Introduction to Internet Business

1.3 Reasons for Going Online

1.3.1 Expanding Market Reach

One of the major advantages of the Internet is its global availability. If you have a little company it is quite simple to expand the market reach beyond your geographic location and your current customer segments. Although this may relieve some of the pressure you experience in your current target market it will mean new pressure from competitors who are already on the Internet and are trying to get into your markets. The first phase would be to collect experience with a new customer segment and the new medium Internet.

Barnes & Noble, one of the largest chains of bookshops in the United States were forced to open a branch on the Internet, because they felt the pressure of Amazon.com, which is selling books over the Internet only and attracted more and more people who traditionally went into the shops of Barnes & Noble. The online venture started small for Barnes & Noble in order to gain experience, but grew fast after the initial pilot and has become since then number two in the online book selling market.

Tupperware on the other hand decided to ban all activities on the Internet. The Tupperware web site only contains marketing information. According to the CEO of Tupperware, the Internet is a marketing medium and they do not want to use it for anything else. The personal contact in the form of Tupper parties is essential; it is part of their company culture. In my humble opinion Tupperware is losing a huge opportunity, especially with people who just want to order another Tupperware box or replace one and won't do so, as they have to go to the next Tupper party, which will take up a lot more of the customers' precious time than they may be willing to spend.

On the Internet every company that offers goods, services or information is reduced to the same size: to the size of the customer's browser window. Therefore it is easy for a small online translation service to compete with a large one. The customer will see differences in pricing, service and the way the company presents itself on the Web. This and what other people say about the online service are the basis for the decision. Marketing for the web site is important. Many people choose a web site because others are talking about it or because they have seen advertisements for it. If you had the choice to go either to Barnes & Noble's web site or to MediaTechBooks' web site, you would go and visit the first one because the brand name is well known. But other than with traditional shops, the customer most probably will also visit the second to double-check prices and offerings. Moving from one bookshop to the other costs only a few seconds and the customer does not feel the pressure of a shop assistant who may help the customer in making his or her decision.

1.3.2 Generating Visibility

Another important goal, especially for small and medium-sized enterprises (the so-called SMEs) is to gain more visibility. The Internet allows a company to present itself at very low cost. Although buying a computer and setting up an Internet connection may not be cheap, once you have it, setting up new web pages and adding prices, products and information costs very little and the costs for reproduction are practically nothing. You do not need to replicate a catalogue, a brochure or a flyer. Put it onto the Internet and it replicates itself. Each user generates its own copy when accessing your web server. This is especially true when you use one-to-one marketing tools that allow the customer to see a personalized view of your products, services and information. Through co-branding, you are also able to present your products and services on other web sites.

Generating visibility is substantial for every company. The better known your company is, the more people will be interested in doing business with you. In the early years of the Internet being online was a synonym of being cool and forward-thinking, but it was in no way a must to be online. This may be true for certain industries, although it is difficult to find an industry where this is still true. Missing the opportunity to present your own company on the Internet, even with only a simple web site, is something nobody can do today. Several years ago the Security First Network Bank wanted to become the first Internet bank in the US. Now it is one of the largest electronic banks in the Internet business.

Early adopters have the advantage of getting to know technology in advance of the competitors. Therefore new technology enables small start-ups to become large organizations. Dell, who was selling in the early nineties computers over the phone, wanted to become the biggest computer reseller on the Internet. There is no doubt that they have achieved this goal. For Dell it was easy to move from telephone business to Internet business. As they do not have a channel, which involved shops and resellers, they did not have to resolve a potential channel conflict. All they did was move from one communication medium to another one, which offered them more possibilities.

With the traditional telephone business Dell had to send out catalogues to its customers. Using the Internet they have a web site which can be reached twenty-four hours a day with a lot of technology and little human resources behind. Once the web site has been set up, it is able to accept orders and offer instant help without any user interaction. As they still have their traditional telephone business, they have a call center, which can also be used to help web customers.

1.3.3 Strengthening Business Relationships

Implementing business-to-business communication on the Internet has a huge potential. In the past many industries have been using electronic data interchange (EDI) to simplify business processes and reduce the cost of communication between the business partners. Through EDI suppliers, manufacturers, distributors and retailers are able to share information on the inventory and enhance the flow of information and goods through the supply chain. Passing on the information electronically reduced the cost of communication and the number of errors.

The disadvantage of EDI is that it is very expensive and time consuming to implement, therefore many SMEs have not implemented it. Once a company has implemented it, every partner that uses it needs to implement it as well. Even if two companies have an existing EDI infrastructure, the special connection between these companies needs to be implemented. Consider a manufacturer with 50 suppliers; the costs are enormous for the manufacturer as it has to implement 50 EDI infrastructures.

The paradigm of EDI is good, but the technology was too expensive. With the Internet it has become accessible for all companies. Costs that have been reduced by fifty times are not seldom and EDI on the web allows for more content. Exchange of multi-media information has been made possible and fosters much tighter relationships among participants. The real-time capabilities of the Internet provide a sense of teamwork and shared goals. EDI via the Internet enables all components and systems of a virtual value chain to communicate with each other automatically.

Early EDI implementations on the Web were proprietary standards, but more and more implementations do EDI via the Web by using XML documents. For further information on XML see Chapter 9.

1.3.4 Responsiveness

The Internet can support increased responsiveness to your customers easily. Increasing responsiveness to customers and partners is very important to tie customers to a company. Being responsive gives customers the feeling that they are treated well by the company. Trans-O-Flex, for example, a logistics and shipping company in Germany gives customers the possibility to check the location of their shipments at any time. Although this feature nowadays is a must for all companies, it was something revolutionary a few years ago. Instead of calling your logistics partner and asking what happened to your goods, you can just go to their web site and check yourself, which means a cost reduction for yourself and even a greater one for the shipping company.

Responsiveness means also that when you give out e-mail addresses to your customers, somebody needs to answer these e-mails fast and competently. If they do not know the answer to the questions, they should know whom to ask within the company. As a rule of thumb, e-mail should be responded within one working day, even if you do not have the answers ready. Send a short notice that you have received the e-mail and that you will try to help to resolve the queries. Offering up-to-date information on your company to partners is also very important. GemPlus, one of Europe's leading smart card manufacturers, for example, provides partners with sensitive up-to-date information via a secured web connection (using basic authentication and SSL encryption). Partners are able to see this information using their logins and passwords. This part of the web site is GemPlus' Extranet area. As you can see, technically there is no difference between Extranet and Internet, except for the limitation on the viewers.

1.3.5 Offering New Services

Offering new services is also a reason to go online. Introducing new services in traditional markets is difficult and expensive. The Internet on the other hand offers the possibility to introduce new services with very little start-up costs. New services should not only be provided for customers and partners, but also for employees. A service for the employees could be for example a search engine for the Intranet. The larger the company grows the harder it is to find relevant information on the internal network. A search engine is only helpful if all employees put their documents online. Even if they are not able to create HTML documents, it is fairly easy to upload existing word documents to the Intranet, which can be indexed by the search engine as well. The search hit-rate for non-web documents is lower than with HTML documents, but still much higher than not putting them online at all.

Hewlett-Packard provides specific configuration bundles to resellers over its order@hp.com web site. This is also a new service to Hewlett-Packard's offerings. Up to then Hewlett-Packard did not offer pre-configured bundles online. The next step was to offer an online configurator where partners, resellers and end customers are now able to configure their PCs and Unix Servers using a simple web page. Complex configurations need special configurator tools. More information on configurator tools can be found in Chapter 7.

AutoByTel, the "Dell of the car industry," offers a complete set of car services online. It is possible to buy, to rent, to insure and lease a car from a single web site. AutoByTel as the name suggests used to sell cars via telephone, so moving to the web was a natural thing to do.

1.3.6 Cost Reduction

The cost for estate, service support and production can be reduced greatly through the use of the Internet. So it is another very good reason to move business to the Internet. Printer manufacturers such as Canon or Epson use the Internet to distribute printer drivers and updates. The cost for replicating floppy disks or CD-ROMs is not very high, but because of the high volume of printers they sell, it is a very large sum in the end. The replication cost on the Internet are nearly zero. Although downloading the driver does not cost anything, the infrastructure to do this needs to be paid for. By generating new business on the Internet, these infrastructure costs become irrelevant to these companies, as they are generating additional business and offer an instant solution to missing printer drivers as one new service. This results in more content customers and less overhead.

The ExhiBit Gallery in Pisa, Italy, a small gallery focusing on contemporary paintings closed down its showrooms shortly after it moved to the Inter-net. The costs for the showrooms were too high to maintain and someone had to be there every day, just in case some visitors came by. As only very few visitors came during normal business hours, there was no reason, why someone should be there all the time. Their first reaction was to reduce the opening times, but this didn't help much. Moving to the Internet did help a lot. The showrooms are now open 24 hours a day and about four hundred visitors a day from all over the world are visiting the online gallery.

Costs can also be reduced in the customer care center by offering frequently asked questions (FAQ) pages, where customers can find answer to frequently asked questions about a product or service. Newsgroups where customers can ask questions can also be very helpful. Other customers may be able to share their experiences and reduce the work load for the customer care center. In addition, companies can support employees and business partners over their corporate Intranets, keeping them informed and soliciting their feedback.

A company web site can also help to reduce inventory costs by hortening the sales and supply cycles. By distributing information in electronic form, you can reduce material costs by saving on paper, the printing and the manual distribution. The customer is taking over parts of the distribution costs.

Cost saving should not be seen as the primary goal in the long term. In the long term everybody will have saved cost and increased the profit. In order to survive it is necessary to have a deep relationship with your customers. This will allow you to charge more money for a service than others do, because service quality is what matters, not the base product.

1.3.7 Just in Time Inventory

As price pressure is very high on the Internet, it is necessary to reduce operating costs by reacting much faster to demand, as demand is created in real-time. Therefore it is necessary to cut down inventory to reduce the cost and adapt more dynamically to the wishes of the customers. The longer it takes to reach suppliers, the more inventory a company needs to hold to account for errors and delays.

Having large quantities of one product is not helpful, if your customer's have highly dynamic demand for certain products. Therefore it is necessary to build stronger relationships with your suppliers and integrate them into your digital ordering process. Estimates on the product sales for the next day, week or month (depending on your inventory cycle) also helps to keep the overhead low. Therefore digital communication between factories, marketing and purchasing departments becomes essential.

In the United States an initiative called "Collaborative Planning Forecasting Replenishment" (CPFR) has been set up by retailers, wholesalers and manufacturers. It is in the process of setting up standards and guidelines for better forecasting. Using this system retailers and suppliers are able to exchange their forecast electronically and in real-time in order to change orders or production.

Online bookshops, such as Amazon.com have only very limited stocks. They rely totally on their suppliers to deliver the books in real-time, which they then pass on to their customers.

1.3.8 Preventing Financial Loss

This lead us to the last reason we want to discuss here to go online. Preventing financial losses is one of the most important reasons. Although the Internet may pose a financial threat to your company it means also a great opportunity. The first few years, many companies need to invest heavily into a new infrastructure. But once you have made the break-even, it is much easier to resist the changes of the future. Amazon.com was in red figures until 1999 and only then a break-even was reached. Although being highly successful, marketing and infrastructure have cost more than the company received in revenues. In order to grow, Amazon.com needed to invest a lot in new customer segments.

One of Germany's largest shopping malls, My-World had to re-launch its web site in early 1998, because of lacking success. Since then it became an important online shopping portal for Germany. IBM's WorldAvenue had to be closed down, as it generated no revenues. These two examples show also quite clearly that it is not sufficient to convert existing environments to the Internet. They need to be adapted to have an impact and to be a success. In Chapter 7 we will see how shopping malls can be transformed to portal sites and become highly successful.

Although the Internet may pose a financial risk to your company, it should be no obstacle for you. Not investing into e-business will kill your company for sure. In order to make your e-business venture a success, the guidelines in this book may be helpful. As with most guides, this is not the only way to conduct business, but it is a way, which balances risks and investments in such a way that you will be highly likely to succeed.

1.3.9 Relevance to IT

Although your IT department should not need to be the driver for your business decisions, without them you are nobody on the e-business side of life. Your IT needs to adapt to understand the new needs for the New Economy. They need to employ Internet experts without reducing people with knowledge for the systems currently used. The IT department can gain experience in the Internet world by implementing an Intranet first. If you do not have an IT department or you do not want to invest directly into Internet technologies, then you should consider outsourcing the whole operation. If you have your own IT department and want to implement your own e-business strategy, keep in touch with them to learn what can be done and how much it would cost.

For some new services it may be better to outsource the development and just maintain it on the own network. Your existing IT infrastructure should be able to cope with the changes that come along with the Internet. The Internet is changing all the time, so you need the right people with the right skills to move on into the right direction.

As more traditional electronic services, such as e-mail, remote access and web server hosting have become commodities, or off the shelf products, these services can be outsourced to third party services who specialize in these areas. This frees up resources in your IT department to deal with new services and technologies that are not commodities yet. Part of the IT department would start to act as a broker for services between the internal customers and the external service providers. This would allow IT to maintain control over the services, without having to keep up operations on a daily basis.

1.3.10 Concerns for Going Online

Traditional companies may have concerns for going online, as they have established processes and channels, which would require investments for the digital age. Many conservative companies are reluctant to invest into new technologies, processes and ideas, as they are successful in their businesses and fear that the investment will do more harm than good.

Employees in companies fear also that with the introduction of the Inter-net they may lose their jobs, as they are not qualified to work on the Internet. The Internet changes the work of many employees drastically. It requires the employee to adapt to the ever changing Internet. Long-life learning becomes more important in order to keep up with the latest developments on the Inter-net. Other than with traditional business were maybe nothing changes for ten years, technology and paradigms on the Internet change must faster.

In 1997 push technology was expected to take off and become the next big thing. Many companies were heavily investing in this technology and disappeared soon after. In 1998 nobody knew anymore why there was such a fuss about it. Push technology is still being used, but it has been integrated into many products, such as newsfeeds or automatic software updates which are triggered by the server and not by the user (which is called pull). The certainty on which many businesses relied in the past is gone. Only the companies that are prepared to invest will survive the challenges of the 21st century.

Resellers and merchants fear that disintermediation will ruin their business. Through the Internet it has become easy for a manufacturer to get in direct contact with the end customer. But most manufacturers cannot do this without conflict between the company and the traditional channels. Therefore manufacturers may be reluctant to go online, in order to prevent a channel conflict. More forward-thinking manufacturers may use the Internet, but not to reach out for the end customers, but increase their relationships with their resellers, for example.

Companies offering information and soft products on the Internet are concerned about copyright issues. Compact disc sales are dropping although more people are listening to music, the reason for this are the CD recorders, which make it easy to duplicate audio CDs and the file format MP3, which allows transfer of songs over the Internet in a highly compressed way. Typical files in the MP3 format are compressed at a ratio of 1:10, resulting in a 3 minute song to be 3 MB instead of 30 MB. New appliances such as the Rio MP3 player replace disc man. Although unauthorized copying music over the Internet is illegal many sites offer the files. Search for your favorite music and you can be almost sure that you will find something.

A successful online business needs to be accepted by the customers. If none of your customers has access to the Internet then providing an online service is no good, if your company does not try to target new customers. Providing your current customers with Internet access and Internet-enabled equipment may cost too much. In order to move your customers to the Internet you need to offer additional services that were not available without. Online ordering should offer the possibility of tracking the order, for example, which would not have been possible without the Internet.

Without a global consent on the legal framework that needs to be implemented on the Internet many companies are reluctant to invest, as they are not sure what the consequences may be for them.