For the past year, readers of the business press have been bombarded by stories of failure in the Internet world. Much of the focus has been on the demise of dot-coms — a sector of the New Economy that in 2000 accounted for less than 10% of all Internet-generated revenue.
The gloom and doom emanating from the fall of the dot-coms has partly obscured the efforts by many traditional companies to incorporate the Internet into their activities. Some of these companies have made impressive strides, but many have suffered from the lack of reliable guides along the road to e-business transformation. The executives attempting to lead such change have all too often had to make do with half-baked ideas that made great promises but proved to be missing key ingredients.
To help remedy that situation, we have developed an operational model of e-business value creation that is backed by substantial research. We have tested the model, which is rooted in what is known as information-technology business-value research, by gathering data from more than 1,000 small, midsize and large companies in a variety of sectors.1 (See “About the Research.”) The model’s premise, one that is borne out by the data in our study, is deceptively simple: that the achievement of e-business operational excellence will lead to improved financial performance. The central task for senior managers, then, lies in understanding what drives operational excellence in the e-business realm — and then committing the necessary resources to the development of the drivers.
A tour of the eight drivers we have identified will help managers carry out this important work. Companies that incorporate these tools into their day-to-day activities can reap the opportunities, still largely untapped, presented by the existence of the Internet. Before we get to the tour, however, we will briefly lay out the central components of e-business operational excellence.
Measuring Up to Operational Excellence
Managers should assess a company’s operations by looking at both traditional and e-business measures. Most companies have a handle on the former; they routinely keep track of figures on inventory turnover, order-to-delivery cycle time, mistakes in order fulfillment and so on. Many companies, however, are less focused on tracking e-business measures, including the percentage of an organization’s total business that has been transacted online, the percentage of goods purchased online from suppliers, the number of existing customers doing business online, the number of new customers acquired online, and the percentage of customer-service requests handled online.
In our research, companies that scored high on those measures also enjoyed significant increases in revenue per employee, gross profit margin, return on assets and return on investment. (See “The Bottom Line on Operational Excellence.”) We also found, however, that many more small companies (defined as businesses with less than $10 million in annual revenue) were taking advantage of the Internet’s capabilities than larger organizations. That’s not really surprising, of course: Smaller companies face fewer problems with systems integration and have the flexibility needed to make rapid changes. But it does point to the level of opportunity still awaiting large companies to increase online revenue and procurement, and to rethink the way they acquire and serve customers.
Companies that receive a high percentage of their dollars through Internet sales are likely to be leaner than if they relied only on traditional channels. As more revenue flows in directly, for example, they can reduce the size of their sales staff. They can also shift tasks to the customer — such as gathering information about products, entering orders and tracking shipments — that were formerly handled by employees. Such efficiencies can have a major impact on a company’s fiscal health; witness Northwest Airlines, which saves 80% on processing costs when customers buy tickets online.2 Most large companies in our study have a long way to go to increase the percentage of revenue obtained online; on average, they took in only 7% online, and the median value was 1%. (The comparable figures for small companies in our research were 40% and 25%.)
To be successful with e-business operations, it is not enough to earn revenues online. Companies must also seek to reduce their cost of goods sold by obtaining products they need through the Internet. The benefits of online procurement can include lower prices (through participation in exchanges), tighter coordination with suppliers, fewer problems with stock-outs, a smoother production schedule, and the improved likelihood of carrying out just-in-time operations.
Online procurement goes on behind the scenes and is difficult to implement, but it may be the most important element of e-business operational excellence for large corporations. Because big companies cannot necessarily double their customer base simply by going online, they must seek to maintain competitive advantage in part by managing extremely complex supply chains. The impact of online supply-chain management is already being felt. According to many industry analysts, the Big Three auto companies may expect to save between $2,000 and $3,000 per $19,000 vehicle by rationalizing the supply chain through their collaborative exchange, Covisint.3 In addition, General Electric Co. expects to deliver 10 cents per share in savings in 2001 thanks to online procurement and related initiatives,4 and Office Depot has increased its inventory turnover from four to six times from 1996 to early 2001.5
The Internet’s reach makes it possible for traditional companies to find new customers without being constrained by geography or the size of the customer and without having to break the bank on marketing expenses. Texas Instruments, for instance, has used the Web to reach out to small consumer-electronics companies, a segment that it could not have served profitably in the past.6 Wells Fargo issued $600 million in online home-equity loans in 2000 in areas of the country where it had no branches.7 About 65% of The Wall Street Journal’s initial online customers were people who did not subscribe to the print edition.8
For companies that have pulled out all the stops to acquire new business through existing channels, these examples show how the Internet can open up virgin territory.
Acquiring new customers through the Internet has proved to be extraordinarily expensive for many companies. Startups, of course, have had to start from scratch, but established companies have the less daunting job of getting existing customers to do business online —in such cases, some measure of trust is already in place. Smart organizations work to transfer these relationships online and to strengthen them by providing superior service. FTD, for example, sells flowers online to 83% of its total customer base, but such figures aren’t the norm.9 On average, only 15% (with a median of 3%) of the existing customers of large companies in our study conducted business online.
Many companies talk the talk about customer service; few walk the walk. The Internet has great potential to bring actions into line with words. A well-run site would provide customers with much of the information they need; it would also guarantee speedy responses to questions. Companies would save money on what has always been a labor-intensive function.
As in other areas of operational excellence, Cisco Systems and Dell Computer Corp. lead online customer-service efforts. Their Web sites offer comprehensive repositories of information, online communities in which people help one another, and interactive features that allow customers to help themselves.10 Most companies, however, have not undertaken the major technology and process initiatives required to emulate those sites. Online customer service remains an area of untapped potential.
The companies in our study that enjoyed significant improvements in financial performance had much higher percentages of online revenue, procurement, new-customer acquisition and so on than those that did not. Most large companies, however, are still only slowly working to incorporate the Internet into all their activities. They will be able to move with more assurance once they properly understand what drives e-business operational excellence.
The Drivers of E-Business
In trying to bring about e-business transformation, companies have generally focused too much of their attention on technology. But systems do not work in a vacuum, and senior managers must recognize the complementary nature of technology, business processes and e-business readiness throughout the value chain.11 By taking a more holistic view, managers can turn those facets of a company’s operations into the drivers of e-business excellence. The drivers we identified in our study encompass three areas: e-business processes for customers and suppliers; IT applications for customers, suppliers and internal operations (all of which must be integrated); and the e-business readiness of customers and suppliers.
For the purposes of our model, when we talk about processes we have in mind the processing of information from customers and suppliers and the execution of tasks related to that information. The information received from a customer usually comes in the form of a request or a complaint. The first step in getting e-business processes right is providing the customer with a single point of contact, either through the Web site or through contact with one, and only one, representative of the company (a sales rep or customer-service rep, for example). Equally important, internal processes should be coordinated so that a customer request that is filtered through the contact point results in immediate assistance. Visitors to the site who have to spend too much time hunting for the right contact will eventually give up in frustration.
The response to the customer request must be offered as quickly as possible. Managers must make sure that processes are in place so that information flows smoothly to a source that can respond to the customer. In our study, we found that many companies have, in fact, streamlined customer-related processes: 75% provide a one-stop contact point, and 81% resolve customer complaints with only a few steps that are hidden from the customer.
Once the company has finished helping the customer, the second crucial step is to make sure the information gleaned during the interaction gets used. In other words, customer feedback must be quickly incorporated into processes — such as those for design, manufacturing and quality assurance — for immediate action. Too many large companies have no formal processes in place to modify products or services in response to customer feedback; they often let such information languish for several months before taking any action. GE’s appliance division, however, has a customer-answer center that routes feedback to managers in marketing, dealer relationship, customer service, manufacturing and new-product development. Such feedback is used, among other things, to identify problems that require immediate resolution.12
The Internet provides new opportunities for companies to develop relationships with suppliers as well as customers. The key, again, is the exchange of information. Of course, neither buyers nor suppliers will share sensitive information in real time unless an atmosphere of trust prevails. Companies need to put a set of strategic process changes in place to create an environment of mutual trust.
The processes for sharing information with suppliers need to cover a broad range, including the type of information, the level of precision required, the frequency and channels of exchange, and the format and security of the data. If processes to settle such issues do not exist, the technology that enables information sharing will not serve its intended purpose. Unfortunately, few companies in our study have developed effective ways of sharing information through the Internet. For instance, only 27% share demand and product-roadmap information with suppliers; only 33% have information-exchange policies with suppliers.
Consider one type of information that can have an important impact on manufacturing: knowledge about product quality. Although few companies have created the processes that would let them monitor quality at the source of supply, Cisco is an exception. It has installed software and test equipment at its manufacturing and supplier sites that provide real-time information on all aspects of manufacturing and logistics; thus Cisco is able, for example, to monitor defect rates of products coming from suppliers.13 Similarly, buyers also need to provide information to their suppliers —customer feedback, for example — so that they can refine their manufacturing processes.
The processes needed to fully develop mutually beneficial relationships with suppliers are myriad — consider the importance of developing the right supplier-selection criteria and of establishing metrics to evaluate partners — and few large organizations have made much progress in this area. Senior managers who ask the right questions, however can make great strides in a relatively short span of time.(See “The E-Business Drivers Checklist.”)
The E-Business Drivers Checklist
IT Applications: Customer Orientation
An effective e-business operation provides Web-site visitors with detailed information. The site should contain a comprehensive FAQ (frequently asked questions) section, as well as details about products that are tailored to the specific customer on the basis of past or current orders. In addition, the site must allow visitors to carry out a variety of transactions. Customers must be able to submit, customize, modify and track orders; to pay online; and to receive automatic notifications about the status of orders.
We found that many companies are failing to exploit the opportunities they have to interact with customers. For example, 66% of the businesses in our study do not have the ability to allow personalized content; 72% have not set up online forums or virtual communities; and 48% have Web sites that lack an FAQ section on products or services. Danzas AEI, a $7.5 billion freight-forwarding and logistics company based in Basel, Switzerland, is an example of a company that has figured out how providing online information to customers can be a strategic differentiating factor. Danzas provides its customers with timely and detailed information on materials, inventory, logistics and supply-chain management.14 It also provides regulatory and procedural information regarding international shipments, thereby speeding up customs-clearance processes.15
On the transactional side of IT applications directed at customers, product customization has been an important issue. Companies have found that it is not difficult to create Web sites that can process customized orders but that fulfilling the orders quickly and cost efficiently is challenging. The lesson is that IT applications must be aligned with the rest of the e-business model; in this case, customization has to be integrated into the entire supply chain.
IT Applications: Supplier Orientation
Although customer-facing IT systems are in a sense visible to public scrutiny — and thus are likely to get more attention — the success of e-business hinges on electronic linkages between supply-chain partners. Supplier-oriented systems must be capable of sharing information on process and product quality; on resource planning in such areas as inventory, production scheduling, capacity and demand; and on relationship management. In other words, it must provide features similar to those offered to customers: online communities and an FAQ section, as well as supplier-evaluation reports. These applications should also support automatic ordering, online invoicing, order-status tracking and electronic payments.
A Web-based alliance between Home Depot and GE highlights the benefits of supplier-facing systems. Home Depot set up the alliance with GE because it wanted to offer more products while housing less inventory. Thanks to an Internet application, Home Depot can sell GE appliances at its stores and have them delivered directly to purchasers from the nearest GE warehouse.16 The application links Home Depot’s point-of-purchase data to its accounting processes and also to GE’s e-business systems. Home Depot enjoys lower inventory costs and GE has a stronger presence in the retailer’s stores than it otherwise would. In addition, GE can use the real-time demand information coming from Home Depot to adjust the production of appliances up or down.
Although companies in our sample have made some progress in developing online customer relationships, few have tapped the potential to exploit efficiencies in the value chain by connecting with suppliers over the Internet.
IT Applications: Internal Orientation
Companies that have not exploited the Internet to improve internal processes are unlikely to succeed with IT applications aimed at customers and suppliers. Employees cannot be responsive to customers, for example, if they cannot readily access internal information through easy-to-use interfaces.
In 1996, GE Capital created a pioneering intranet application that supports key functions including human resources, project management and the sharing of best practices. The existence of the intranet has led to a 50% reduction in time spent on obtaining access to project information from other business units. As with any technology, intranet applications call for process changes within the organization. For example, to encourage use of the intranet, GE Capital provided explicit incentives and guidelines. The intranet “quality library,” a repository of internal documents on the quality of products, services and operations, was declared the new medium of communication on that subject. Management also made participation in the intranet a part of employee evaluations.17 Because its internal IT applications were so well developed, GE Capital has been able to adapt more quickly to e-business with its customers and suppliers.
Customer, supplier and internal applications require the glue of systems integration to hold them all together. A high level of integration throughout an organization enables it to transmit, combine and process data from customers and suppliers. Tightly knit systems mean, for example, that orders can be monitored from manufacturing through shipment; that order changes can be absorbed automatically by suppliers; and that data can be shared internally in real time in areas such as forecasting, production, shipment and accounting.
Home Depot has approached the problem methodically by ensuring a complete integration between its online and back-office capabilities.18 However, tying together internal and external systems is a significant challenge for most organizations. Lack of integration between online and back-office systems created major order-fulfillment headaches for Toys “R” Us during the 1999 holiday season. A Jupiter Media Metrix study found, too, that 76% of retailers cannot track their customers over multiple channels. Large companies have a long way to go to integrate their complex systems; however, the benefits that they stand to reap from doing so are substantial.
E-Business Readiness of Customers and Suppliers
The success of a company’s e-business initiatives depends not only on its own efforts but also on the readiness of its customers and suppliers to engage in electronic interactions. Although managers may believe that it is beyond their control to influence others’ readiness, they can in fact create a value driver by committing resources to the problem.
Dell Computer, for example, implemented an online supply-chain-management application to help its component suppliers increase the accuracy of their forecasts; the application gives suppliers direct access to customer-order information.19 And it has actively helped customers increase their e-business readiness by enabling them to integrate their procurement applications with Dell’s customer-facing systems.
Despite Dell’s example, it is true that lack of readiness on the part of customers and suppliers can be the weakest link in the value chain. Thus Amazon.com, which uses Internet technologies heavily in all its operations, has been forced to build warehouses and distribution capabilities because publishers are unable to manufacture and ship books the same day they receive an order. Likewise, General Electric projects savings of $1.6 billion in 2001 from e-business, but it may be limited in its drive to find more savings by the lack of readiness of many of its customers and suppliers.20
Each of the drivers we have outlined above is important in its own right and requires guidance by specialists, who must design and implement specific applications and business processes. Senior managers, of course, must keep their hands on the tiller of operational-excellence and financial-performance measures. Those measures are based on a company’s strategic objectives and go hand in hand with an overall vision of the digital enterprise. As a whole, then, the e-business model we have described here requires both top-down and bottom-up approaches to the necessary tasks.
E-Business Value Model
A World of Opportunity
The Internet economy involves much more than just dot-coms and necessitates a fundamental transformation of traditional organizations. The true benefits of the New Economy are achieved through the digitization of the entire value chain. (See “E-Business Value Model.”) There are significant financial payoffs from e-business initiatives; however, companies must focus their efforts on specific areas to realize such gains. The nature of benefits and challenges is different for small and large enterprises. Small companies have an unprecedented opportunity to expand their customer base with relatively few impediments. Large corporations can expect significant gains in supply-chain efficiency and productivity but must overcome major process, systems and readiness barriers.
Our e-business value model conveys to management where to focus organizational resources by highlighting specific areas of opportunity. In particular, the model emphasizes that to achieve operational excellence and subsequent financial gains, managers must evaluate how processes align with e-business transformation, while encouraging the participation of suppliers, customers and internal constituents. In the absence of such complementary investments in process, technology and readiness, managers risk the failure of their companies’ digital transformation.
1. For a discussion of IT business-value models, see R.J. Kauffman and C.H. Kriebel, “Modeling and Measuring the Business Value of Information Technologies,” in “Measuring the Business Value of Information Technologies,” P.A. Strassman, P. Berger, E.B. Swanson, C.H. Kriebel and R.J. Kauffman, eds. (Washington, D.C.: ICIT Press, 1988). See also A. Barua, C.H. Kriebel and T. Mukhopadhyay, “Information Technologies and Business Value: An Analytical and Empirical Investigation,” Information Systems Research 6 (March 1995): 3–23.
2. C. Murphy and C.T. Heun, “The Results Are In,” InformationWeek, Jan. 29, 2001, 22–24.
3. M. Baer and J. Davis, “Some Assembly Required,” Business 2.0, Feb. 20, 2001, 76–83.
4. Murphy, “The Results Are In,” 22–24.
5. E. Berkman, “Clicklayer,” CIO Magazine, Feb. 1, 2001, 92–100.
6. J. Berry, “E-Business Is Still an Elusive Goal for Most Companies,” InternetWeek, April 24, 2000, 41–42.
7. Murphy, “The Results Are In,” 22–24.
8. P. Seybold, “Customers.com: How To Create a Profitable Business Strategy for the Internet & Beyond” (New York: Crown Business, 1998).
9. Murphy, “The Results Are In,” 22–24.
10. Seybold, “Customers.com.”
11. Complementarity was recognized as a driving force in manufacturing by P. Milgrom and J. Roberts, “The Economics of Modern Manufacturing: Technology, Strategy, and Organization,” American Economic Review 80 (June 1990): 511–528.
12. T. Davenport, “Managing Customer Knowledge,” CIO Magazine, June 1998, 32–34.
13. L. Lapide, “The Innovators Will Control the Supply Chain,” Montgomery Research working paper, San Francisco, 2001, http://www.ascet.com/authors.asp?a_id=128.
14. T. Smith, “Niche Player a Standout Among Shipping Titans,” InternetWeek, June 12, 2000, 85–86.
15. T. George, “On the Move and In Touch,” InformationWeek, Sept. 11, 2000, 301–310.
16. C.H. Deutsch, “G.E.’s Management Methods Are Put to Work on the Web,” New York Times, June 12, 2000, sec. C, p. 1.
17. J. Bresnahan, “Buying Power,” WebMaster Magazine, April 1997, 34–38.
18. R. Whiting, “Value and Pain in Integration,” InformationWeek, Sept. 4, 2000, 22–24.
19. TechWeb News, “Dell Applies Direct Model to Suppliers, Too,” Aug. 8, 2000, http://content.techweb.com/wire/story/TWB20000811S0016.
20. M. Murray and J. Sapsford, “GE Reshuffles Internet Strategy To Focus on Internal Digitizing,” Wall Street Journal, Friday, May 4, 2001, sec. B, p. 1.