range of routers, devices that direct the flow of traffic on the Internet. Cisco has developed a very profitable and innovative e-business model, combining aspects of the direct-to-customer, content provider, and value net integrator business models (see chapters 4, 11, and 10, respectively). We discuss Cisco in detail in chapter 10.
Quicken is transforming into a financial services intermediary via their "one-stop shop" Web site www.quicken.com, which offers the more than twelve million users of Intuit's financial management software access to insurance products, share trading, mortgages, and other financial products. With 80 percent market share in the personal finance software market, Quicken has a unique opportunity to become a financial services marketplace, growing its revenue stream from fees, commissions, and advertising.
You can do your bit for the search for extraterrestrial intelligence (SETI) at home. More than 2.5 million personal computer (PC) users participate in the search by running a program that downloads and analyzes radio telescope data when they are not using the machine (http://setiathome.ssl.berkeley.edu). Although not really an e-business model, SETI at home illustrates the power and potential of virtual communities and the potential of distributed and real-time e-business models.
These examples describe new business models that have the potential to change the way business is conducted in a number of industries. We will explore these examples in more detail later in the book.
The Second Wave of E-Business
The powerful force of these factors has motivated existing and profitable place-based firms to marshal huge efforts to migrate to e-businesses. We are about to enter the second wave of e-business, which will have three important characteristics:
1. The difficulty to build and sustain a profitable dot-com business will be reflected in more realistic (i.e., lower) stock market valuations. We expect to see one or two dot-coms gain success in each major business sector, and the rest struggle to survive.
2. Existing firms that are evolving to an e-business model by combining the best of place and space will do much of the hard work and make most of the profits. These firms will seriously challenge dot-coms by providing their services not only more cheaply and at a higher quality but also in a manner that is integrated with their place-based channels.
3. The artificial distinctions between B2B, B2C, and C2C will disappear. Most viable e-business models will have a combination of business and household customers integrated in the same model, each representing different customer segments that require different value propositions.
The migration and evolution from place to space is a struggle for most traditional business, and the struggle will continue into the second wave.
Traditional Businesses Are Struggling
Many traditional and profitable businesses are struggling to respond to the threats and opportunities of e-business. The threats are played out not only in stock market valuations, but also in the marketspace, where dot-coms without the heavy investment in physical infrastructure can cherry pick profitable niches in which to compete. Traditional firms face a number of difficulties in responding:
Culture and leadership. Most large traditional firms are successful and profitable, and they achieved their success via strong leadership and cultures suited to their industry. E-business threatens this status quo in traditional firms. The leaders are often ill-prepared to make major strategic commitments to e-business and are reluctant to take the initiative, preferring to wait and see. In firms such as the bank described earlier, the prevailing culture actively works against new initiatives that threaten the status quo. Senior management must shape the e-business vision and the employees and the culture they create must implement the models. In many places throughout the book we will refer to the importance of leadership and culture without discussing the detailsthat topic deserves a separate bookbut in chapter 13 we provide our top ten e-business leadership principles as a starting place.
Channel conflict. Potential channel conflicts exist between the new e-business channels and traditional channels, often including intermediaries. Recently one of Australia's largest retailers, Harvey Norman, announced that it would forgo A$100 million of revenue and no longer sell Compaq computers in response to Compaq's decision to sell their computers direct to the consumer via the Internet and Compaq retail outlets. Harris Technologies, an online retailer owned by Australia's largest retailer, Coles Myer, also announced that it would no longer carry Compaq products.
Cost reduction. Many traditional firms struggle to capitalize on the lower costs available via e-business. A recent BoozAllen & Hamilton study found that the cost per transaction for banks by channel was (in order of decreasing cost):
point of sale: $0.42-$0.24, and
While the economics of e-business are compelling for a bank, many customer segments prefer a branch or a call center with a human voice. In Australia, more than 500 bank branches have closed in the last year, with 1,131 closed in the last five years. Over the same five-year period, the number of ATMs has tripled. The public and media have criticized the major Australian banks for these wholesale closures of bank branches, particularly in country towns. By contrast, in the United States, although the number of banks has steadily fallen since the 1980s, the number of branches has risen consistently at about 2 percent per year. American banks are responding to customer sentiment in some segments. For customers selecting a new bank, the location and availability of branchesregardless of the frequency of usestill are significant criteria. In response, banks are seeking more effective ways to use their branches for high-value transactions and cross-selling.
Skills shortage. The skills necessary for e-business initiatives are in short supply and high demand. Traditional firms struggle to offer compensation packages that compete with the huge potential upside of stock options for employees of dot-coms. Managers of the firms that support our research and attend our executive education programs used to complain that their young people often leave potentially successful career paths in traditional firms for the learning experience, excitement, and stock options found at dot-coms.
Infrastructure. The IT infrastructure requirements for e-business are stretching the capabilities of many firms' IT portfolios. Many traditional firms are struggling with B2B e-business implementation that may require integrating their recently installed and expensive enterprise resource planning systems (ERPs) with their Web sites and those of ally firms. Difficulties include incompatible technical platforms, security, data reliability, and accessibility. The compressed time frames of the e-business world compound these challenges by creating pressure to deliver IT applications in weeks rather than months or years. Firms wishing to compete via e-business must invest in IT infrastructure, which accounts for more than 50 percent of the average firm's IT budget year after year. The promise of "less infrastructure investment after this big investment" never seems to eventuate!
In summary, many traditional businesses lack the physical and IT infrastructure, skill sets, culture, and incentive schemes that are required for e-business initiatives. In addition, these businesses have customer segments that want to do business in traditional ways.
William Thiele, vice president of the General Reinsurance Corporation, sums up the challenges perceived by traditional firms as follows:
Internally the benefits are clear: it has speeded up our business tremendously; we're now effectively open twenty-four hours a day. People work from multiple locations in a collaborative environment.... Externally, this is both a challenge and an opportunity. We've been in business a long time; we have substantial investment in bricks and mortar. Our business model has emphasized face-to-face contact, personal relationships and direct marketing. We can easily envision someone setting up shop in Dublin or Honolulu or wherever they want to, accessing all of our customers without going through the trouble we have. And if anyone else can do that ... we have to do it faster and better.
Some firms, such as the Bank of Montreal, have responded by establishing an autonomous e-business business unit (www.bmo.com/ banking) with a different brand, infrastructure, and pricing structure to appeal to the e-business-ready segment of their customers, as well as to attract new customers. The number of BMO direct-banking clients increased 48 percent in 1999 to one million. Other firms have begun e-business initiatives under their existing brands, and many are still searching for a profitable business model. For example, more than twenty-seven hundred U.S. newspapers post an edition online, but they are generally struggling to find a profitable business model. Many users of the Internet expect free content, so charging a subscription fee is problematic. Newspapers seek ways to migrate their successful place business models, based on subscriptions, general advertising, and classified advertising, to space. The online versions of newspapers and classified advertisements with sophisticated search capabilities provide a strong value proposition. How can they generate sustainable revenues evolving to e-business?
Traditional businesses have to respond to e-business opportunities and threats. Most businesses that operate wholly in place today will need to operate in both place and space tomorrow. The speed of the migration will be determined by the boldness of their competitors, as well as by their own vision and courage. During the process of migration, a traditional business will consider and experiment with a portfolio of potential e-business initiatives. We have developed a series of frameworks to assist this process of migration, which are illustrated by the Lonely Planet case study, the first of twelve case studies of firms evolving to e-business models.
LONELY PLANET PUBLICATIONS: Traveling from Place to Space, Part 1
Lonely Planet, one of Australia's best-known entrepreneurial firms, has pioneered the provision of travel guides for the independent traveler (www.lonelyplanet.com.au). Lonely Planet initially targeted their travel guides to cash-poor backpackers and has adapted the guides to appeal to all travelers seeking an independent travel experience. The Lonely Planet case study illustrates the dilemmas facing many successful firms, particularly those in the information business, as they migrate to e-business. How should Lonely Planet migrate its business to the marketspace? How should Lonely Planet work with its traditional channels (retail bookstores) in the future? What changes should Lonely Planet make in the way it collects information, writes travel guides, and electronically stores its vast library of text, maps, photos, and images?
Lonely Planet Publications began in the early 1970s after U.K.-born founders Tony and Maureen Wheeler completed an overland journey from London through Asia and on to Australia. Recently married, they went globetrotting to get traveling out of their systems before settling into "real-world" jobs. After arriving in Australia, so many other travelers approached the Wheelers with questions about their trip that they decided to publish a book.
Written at their kitchen table and collated, trimmed, and stapled by hand, that book, Across Asia on the Cheap, became the first Lonely Planet guidebook and an instant best-seller. The Wheelers' eighteen months of traveling in Southeast Asia resulted in their second book, South-East Asia on a Shoestring, one of the most popular guidebooks ever written.
By early 2000 nearly four hundred Lonely Planet employees work in offices in Melbourne, London, Paris, and Oakland, CA, with a crew of experienced freelance authors traveling and writing around the globe. The headquarters staff includes seventy-five cartographers who produce and maintain the numerous maps unique to the company's guidebooks. Lonely Planet publishes more than five hundred titles, including guidebooks, phrase books, walking guides, city guides, cuisine guides, and other travel-related books, and it has expanded its product line to include maps and travel videos as well. Within the travel publishing industry, Lonely Planet dominates the Australian market, leads the market in the United Kingdom, and ranks third in the United States. While its market shares in Asia and Europe are smaller, growth prospects are high. The Lonely Planet brand is well known worldwide and is viewed by the Wheelers and management as one of the company's most important assets.
To manage the many opportunities for expanding its range of books, Lonely Planet developed a process for determining the viability of a proposed new title or series. Initial ideas originated from authors, staff, senior management, publishers, or readers, and they were tested by polling marketing staff, assessing reader and author feedback, and analyzing sales history. The top forty or fifty ideas were then reviewed individually, with a benchmark of 50 percent gross profit required for a title to proceed. This benchmark was varied for projects that shared costs with other products or had strategic significance. Generally, Lonely Planet produced about twenty new titles per year.
Lonely Planet publications targeted travelers going to far-flung destinations, and they were written in a slightly irreverent style. As the company grew, Lonely Planet widened its coverage to include most parts of the globe and to cater to a wider spectrum of readers. Lonely Planet publications aimed to provide guidebook options for independent travelers of all types, including backpackers, ex-backpackers who still liked to travel to unusual places but now had more money to spend, and time-poor, cash-rich travelers who appreciated Lonely Planet's style and attention to detail. Regardless of the target market segment, Lonely Planet guides contained numerous drawings and color photographs as well as maps and text. Lonely Planet accepted no advertisements, and it stressed that its writers did not accept discounts or payment in exchange for positive coverage. As the founder and principal author of Lonely Planet Publications, Tony Wheeler's advice was sought by independent traveler publications all over the world. The New York Times Magazine called him "the trailblazing patron saint of the world's backpackers and adventure travelers." Travel & Leisure's twenty-fifth anniversary issue named Tony as one of the people who changed the way the world travels.
Lonely Planet products were sold primarily by bookstores and electronic retailers worldwide, and via the Lonely Planet Web site. This award-winning Web site received nearly three million hits a day, by more than two million different people a month, often from people who were already traveling. Lonely Planet's global revenues in 2000 were nearly A$65 million, maintaining a 20 percent per year growth throughout the decade. Revenues included third-party royalty payments from portals and online travel sites, such as Travelocity. The additional exposure gained from licensing arrangements with these powerful Web presences appeared to have doubled traffic to Lonely Planet's own Web site.
Privately held Lonely Planet did not disclose profit figures, but the company was doing well enough to attract a significant investment from well-known Australian advertising magnate John Singleton. Singleton, who said he paid "plenty" for the 12.8 percent stake he purchased in late July 1999, called Lonely Planet "the world's largest single influence on tourism." The remainder of the company stayed in the hands of the Wheelers and employees.
Lonely Planet generally updated its printed guidebooks every two to three years. Between editions, travelers could access instant online updates for some Lonely Planet guidebooks via the company's Web site. Containing important information and changes gathered since the most recent printed edition of a book, these upgrades were available at no charge to enhance the quality of existing Lonely Planet guidebooks. Upgrades were just one feature of the Lonely Planet Web site, the hub for a virtual community of travelers with an active bulletin board called Thorn Tree. Thorn Tree attracted around fifteen hundred postings per day from travelers sharing or requesting information. Lonely Planet's headquarters staff in Melbourne included a team dedicated to reading both these postings and electronic mail sent to the company. The teams briefed company management on emerging trends in travel and identified updates for guidebooks.
Rob Flynn, the electronic publishing manager of Lonely Planet, believed customers desired personalized travel guides, perhaps including hotel and travel bookings. "In terms of a brand new business, we think it's enormous, and it can't exist outside the electronic world. We have a huge database on places to eat, places to stay, maps, photos, and attractions in every town in the world, and up till now, people haven't been able to make a selective choice," Flynn said. Flynn regarded "reinventing the travel guide" as the next big business opportunity created by the Internet. Lonely Planet had not yet developed a formal process for evaluating proposed e-business initiatives. Steve Hibbard, the company's chief executive officer (CEO), noted that as the CEO he focused on overseeing the creation and implementation of these initiatives, often requiring cooperation from many groups across the organization to succeed.
Lonely Planet, a very successful book publisher in the marketplace, illustrates many of the issues facing traditional businesses today as they consider migrating to the marketspace. For example, Lonely Planet has a large number of products, most of which are distributed via intermediaries through multiple channels to multiple customer segments. Lonely Planet's key assets include a loyal customer base, a well-known brand, motivated and highly qualified writers and editorial staff, a can-do culture with an irreverent style, and a significant amount of intellectual capital. How should Lonely Planet proceed with e-business?
We will discuss the critical issues for Lonely Planet several times in the book. In chapter 12, we will continue the Lonely Planet case study by describing their recent electronic initiatives. We will use our business model schematics to analyze Lonely Planet's challenges in migrating to an e-business model. To assist firms such as Lonely Planet strategizing about e-business, we introduce our notion of atomic e-business models.
What People are Saying About This
Steven Hibbard, CEO, Lonely Planet Publications
Dr. John J. Sviokla, Vice Chairman, DiamondCluster International, Inc.
Erik Brynjolfsson, Codirector of the Center for eBusiness, MIT
Peter Keen, author of From .Com to .Profit and The E-Process Edge
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Trully, this book will give you complete insigth into the world of (e)business - (new) economy. Ideas and implementation of today's business are shown clearly and distinctly, so that everyone in different areas of global business network can indentify problems within its firm, set it and solve it, eficiently and efectivly.