THE E-BUSINESS HYPE AND THEREAFTER – A COMPARISON OF PERSPECTIVES
Staffan Brege, Professor of Industrial Marketing
Mats Abrahamsson, Professor of Logistics Management
Department of Management and Economics, Linköping University

During the last years we have witnessed the rise and fall of e-Business. An e-Business-hype of very high amplitude has been dramatically punctuated in a comparatively short time period. The death of the hype has been illustrated by the bankruptcies of a majority of the first generations of dot.com companies. Today, the e-Business hype is dead, but at the same time there are more e-Business activities than ever going on. Instead, e-Business has been taken over by “the old economy” companies and is now being implemented in a more evolutionary manner. And more lately we can also notice a growing profitability among the surviving dot.coms, most notably Amazon.com. The perspective on e-business has dramatically changed compared to the “new economy perspective” during the hype. In this article we will further explore these differences. Our empirical base is primarily a co-operation with some ten Swedish large companies, which give a representative picture of the state of the art among the early adopters of the internet technology from a Swedish perspective.

The major problem connected to the rise and fall of the e-Business hype, was that everything was expected to “happen over night”. Development that perhaps more realistically would take place over a ten-year period was “squeezed into” a couple of years. e-Business was held forward as the crown jewel of the “new economy”, which was materialised in the remarkable growth of the US economy during the 90ies. e-Business was boasted to an almost criminal (and in some cases beyond that) extent by the actors in the financial market, and this created the high amplitude of the boom.

But it is important to state, that the death of the hype does not mean a complete rejection of e-Business as a concept for the future. We have not had so much of that type of rejection discussion in Sweden compared to other countries with less e-Business maturity and also less overall interest in the IT business. What is important to keep in mind is that almost all major technological break-through, and we look upon web technology and e-Business as a major one, will take time.

Looking at Swedish industry in general and our case companies in this study in particular, we can conclude that e-Business activities are more frequent than ever. Our case companies also feel a stronger and more explicit pressure from the market and its business actors to continue e-Business development. Therefore, we can look positive to the future regarding e-Business growth. We foresee a strong, but mostly evolutionary kind of implementation of e-Business applications within industry.

Comparing the situation during the period 1999-2000 with today, there are several very distinctive differences:

1.                                       Revolution vs evolution

Back in the year 2000 only the sky was the limit for e-Business development. The forecasts made by consultants and merchant banks were competing in their optimism. One common phenomena, was (and is) to build the next forecast on the last one (treated as a “fact”) and thus creating a positive circle of growth projections. Our thinking, if we look back a couple of years, was very much influenced by the exponential development of technical capacity increases and cost decreases in the IT sector. It was also influenced by the telecommunication laws, which predicted an exponential development of network value when new nodes in the network were added. These net value formulas were uncritically adopted from public telecommunication (developed in more or less monopolistic settings).

The situation was accentuated by the development on the stock market. Dot.com companies were rocketing their share prices, a phenomena that large parts of the population had hard to understand at first. You could say that the dot.coms were in the business of promoting their own shares, perhaps more than producing and marketing services and products over the net. So finally, the public was convinced that e-Business would be the engine of the future economic growth – “the new economy” – with sustainable high growth and historically high productivity increases combined with high degrees of employment and low inflation. This combination of low inflation rates and high degrees of employment was a situation that was not predicted in traditional economic theory.

Today, we view e-Business in a more evolutionary way. First, e-Business is not turning the old strategies on the head, but rather implemented to support and strengthen them. So far, we don’t see much of revolutionary new strategies, like bypassing the wholesalers and agents in the marketing channel – a development that web technology has made possible at least from a strictly technical point of view.

Instead e-Business, often in the form of extra-nets, is used to strengthen old relationships, including the relations with middlemen, and to further develop the customer offerings. The revolutionary phase can very well happen later on, once the effects of the first e-Business applications can be evaluated and the organisations are more “e-Business mature” and there are more solid e-platforms established.

Secondly, the first e-Business applications are more specifically focusing activities and sub-processes often within one and the same functional area. We expect these e-Business applications to “accumulate” and in the next steps become more holistic, crossing functional and organisational borders and covering the major processes of the company.

2.                                       Dot.com vs established companies

Back in the year 2000 most media focus was on the new dot.com companies and mostly B2C (business to consumer) companies. Even though all the projected demand forecasts pointed at B2B (business to business) as the largest and major potential for e-Business, the B2C companies draw the most attention.

There were several role models presented in the academic research and media, such as Amazon.com and E-Bay. Over time the business model (or rather models) of Amazon.com was expanded and refined with the bold intention to establish a world dominance. The merger between America Online and Warner also caused much attention - a “new economy company” acquired an “old economy company”, very much due to the rocketing share prices among the dot.coms.

Blinded by the opportunities created by web technology it was easy to forget, that there were (and are) other important things to make a business successful. The internet potential lies in its ability to connect large amounts of actors in global networks, to reach 24-hours availability, to achieve one-to-one marketing also within B2C settings, to increase customer interaction etc. Most dot.com companies were consequently established within those areas where business and value added could be extracted from “information processing”.

But at the same time, the dot.com companies needed to master internet logistics (delivering one product or service to one customer/consumer at a time), to build brand name image, to find those customer segments with the potential for profitable e-Business etc. One other mistake made by most B2C companies was to establish price levels that were lower than retail prices, which left few extra margins for covering marketing and logistics expenses. And last but not least, these companies had to be lead by businessmen not young web masters.

Today, the “old economy” companies are leading the development of e-Business, both in the development of extranet applications and in the establishment of open market places. Our partner companies express their greatest interest in strengthening customer relationships, but also within the area of purchasing there has been interesting development, like the Covisint market place in the automotive industry.

3.                                       New strategies vs old strategies

During the early phases of internet development many experts foresaw the decline and finally death of mature companies that failed in adopting the new web technology. In focus were strategies that changed from physical to digital business models. Another dominant way of thinking was the shortening of marketing channels, establishing a direct link between producers and customers. Middlemen were no longer necessary, when using the “reach” and “richness” of the internet media to its full potential. You could more easily reach out directly to a large amount of customers with a more complex or richer offering.

Experience, so far, show that e-Business applications are much more supporting old strategies. Our partner companies are, at least up till now, very clear on this point. Strengthening established customer relations and market channel structures are regarded as more important than opening up new channels and market segments. However, this development is not the same as a static view upon positioning in the marketing channel. Even with the same actors in the marketing channel - producers and middlemen and customers - e-Business could lead to changing roles and responsibilities. A marketing channel with support of e-Business has the potential for major improvements both in terms of effectiveness (value creation related) and in terms of efficiency (cost related). The advantages of increased “reach” and “richness” are of major importance even though the channel structures from an overall perspective remain unchanged.

One indicator of the development towards strengthening old strategies (so far) is the preference of extranets over open market places. Early e-business strategies were very much in favour of neutral open market places (administered by a third party actor), where several sellers could meet several buyers in a “perfect competition” situation. The third party market places have almost disappeared from the scene, partly because of the difficulty in attracting sellers and buyers and partly as a consequence of the difficulties in “extracting” profit as middlemen. Our hypothesis is that the success of different market places “mirror” the overall power-dependency relations in the value chain. Therefore, we think that buyer-initiated and buyer-dominated market places have the best opportunities to attract buyers and sellers. So far, the products that seem best “suited” for market places are in the category of indirect materials.

One lesson from our partner companies is that price and cost transparency is not a goal in itself, at least not applying a strictly corporate perspective. Neither is perfect competition in the market place. To the contrary, it is in the interest of both sellers and buyers, and especially sellers, to conceal price levels in specific seller-buyer relationships. This can be more easily handled in extranet solutions, which therefore in many cases seem to be more preferable. Webb technology is promoting transparency and new e-Business models exploit inefficiencies in traditional value chains, but from a company point of view local monopolies are preferable compared to perfect competition.

4.                                       Fast growth vs profitability

The early e-Business models were very much focused upon fast growth - very fast growth at any cost. This development was made possible by all the financial capital that was attracted to this segment. The dot.com entrepreneurs could even make choices between competing financing institutions. Therefore, financing was not considered as a problem in these days.

Behind this fast growth strategy to create a “first mover advantage” were telecommunication formulas, which stated that the value of a network increased when new nodes were added to the network. Following this logic, you could give away your first offerings for free in order to establish a large customer base. Once established, you could introduce new versions, which you were getting paid for. And in the meantime, your company was highly valued on the stock market based on unrealistic valuations of a large customer base.

However, these telecommunication practices were primarily built upon public networks with comparatively loyal customers and a steady flow of revenue. It was a mistake to project this analogy on e-Business, which seldom value the community function (where everyone is communicating with everyone else) as high as in a telecom network, but instead value a more traditional seller to customer relation in the customer base.

But there were also other factors that promoted growth strategies. The business models with low prices and consequently too low margins demanded growth, far more growth than was realistic for newly started companies. Secondly, the investors preferred growth, which made the share prices raise and the company more valuable. Consequently, a large number of dot.coms started an internationalisation strategy without having a well-functioning business model or the necessary business competence on mergers and international marketing.

Today, profitability and value added are more important than growth. The experience from the first generations of dot.coms is very disappointing. Growth was for several reasons not a viable strategy. The change from growth has also to do with the change from “the new economy” to “the old economy”. The “old economy” companies use e-Business applications to add value and build relationships and in the end to promote profitability. Our partner companies, perhaps a bit surprisingly, seem to value the strategic opportunity to create value more than using e-Business as a vehicle to lower costs. They also state that each e-Business project has to be profitable on its own merits, which is quite a change in the direction from growth to profitability.

5.                                       Digital vs physical business processes

The new exiting web technology and the early business focus on dot.com companies made us very easily forget those parts of the business process that couldn’t be handled digitally. The early view was to transform all parts of a business model possible to a digital application. This created several problems. First of all, the dot.com companies often had physical products, which they easily forgot and physical products made logistics an important company function.

Internet logistics is a distribution system that can efficiently handle single products sent to specific customers/consumers. This is a special kind of logistics compared to a distribution system delivering consolidated loads of products to wholesalers and retailers and this form of logistics is very well handled by the old mail order companies. Secondly, the customers didn’t always prefer the digital solution as the best way to communicate with their business partners. For instance they might want personal contact in some part of the purchasing and delivery process.

What is more obvious today is the need to combine digital and physical properties in the development of strategy and operations into business models. On a strategic level, the most successful B2C companies are often multi-channels, like IKEA, H&M and the traditional mail order companies. When looking at the different phases of the business process, the pre-sales and post-sales parts are most easy to transform into an e-Business solution. Many industrial applications focus upon different after market solutions with spare parts, customer communities for discussions and experience sharing etc.

6.            Technology vs organisational focus

The initial technology focus as the major implementation issue has been replaced by the growing awareness that the success of e-Business is very much an organisational issue. Of course there are several very difficult technical issues, such as connecting the e-Business modules to external partners and to the internal IT-systems. But technology is not the major obstacle to the implementation of e-Business.

The experience of our partner companies is that e-Business strategy has to be grounded in corporate strategy and anchored at the top management level. This can sometimes be seen as a problem. Another problem is to communicate the e-Business solutions from a small group of application developers to the rest of the organisation. Internal co-ordination problems, internal resistance and cultural inertia in accepting new technology solutions are important obstacles to solve.

Our partner companies view the questions of shared visions and central co-ordination of e-Business as very important. At the same time a successful implementation demands an in-depth knowledge of specific activities and processes and based upon this knowledge a realistic appraisal of the pros and cons of an e-Business solution. A thorough mapping down to specific activities is therefore an important starting point for e-Business development.

Some final remarks

If we could erase from our brains the memory of the e-hype, the e-Business development of today would seem rather realistic compared to the rate of diffusion of other kinds of technologies. We feel it is important to look optimistically to the future. The web technology has enormous potential and provides a wide variety of opportunities. However, what is important to remember is that web based technology has to be transformed into viable business models, where parameters such as customer satisfaction, value added, cost efficiency and profit are important.

A realistic view upon doing business has to be guiding the transformation of the opportunities of web based technology into specific e-Business applications. Bearing that in mind, e-Business will become more and more important in business. So, finally in the year 2010 we will have accomplished a lot of the things we thought should happen next year, in the year of 2000. The e-Business has by then dropped the “e” and there is only plain Business.