The Convergence of Business & Technology
By Charles C. Poirier -- Supply Chain Management Review, 9/1/1999
A funny thing has happened along the supply chain highway. Companies that have wholeheartedly embraced this new business discipline of integrated supply chain management—which advocates optimizing operations across the full network of supply chain partners—are taking a commanding lead over those that felt other matters were of greater importance. The separation between the supply chain leaders and the followers is widening rapidly. In fact, the gap can now be measured in years, not months.
The good news for those organizations that have not yet made supply chain management a business imperative is that there's still time. In many industries the opportunity exists to move into the fast lane of the supply chain highway and start to build a competitive gap of their own. Doing so, however, requires the participation of willing and trusted partners. And in the electronic age we're living in, that means having partners with sophisticated e-Commerce capabilities for building network solutions.
The formula for success is becoming clear. The future of business will be electronically enabled across a network of enterprises collaborating closely and continually. Within industries, dominance is going to pass into the hands of the "value-chain constellations." These will be alliances of companies in a specific supply chain network that apply their resources in a combined and collaborative manner. Their unwavering focus will be on specific industry markets, customers, and end-consumers that will deliver the highest yield. The constellation's constituents will align their strategies and work in a spirit of trust to develop new and profitable revenues. At the same time, they will deliver above-industry levels of satisfaction to the targeted customer/consumer base. These constellations will display greater overall effectiveness than any competing supply chain network.
To enjoy sustainable success, these alliances will go to market through both a physical channel and a cyber-based channel of customer fulfillment. Both channels will have to accentuate e-Commerce features that distinguish the constellation in the business customer or consumer's eyes. Further, the supporting network has to reach all the way to the primary suppliers in order to be totally enabled. With anything less, the supply chain response will be diminished.
The Inevitability of ConvergenceIn this emerging business environment of electronically enabled commerce and value-chain constellations, convergence will be the key. That is, the ability to converge business strategies and information technology with a focus on the end-consumer will become a defining characteristic of the industry leaders. The confluence of these two dimensions flowing toward specified customers and consumers ultimately will lead to success and sustenance in the new millennium.
In this age of convergence, companies will have to combine business, growth, profit, and customer/consumer satisfaction strategies with state-of-the-art technology to develop a cohesive business plan. Importantly, this must be done across a full value chain of partners that have formed the constellation of choice for the most desired consumers. Any slow or unresponsive partner in that alliance will hinder the total network's overall effectiveness in reaching those consumers.
As the value-chain constellation builds new, profitable revenues with these consumer groups through a clearly superior e-Commerce capability, true business-to-business-to-consumer commerce becomes a reality. The additional profits that derive from these revenues will ratify the supply chain as a business discipline.
Constructing this future network will require a new level of business collaboration. This means getting the supply chain partners' collective Information Technology (IT) groups out of the back rooms and into the front office. The IT professionals need to be brought into the supply chain design teams to help the marketers construct the necessary future systems supporting the constellation. This requirement goes beyond any single process area or individual company. It must include the collaborative efforts of designers and IT groups across the breadth of the total supply chain network. This kind of inclusiveness can help avoid weak links in the ultimate network design.
A New Channel EmergesThe expansion of commercial business over the Internet has been more rapid than anyone expected. It's been likened to a tidal wave, an electronic El Niño, a tsunami, a tornado. By any analogy you choose, one inescapable conclusion follows: It is revolutionizing the way in which consumer-based business is being conducted around the world.
The signs are evident in every business sector in virtually every economy. An ever-increasing number of transactions are being transformed from physical purchasing of inventory held in a retail outlet or store to a cyber-based relationship between a Net-wise buyer and an electronic system of response. In both cases, products and services are delivered to the consumer. But depending on the product, the channel chosen, and the intentions of the Web designer, prices may be higher or lower and consumer satisfaction will vary. In general, though, the Web offers lower inventory and distribution costs and more direct global reach.
We're all well aware that the number of cyber channels courting users is rising exponentially. (Everyday, the World Wide Web grows by roughly a million pages.) That portion of business activity focused on end-consumers is termed business-to-consumer commerce and can be pegged at a basis number, call it X. The business-to-business linkage necessary to support that channel of electronic distribution will be five to eight times that basis number. As they view this phenomenon, companies are being forced to decide which business and consumer channels of response to develop. Making the wrong decision can put the organization at serious risk of losing a portion of current, profitable business. Making the right decision secures the desired new revenues. In all likelihood, that right decision demands the formation of a superior business-to-business-to-consumer network of response.
The schism between the two response channels is widening across all points of the supply chain spectrum—from product and service conceptualization, through production and distribution, and finally to consumption. Crossing that chasm will become ever more difficult as the gap between the consumer choices increases. Companies need to act now to figure out whether the business should be on one side or both sides of the gap. Some might insist they can survive without using the Web. But by taking this position, they put a significant amount of their future business at risk. Others will opt for a dual strategy that uses both physical and cyber channels and incorporates both offensive and defensive features.
Let's be clear, we're talking here about network planning that will shape success or failure in the future. Business opportunities captured by the well-prepared players will translate to market dominance. How well companies perform in this new business environment—where business practices converge with technology and consumers are won or lost—will largely determine whether they'll be doing the acquiring or be acquired down the road. There are no gray areas. It's a few years of good times with the old business models, or sustained future prosperity with technology-enabled network solutions.
In charting a course for their technology-enabled future, organizations will have to address the following questions—not by themselves, but in collaboration with their supply chain partners:
- What consumers should our company or members of our supply chain network pursue?
- What business customers are crucial to securing these end-consumers?
- What supply chain channels will these consumers favor to satisfy their needs?
- What distribution mechanisms, physical or cyber-based, need to be put in place?
- What pricing strategy is correct for the channels of choice?
- How must the value-chain members change their collective cultures to meet the emerging environment?
As business strategy and technology inevitably merge, companies will need to develop a clear strategy. We recommend a dual strategy—one that embodies both the cyber-based and the physical channels. Exhibit 1 presents a simplified version of the recommended model. In it, consumers are clearly in control of the multiplicity of choices now subject to their purchasing power. It is toward this consumer base that businesses now must orient their supply chains. Put another way, a business will succeed or fail to the extent that it can accurately respond to this consumer buying power.
As the consumers look upstream in the supply chain, they will have two choices of response—physical and cyber-based. In the traditional physical channel, the consumer will go to a store or other retail outlet and select the item or service of choice. The requirement in this channel is to support the network of supply with the latest technological systems, so the experience is satisfying and the cost is competitive. The available inventory has to match current demand and the delivery system needs to be virtual from beginning to end—with extremely short response times and very competitive costs. In the cyber channel, the Internet replaces bricks and mortar as the Web buyers simply surf about for the product and service desired. Almost magically, a nearly invisible channel of response will deliver the item to their doorstep.
The focus in both channels is on capturing the best consumers. From that perspective, the network must feature the best system of response, with business partners linked with the best business-to-business-to-consumer networking system. Through the most efficient channels of choice that go all the way to primary materials and supplies, the consumer will be selecting from the best opportunities—one click at a time. Today, the consumer makes that choice over a personal computer with the help of a keyboard or a mouse. In the future, the choice will be made through voice-activation. Over a voice-to-media system in the consumer's living room or home office, the next buying decision will be just a sentence away. Only the best-enabled systems will survive in this kind of environment.
Business-to-Consumer HeadlinesA look at what's already happened in e-Commerce today hints at an even more amazing future. At present, the most popular Web stories are about business-to-consumer Web sites and the instant wealth afforded to some of the new Internet application developers.
Of greater interest to the business professional, however, are the changing demographics of the consumers using this medium. The profile of the Web consumer is becoming clearer. Right now, 64 percent of online shoppers are between 40 and 64 years of age. Fifty percent of households with online access made purchases over the Web last year. The fastest-growing Web users are teenage girls and women over 50. The former group likes to buy clothing, cosmetics, and personal products in the privacy of the home rather than at the mall. The latter associates online shopping with actually going to the shopping center. It's significant to note that online buyers display more consistent buying patterns than the retail buying public at large.
The success stories in this new buying arena abound. Most people are familiar with the great achievements of Amazon.com. This start-up channel reached sales of more than $600 million in 1998, while ringing up a market valuation of over $20 billion. The message here is that companies competing in the same market have to view the Web as an offensive and defensive tool. From an offensive perspective, Amazon has shown how new buying patterns can be quickly established through the cyber channel. From the perspective of Borders or Barnes and Noble, the lesson learned is that if you don't have a defensive strategy, you put a significant portion of your business at risk to new competitors with a cyber link to good consumers.
Newspaper headlines are saturated with other examples of companies using the Web to reach consumers. For instance, much attention has been focused on Charleschwab.com as it rapidly moves in on the territory previously dominated by large commercial brokerage houses. Similarly, 60 percent of commission trades with Fidelity Investments in 1998 were made over the Web. Other industries also are taking advantage of this new channel. Egghead is using the Web to offer remnant software through surplusauction.com. From the entertainment world, the artist formerly known as Prince is selling music direct to the public. Disney is planning to transmit digitized movies directly from its studio to the movie theatres, bypassing all the traditional intermediaries. And Papa John's Pizza now can accept your takeout order online.
Some companies are encouraging consumers to use the Web by offering special deals. Bargain Book Warehouse offers books via the Web with one shipping fee of $4.25. The more books you buy, the less you pay per item for shipping. Dealaday.com offers discount clothing, similar to what can be purchased in person at discount stores like Marshalls. After 10 purchases from this start-up, shipping and handling is free. In the banking industry, Countrywide Home Loans takes 1¼ points off the closing costs for loan applications done online.
The consumer is driving this cyber-revolution. As Daimler Chrysler Chairman Robert Eaton told members of the National Automobile Dealers Association, "The customer is going to grab control of the process, and we're all going to salute smartly and do exactly what the customer tells us if we want to stay in business." Daimler Chrysler now plans to post vehicle information on the Internet to enhance selection and delivery across the automobile-to-consumer network. The other major car manufacturers are rapidly following suit, as they forge e-Commerce—based systems to help the cyber-hooked consumer buy cars over the Web for delivery at the nearest dealer location. And the beat goes on!
A useful analogy can be drawn between the Web and automated teller machines (ATMs). Remember when ATMs were introduced, some said consumers would prefer to deal with real people. Now, banking in supermarkets has been commonplace for years, and Shell is planning to install ATMs next to its gas pumps. People are even willing to pay a fee to use ATMs.
There can no longer be any serious doubt about a cyber-based channel's ability to attract significant numbers of new consumers. These buyers, moreover, will be drawn to the network offering the most effective means of satisfying their desires—some of which are fleeting and can only be captured through an immediate medium. So the planning and implementation of these networks must be in tune with changing patterns of demand and the absolutely latest technology. Business entities have to plan on using the Web to secure profitable new revenues (often in nontraditional markets) and to defend current positions with existing customers. Accomplishing these objectives requires supporting business-to-business structures and systems to enable the efficient delivery of products and services over the new channel.
The Business-to-Business BoomIn the larger segment of commerce, business-to-business transactions, the e-Commerce pace is accelerating just as rapidly. And just as in the consumer-to-business segment, business strategy and technology are rapidly converging.
At work, business users tend to visit the same Web sites frequently. At home, by contrast, these same users tend to roam over a more varied menu. The overall pattern in the workplace or at home, however, is the same: The amount of business being conducted over the Web is growing exponentially. Business users are finding distinct advantages in the speed and accessibility of vital information offered via the Internet. From an offensive standpoint, this new capability opens up new avenues of revenue. Defensively, companies have to be wary of competitors coming from new directions—sometimes almost literally out of the blue. These "cyber bandits" are attacking existing bases of business, generally without capital investment (no bricks, mortar, or equipment). They poach on established territories and carry off existing customers and consumers—often with surprisingly little effort.
The success stories in the business-to-business segment of e-Commerce are as notable as they are on the consumer side. Business-to-business Web features include online auctions (for example, the trading of steel over E-steel), automated buying recommendations, and computerized supply replenishment.
In many business sectors, cyber channels are fast eclipsing the traditional physical channels. Law firms that used to spend big money on reference books, for example, now do their research electronically using Authority On-Demand through bender.com. Cisco Systems, the manufacturer of routers and connectors for the vital linkages between business computer systems, reports that 75 percent of its sales volume last year was handled over the Web. (For more on Cisco's use of the Internet, see the accompanying sidebar.) In a move that underscores the value of technology-based solutions, AMP, the electronic components manufacturer, now sells its Web-based online catalog system information to other companies.
Chevron, which annually buys more than $3 billion in products and services from 200 suppliers, plans to move its procurement system onto the Net. This will give the company's buyers access to manufacturers of oil and refinery components as well as to service providers in their industry. Chevron ultimately plans to expand online procurement to its entire global purchase budget of $10 billion.
Office Depot now derives a significant percentage of its revenues from electronic orders for industrial accounts. Web-based buying catalog systems are offered by Ariba, Aspect, Harbinger, and Commerce One, among others. Business leaders effectively use these robots to make it easier to search for available products and services and suggest the best systems for securing what is needed.
Each of the businesses cited here needed a network of constituents to make the end-of-chain offering feasible. Similarly, the business value chain of the future will be a collaborative framework, close to optimized in performance, under the direction of visionary leaders, with a focus on specific end-users.
Importantly, the business-to-business segment of the supply chain network will be focused totally on the market of choice, specific consumers within those markets, and specific products and services designed collaboratively to satisfy those consumers. The value-chain constellation that wins the loyalty of those designated consumers will dominate future markets. In forging those relationships, there's no time for delay. In the business-to-business arena, the electronically enabled leaders are years in front of the laggards.
One more word about collaboration is in order here. It's critical that supply chain alliances be established within an environment of trust. Trust is essential to the free and open flow of information needed to respond to consumer needs at each point of interaction. Without this openness, the network risks not being fully responsive or being put at an economic disadvantage.
If one partner is not electronically enabled or refuses to share vital information, the response process will not be competitive. Without a competitive response process, cycle times are not competitive, customers become unhappy, and the business suffers. If one link lacks the technology to keep pace with the rest of the network, the total cost of supply rises. Neither situation benefits the value-chain constellation. Online sharing of manufacturing schedules, minimization of total inventories, and online replenishment data are just a few of the hallmarks of tomorrow's value-chain constellations. To succeed, these networks will require interenterprise connectivity and sharing of data that may once have been considered proprietary. These requirements demand a level of trust not generally found in today's business environment.
Betting on the FutureAs we enter the new millennium, two types of organizations will likely emerge. One will continue to pursue the old business models; the other will recognize the new e-Commerce realities. The first group will display these tendencies:
- A refusal to collaboratively build a network of optimized business partners to provide the most effective physical and electronic response to both business and consumer demands.
- A hesitance to build any type of cyber-based response.
- An insistence on dominating and controlling the movement of product and services to consumers—even if that means having less-able partners in their value chain.
The second, more forward-thinking group of companies will demonstrate an entirely different set of traits. They will work diligently to forge an end-to-end value-chain constellation that is optimized at every link of interchange. Their strategic and operational response to business customers and commercial consumers will include both physical and cyber-based components. Finally, these industry leaders will serve as a nucleus for the network partners. They will champion the effort to provide the best channel response to the best customers and consumers—physically or electronically.
It is on this second group that I would place all future bets. They recognize the essential truth that in the future every company will be a technology company.
Business strategy and technology have converged—whether some companies want it to happen or not. The process has been an inevitable one. Now is the time to begin fashioning the future networks that will capitalize on this convergence. Those already behind the curve need to accelerate the pace. All of their efforts should be geared toward the ultimate conclusion of the supply chain vision, to create a business-to-business-to-consumer system of response that is unequaled by any competing network.
Supply chain professionals are faced with at least three mandates in helping their organizations realize that desired future. First, they need to make their internal constituents aware of the inevitability of the business-technology convergence and the enormous opportunity it affords the business. Second, they must be catalysts in moving their companies to the necessary external perspective so an advanced supply chain network can be constructed. Third, they have to create the forums, workshops, and pilots through which the value-chain constellations eventually can be constructed. If they capitalize on the opportunity, today's supply chain professionals can lead the way to tomorrow's e-Commerce future.
| Author Information |
| Charles C. Poirier is an author and partner in the National Supply Chain Practice of CSC. His most recent book is Advanced Supply Chain Management: How to Build Sustained Competitive Advantage (Berrett-Koehler, 1999). |
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