Business Week e.biz
What Every CEO Needs to Know about Electronic Business
A SURVIVAL GUIDE
Date: Mar. 10, 1999Subject: E-business -- NOW!Priority: URGENTFrom: Paul Revere, director of business developmentTo: J.R. Biggenslow, chief executive officerOrganization: Mid-America Paper Corp.
You don't know me very well, so I will warn you up front: This memo may come as a shock. After all, I joined Mid-America Paper just a few months ago, and I'm way down on the org chart. But it's my job to scout out new market opportunities-and I've found the only one that matters. This is a call to arms-straight, no chaser, no PowerPoint slides.
We have to get off our butts and get wired. Not just E-mail. Not just Web browsers or a Web site. I mean the big kahuna: electronic commerce. Our future depends on nothing less than transforming our company into a full-fledged E-business. Now.
Or else we're roadkill.
Oh, I know you're thinking: Who is this clown? Sales are up 10% in the latest quarter, to $1.2 billion for 1998, and profits have rebounded since the pulp shortage of 1996. And yes, I know we already have a Web site. But--not to put too fine a point on it--it stinks. Yes, it's got reams of information and pretty pictures of our products--well, actually, they're pretty ugly on the screen. And although it took me five mouse clicks, I finally found an 800 number to order a catalog.
So what's missing? The money, Jack--THE MONEY! You can't buy anything on the whole damned site. There aren't even links to the Web sites of Office Depot and Staples, our biggest customers. For Pete's sake, even the Netherlands' association of wooden-shoe makers just opened a global electronic-commerce site (www.woodenshoes.nl). Jack, E-commerce is where it's at. And with the exception of some creaky old Electronic Data Interchange links with pulp suppliers, it's where we're not.
Now, I won't deny that our industry is unique. We sell paper office supplies and corrugated boxes to corporations and retail stores--not books and CDs to Web surfers. And we sure can't ship them three tons of colored stock in a FedEx package. But lots of traditional companies have discovered there are all kinds of ways to do business on the Net.
Check out these numbers: E-commerce between businesses is five times as much as consumer E-commerce, or about $43 billion last year. And by 2003, Forrester Research Inc. figures it will balloon to $1.3 trillion. That's 10 times consumer E-commerce, constituting 9% of all U.S. business trade--and more than the gross domestic product of either Britain or Italy. Around 2006 or so, it might reach up to 40% of all U.S. business. Wow!
Problem is, our rivals are a lot closer to grabbing that business than we are--because most of them are already selling online. And as you know from our slumping stock price, our investors see this all too well. With every price drop, we have fewer resources to invest in online ventures. The premium for Net savviness is huge: Amazon.com had $610 million in sales last year--about half of ours. Amazon's market value, however, is almost $20 billion--more than 20 times ours. What's wrong with this picture, Jack?
I'll tell you: It's not just a few crazy day traders having fun with their new E*Trade accounts. The Internet is nothing less than a revolution in commerce. Think railroads. Automobiles. Computers. Each of them kicked off an explosion of new markets and new businesses. Today, these businesses account for most of the largest companies in the world--after giving a lot of companies that didn't get it an up-close-and-personal reading of Chapters 7 and 11.
Don't you hate it? These Yahooligans and Amazonians sport earrings, tap away on Palm computers, and sip lattes while pushing their net worths higher than most undeveloped nations' gross domestic product. These are captains of industry? Get used to it. It won't matter if nine out of 10 of them disappear into the depths of cyberspace. Just one of them can steal our customers while we're twiddling our thumbs.
And that could happen faster than you can say "dot com." On the Net, more than anywhere in the physical world, the first mover grabs the lion's share. Moreover, the Net is quickly breaking down industry boundaries, creating new competitors that spread like flu viruses. Media companies once dismissed Yahoo! as a silly search engine. Intuit wasn't on banks' radar screens until it had already morphed from a software to an online financial-services company.
Yes, the Net has changed the rules. For good. If we're to thrive, or even survive, we must live, eat, and breathe the Net. Starting yesterday. How? Forgive my audacity, but I've come up with a survival guide, a list of our top 10 must-do action items. I'm also attaching a magazine article on each point.1 REENGINEERING YOUR COMPANY
Get ready for another round of reengineering. Brace yourself--this one's on steroids. The Internet lets us communicate instantly with every supplier, partner, and customer--and, in many cases, lets them communicate with each other. This supply chain we've built up so carefully? Boom! Eventually, it will explode into a supply web: Trucking companies will tap directly into our ordering system for earlier visibility on shipping schedules. Retailers and corporations will monitor our inventory database instead of placing orders through sales. Uh-oh, what's that mean for all those shipping dock workers and all our salespeople? Big, big changes ahead, Jack.
Ultimately, the Net promises to change our whole manufacturing process. Dell Computer, for instance, lets customers configure their own PC online and track assembly and shipping status. The result: happy customers. Even with a recent slowdown, sales for the build-to-order pioneer, are still growing 38% a year, more than double the industry's 15% average. And lest you think this is just a silicon sensation, get this: Ford Motor and Weyerhaeuser are at the head of the pack. 2 THROW OUT THE OLD BUSINESS MODEL
Ask yourself a very basic question: Just who are we in the Internet Age? As we face more global competition online and have to cut our prices, we need to reexamine our business model. Maybe we should take a cue from MicroAge Inc., the PC distributor. Realizing the Net would make it easier for resellers to bypass distributors, it started transforming itself in 1995 into a service company, helping corporations with installation and training. Get this--now it even offers data on rival distributors' inventory in case MicroAge's fulfillment arm is out of stock on something--a way to earn customers' loyalty. Nothing's too strange to consider: The online superstore Buy.com, for instance, undersells rivals, sometimes at or below cost, hoping to make profits off advertising. It hit $125 million in sales its first full year in 1998--more than any company in history.3 THE BUYER ALWAYS WINS
Understand that the buyer runs the show on the Net. Up to now, buyers faced big obstacles to getting the best prices and service--limited time and data to compare vendors' products and the cost of dealing with far-flung suppliers. No more. The anytime-anywhere Net knocks down those barriers. It's spawning middlemen galore to give buyers more information. One of these guys will give you nightmares. PaperExchange.com is acting like a NASDAQ for paper products--and you know what that means: lower prices and a tougher time building our brand. We can't just ignore them, either--market researcher Keenan Vision Inc. figures these exchanges will handle 29% of all Internet commerce by 2002. We'd better be there.4 HOLD YOUR CUSTOMER'S HAND
Roll out the red carpet--or whatever the cyber-quivalent is. Have you bought a book at Amazon.com? Try it--they've reinvented customer service. Don't be surprised if our rivals start copying Amazon's methods. The first couple of times I ordered, they automatically upgraded me to free priority shipping--nice touch. And they use some nifty software from Net Perceptions that analyzes my purchases and suggests other books I'll probably like. They're often dead-on. That kind of software would help us sell more to our customers at little extra cost and treat them as individuals. There's also a raft of new programs from startups such as Kana Communications that automate E-mail service and promotions. Bottom line: We wouldn't have to hire a bunch of people to support the online site.5 GO AHEAD, FARM OUT THOSE JOBS
Cancel that vacation--we've got to move fast! None of our usual round of studies and meetings. And we have no time to do everything ourselves--nor any need to. The instant communications power of the Net shatters the physical-world need to do product development, manufacturing, distribution, marketing, and customer management all in-house. Now, there are lots of specialists that can do everything from hosting our Web site to running our warehouses. Look at personal-computer maker Monorail. Using intimate communications links, it has been able to outsource manufacturing and assembly, financing, and shipping to other companies. The result: The company can offer among the lowest-priced PCs--and increase sales with almost no constraints. 6 NO WEB SITE IS AN ISLAND
We should not treat cyberspace as a separate universe. Look at Charles Schwab. By leveraging its brand name online and using its offices as a place to introduce clients to Web access, it has managed to stay far ahead of upstarts like E*Trade Group. Likewise, Day-Timers recently launched a free Web calendar to compete with a raft of online upstarts while also promoting its traditional paper and software schedulers. As we go online, our brand name and purchasing power can work to our advantage.7 CREATE AN ONLINE SENSE OF COMMUNITY
Think global. People all over the world are congregating into virtual communities on the Web, and we want to be part of that. My wife just joined a site called FortuneCity.com--which was founded in London. She can chat online about our little girl's teething problems with other moms around the world. Maybe that's not our customers' thing, but as these communities embrace E-biz, we need to help our retailers plug into them--perhaps by offering them bundles of services such as chat and free E-mail.8 FOLLOW THE MONEY
Now that the Silicon Valley venture capitalists are scouring the country for new industries to wire up, we need to keep our eyes on what startups are getting funded in the online world. This upstart, PaperExchange.com, came out of nowhere. Had we subscribed to one of the services that track venture-capital investments, we would have seen that coming long ago.
9 A WEB OF NERDS? DON'T BELIEVE IT
We need to persuade everyone at Mid-America Paper that the Web is not Nerdville anymore. It's becoming part of everyday life. By 2003, International Data estimates 510 million people will be online worldwide. (By the way, why on earth do only half our employees have browser access? No wonder we're behind. Some 159 million people worldwide are now online!)10 LOG ON, BOSS
Get wired--or we'll get whacked. And Jack, I'm talking to you. Sorry if this seems harsh, but you've got to get closer to the Net than reading the E-mail your secretary prints out. You're not alone--only 25% of CEOs in a recent PricewaterhouseCoopers survey regularly log on to the Net. But you've got to get your fingers on that keyboard every day. Surf the Web. Talk to the nerds in the systems department. You'll see what I mean. This is something you can't delegate.
Jack, I know this must feel like a slap in the face. Please understand I would never suggest such radical change unless the costs of not changing were so high. Maybe you'll decide I'm an uppity jerk and reengineer me to the parking lot. But if we don't get E-bized, we'll soon be pulp--and I'll be out of a job anyway.By Robert D. HofReturn to top