OLD BUSINESS TO E-BUSINESS: THE CHANGE DYNAMIC

Sid Abrams

AT Kearney

Mr. Abrams began by reflecting on how much our concept of communication has changed over the last several years. Communication used to be restricted to verbal exchanges with people who were in the same time and space. As we began to disperse geographically we went to the Pony Express to carry letters and then to the modern post office. This still did not bridge the space separation. Then the telephone and the telegraph began to overcome the space issue but not the time issue. To talk with somebody in France we still had to coordinate because of the six-hour time difference. The Internet takes away both time and space issues, and wireless applications will do so even more.

Tangible Benefits of E-Business Are Not Clear

He suggested that the biggest challenge for companies as they shift to new forms of technology is that we all still need to eat, we need to put gas in our cars, we need drugs to take care of ourselves, we need airplanes to fly in. Thus, while e-business and the Internet and new technology are often exciting and fun, they are also very complex. For senior business executives who mostly believe in the benefits of technology and e-business and are investing pretty heavily in them, the tangible and quantifiable benefits as defined by the business world are still unknown.

Mr. Abrams said that he was coming from a different perspective than many of the speakers. He is part of an organization that works with senior executives and major companies to help them navigate, implement, and take advantage of the changing business world. He said he would like to describe some of the challenges companies are facing and what technology can do to help them cope with change.

The Second Wave of Internet Innovation

Mr. Abrams described life today, from corporate boardrooms to global exchanges, as a whirlwind of electronic activity that is first experienced by many people in buying books online—the business-to-consumer aspect of Internet commerce. Venture capital firms have created new firms, and new firms have created new Internet portals. His opinion is that the current or second wave of Internet innovation will be more difficult and complex, partly because it will focus on the restructuring of organizations as well as their entire value chains (Table 4).

Over the last five years his company has conducted semi-annual surveys of senior and chief executive officers from companies around the world. These sur-



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Measuring and Sustaining the New Economy: Report of a Workshop OLD BUSINESS TO E-BUSINESS: THE CHANGE DYNAMIC Sid Abrams AT Kearney Mr. Abrams began by reflecting on how much our concept of communication has changed over the last several years. Communication used to be restricted to verbal exchanges with people who were in the same time and space. As we began to disperse geographically we went to the Pony Express to carry letters and then to the modern post office. This still did not bridge the space separation. Then the telephone and the telegraph began to overcome the space issue but not the time issue. To talk with somebody in France we still had to coordinate because of the six-hour time difference. The Internet takes away both time and space issues, and wireless applications will do so even more. Tangible Benefits of E-Business Are Not Clear He suggested that the biggest challenge for companies as they shift to new forms of technology is that we all still need to eat, we need to put gas in our cars, we need drugs to take care of ourselves, we need airplanes to fly in. Thus, while e-business and the Internet and new technology are often exciting and fun, they are also very complex. For senior business executives who mostly believe in the benefits of technology and e-business and are investing pretty heavily in them, the tangible and quantifiable benefits as defined by the business world are still unknown. Mr. Abrams said that he was coming from a different perspective than many of the speakers. He is part of an organization that works with senior executives and major companies to help them navigate, implement, and take advantage of the changing business world. He said he would like to describe some of the challenges companies are facing and what technology can do to help them cope with change. The Second Wave of Internet Innovation Mr. Abrams described life today, from corporate boardrooms to global exchanges, as a whirlwind of electronic activity that is first experienced by many people in buying books online—the business-to-consumer aspect of Internet commerce. Venture capital firms have created new firms, and new firms have created new Internet portals. His opinion is that the current or second wave of Internet innovation will be more difficult and complex, partly because it will focus on the restructuring of organizations as well as their entire value chains (Table 4). Over the last five years his company has conducted semi-annual surveys of senior and chief executive officers from companies around the world. These sur-

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Measuring and Sustaining the New Economy: Report of a Workshop TABLE 4 Redefining Economic Organizations: Applications of IT. • Reduces cost and time in the supply chain • Provides greater market coverage with primarily incremental operational cost increases • Alters traditional scale economies, barriers to entry, and buyer/seller power • Provides an effective way to add value • Creates the basis for cooperative relationships with customers and suppliers • Generates new organizational structures and governance models veys show that while senior executives are aware of the growing role of technology, the real challenge for management is to find technology that is tightly integrated with business strategy and operation. The survey also showed that while 97 percent of these executives are convinced that technology will continue to have a very significant role, just over 70 percent believe that their primary focus will be designing and carrying out an e-business strategy. We see that e-business is driving a lot of restructuring, yet industries are participating at different rates and at different stages of evolution. Different Rates of Participation in E-Business High-tech and computer electronics industries were the first to think about e-business, in large part because they helped create the environment and the technology that allows it to happen. The sectors that provide consumer goods and products will participate and reap real benefits much later. They have to learn how to adapt their brick-and-mortar environment where food is produced and grown, and they also have major concerns around channel disintermediation. The auto industry has begun its transformation, but its ability to restructure the supply chain across the supplier base and to push themselves out into the dealer network meets a whole host of challenges around quality assurance, supply, reliability of suppliers, and trust issues around domination of certain categories. Within industries, early adopters tend to be very large organizations—companies that have offices in more than 11 different countries and sales greater than $10 billion. It is in such companies that senior directors have been able to create a vision of technology’s role in helping them change their industry. Around the globe the effects of the Internet are not yet ubiquitous. In the United States the survey shows that 78 percent of executives say technology is now beginning to change the way they do business. In Central and South America, by contrast, fewer than 28 percent of senior executives view technology as having an impact. This is because it is difficult to find skilled people, there is little common understanding of the meaning of a competitive business base, and it is difficult to raise capital for technology investments. He said that many large offshore companies and countries in Western Europe have operations in Central and South America

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Measuring and Sustaining the New Economy: Report of a Workshop and the Far East, but they are reluctant to invest there because they cannot be confident of earning a near-term profit. Mr. Abrams reports that a concern for profits is driving much corporate behavior, although some companies have reacted differently. Some have tried to create a better environment for their employees by offering easy access to computers and the Internet. Uncertain Results from E-Marketplaces In general, senior executives are racing to create electronic marketplaces. The electronics industry alone has 17 to 20 electronic marketplaces for the exchange of goods and materials between buyers and sellers. The consumer goods industry has at least three dominant ones, and the automakers are creating them as well. The challenge for all of these industries is to define new business models. Companies are investing anywhere from $15 million to more than $200 million to start these exchanges; it costs upward of $100 million for the first year of operation. No one yet knows where the benefits will come from. Part of the challenge chief executive officers have to face is that doing procurement over the Internet is easier than creating a digital supply chain with your suppliers, as well as doing collaborative planning, forecasting, and replenishment with your other partners. “What they scratch their heads over,” he said, “is this question: If it’s so hard to get benefits from procurement, how do I get it from the rest of these things?” Knowing When to Invest in E-Business Mr. Abrams emphasized his own belief in the power of technology, but said he had to put himself in the shoes of his clients, who face several challenges. One is “how to learn what I don’t know.” Several years ago companies made a major shift from legacy systems to the enterprise resource environment (ERE). Senior executives spent significant sums of money on these systems, and in 1996 more than two-thirds of them were satisfied with the rate of progress. In 1998, 57 percent were satisfied, and this year 10 percent were satisfied. The CEOs had had to tell their boards that all the anticipated benefits did not materialize. While these leaders now recognize some of the shortcomings of ERE and some of the problems it didn’t solve, they are still unsure about the wisdom of investing millions of dollars to participate in the electronic marketplace. A second challenge reported by Mr. Abrams is the increased complexity and rapid change of business-related technology, including both hardware and software. He recalled buying his first cell phone in the early 1990s, when it cost $800 and was the size of a box of tissues. The question for businesses is compounded: When will the latest great thing for one’s business be outdated, and how can a large current expense be justified?

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Measuring and Sustaining the New Economy: Report of a Workshop TABLE 5 Challenges to Implementing IT Applications in Existing Firms. • E-Business models radically shift how value is created and where it is generated in the value network, often creating channel conflicts • The nature and magnitude of change is difficult to estimate, which makes it difficult to plan and manage • Business processes must be re-engineered and integrated • Multiple infrastructures must be maintained and existing business must be protected until transformation is completed • Resources are inadequate for large-scale, rapid change • Individuals resist e-business models The Pain of Re-engineering A third challenge, mentioned briefly above, is the complex impact of a new system on many aspects of an organization. Senior executives of any company, from 10 people to 120,000 people or more, confront the same issues: What do I do with all the people who work here, how do I ensure that this company participates, and how do I deal with the political, emotional, and social ramifications of a transformation whose features I can’t imagine? How do we develop our people to be successful? What is the right organization model? How do I take my traditional old-economy company and give it the entrepreneurial spirit of a dot-com without destroying our business and causing a bloodbath in the boardroom? Still, Phenomenal Potential for E-Business Despite all these challenges the potential for e-business is phenomenal. The Meta Group projects that by 2003 more than 40 percent of the Global 2000 companies will have adopted an enterprise view; they will all be participating in e-business to some degree and the more advanced will be following an enterprise architecture approach—linkage between strategy, business process, and technology. How can this be done? One vision is that companies will be closer to consumers. For consumers to participate in an e-business world, technology needs to be powerful enough to operate virtually in real time and it needs to be as pervasive as the telephone is today. Applications must be truly meaningful and useful. Standards must be clear to ensure ease-of-use compatibility. On the business-to-business side, organizations must adjust as value chains become more tightly integrated. On the business-to-consumer side, people will need the skills to use the Internet productively. In countries with extensive Internet use companies will need to understand a new set of labor issues between employees and employers.

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Measuring and Sustaining the New Economy: Report of a Workshop Clearly, the price of technology will continue to fall even as technology becomes more powerful and useful. If productivity gains are to continue, senior executives must learn a new language and culture as they struggle to guide their companies through this transformation and benefit from it. From a policy point of view, the government needs to promote both basic and applied research that will help organizations adapt to this challenging new world.