eBusiness: The Hope, the Hype, the Power, the Pain

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The Dinosaurs Strike Back

“Why jump into this business when nobody makes money?” Jurgen Hubbert, Daimler Chrysler Board member.

“It took us a long time to get over our denial and accept the fact that the Internet is not a temporary phenomena but a true change in the market place.”[1] – David Komansky, Chairman and CEO of Merrill Lynch

"I was afraid of it, because I couldn't type." -Jack Welch CEO of GE.

When the eBusiness revolution began in the early 90’s, many in the established enterprises were amused, then bewildered, and increasingly desperate. Had all the laws of economics and business changed? Or, was this just a temporary insanity that would pass once everyone came to their senses? Some corporate leadership got it very quickly; others remained bewildered. As the business environment changed dramatically during the 90’s, established enterprises awoke to find many of the cherished truths and “rules of thumb” no longer working. “Creative Destruction” became the fear and the mandate for every executive.[2] It was easy to characterize the old economy companies as out of touch and dinosaurs. “They don’t get it” was the “in-crowds” way of dismissing the established leadership. Analyst after analyst and columnist after columnist pronounced the death of the mainframe, yet it would not die. AT&T, the venerable Ma Bell, had created many of the basic technologies at it’s own Bell laboratories, but had little to show for it. Xerox, especially through their Palo Alto Research Center (PARC) had literally reinvented computing, but it took a guy who started his business in a garage to make the Xerox vision into revolutionary product – the Macintosh.

Bill Gates epiphany about the Internet on December 7, 1995 is legendary. How he turned Microsoft on a dime is still being debated as either brilliant or illegal! Pundits dismissed IBM as an irrelevant purveyor of big iron and everyone knew mainframes were dead. Defying the prepared grave, IBM converted itself into a full service provider of Internet technologies and services. Jack Welch, CEO of GE admitted: "I was afraid of it, because I couldn't type.[3]" Leading by example, Welch, the most admired and successful old economy executive hired a young assistant to follow him around and inculcate in him the ways of the network. He was so happy with the result that he established this as a pattern for other GE executives. Later he befriended Scott McNealy, the SUN CEO and invited him on to his board and made him one of his golfing buddies.

The old economy companies have substantial assets in the eBusiness world. Earnings, assets, brand names, and people were all advantages (in many cases) in the competition for customers.

By the beginning the 1990’s even Microsoft, founded in 1981, was viewed as an established enterprise that “just didn’t get it. Then Bill Gates had an epiphany and announced that he was going to turn Microsoft into an Internet company. In an amazing business transformation, he did just that. Many feel that he embraced the Internet only to either destroy or co-opt it. The industry is still debating the tactics Microsoft used, but no one doubts the spectacular success that they had.

Investment brokerage firms were one of the best examples of firms that were slow to get it. As David Komansky, the chairman of Merrill Lynch, said, “It took us a long time to get over our denial and accept the fact that the Internet is not a temporary phenomena but a true change in the market place.”[4] In the meantime the on-line players like AmeriTrade, E*Trade, and Datek looked like they were well on the way to dominating the on-line market. It was not to be. The established brokers came back quickly and strongly in 2000.[5]

Victoria’s Secret

When Victoria’s Secret decided in 1997 to go on-line, they faced a fairly typical situation for old-line retailers.[6] First, they were comparatively late to decide to play in this arena. They had a huge brand name that could be leveraged, but also must be protected. They had established relationships with customers and there were expectations that went with those relationships.

The advantage of the brand was highlighted by the first deployment of the Victoria’s Secret site. In 1998, they put up a site that simply invited viewers to send in their email addresses. With no advertising or promotion, over 300,000 web surfers sent in their address. People simply went to the site because they expected it to be there.

As an established enterprise, Victoria’s Secret wanted to be sure that its Internet customers had much the same experience as its catalog customers. That experience begins with very high quality photographs of some of the worlds top models wearing the Victoria’s Secret product line. There were some technical challenges to delivering content at a high enough quality over low bandwidth connections. Servers also had to be scaled to maintain the quality and availability of service even when heavily loaded during peak periods or promotional events. A catalog sale is initiated when a customer calls one of three call centers strategically located around the country. The sales representative is able to use a private network to check an IBM dB2 database and tell the customer if the item is in stock and when it might ship. The Internet customer needed to have the same experience. This required tight integration of the Web site with the established database.

Lastly, Victoria’s Secret wanted to be able to use the web to build the brand further. Toward that end, they planned an early deployment of the web site that would broadcast the companies spring lingerie fashion show from Cannes. This last ambition was to be by far the most difficult to implement. Server and bandwidth requirements for streaming video are the largest of all of the web experiences. In order to size the servers, they had to make an estimate of the peak loading and then design around that. In the February 1999, they did their first fashion show. From a marketing perspective it was an enormous success. Far more people visited that anyone had planned for. From a technical perspective and a consumer experience perspective, the broadcast was a complete fiasco. The web site simply could not handle the anticipated demand.

The resulting bad publicity may have once again confirmed the adage that there “is no such thing as bad publicity!” Victoria’s Secret could never have afforded the advertising that came to them for free as the result of the show. If building brand awareness was the goal, there were few who were not aware that Victoria’s Secret had just conducted an ambitious web broadcast that failed because so many people were interested. In the following years, they got better and better at meeting customer expectations and customer awareness has continued to grow.[7]

Ford

In June of 1999, a task force of Ford Motor Company presented an audacious vision to CEO Jacques Nasser and other senior executives.[8] What would Ford Motor company look like if it operated like Dell Computer in offering mass customization of its products for buyers or Wal-Mart if it gave it’s suppliers the responsibility for “stocking the shelves,” or making sure that they controlled inventories for Ford. Apparently, the vision was so compelling that Nasser committed the company into a massive makeover into what he hoped would be the first automotive Internet eBusiness. The strategy was multifold. The objective was to increase revenues through “build to order” sales and through the creation of a services strategy in which packages of services would be delivered to consumers in their cars. ''It could give us a bird's-eye view of what consumers want out of a car before we build it,'' J Mays, Ford design chief. This was the B2C portion of the vision.

Ford also anticipated stream lining internal business operations. They planned to jump start this by offering each employee a home computer, a printer, and Internet access for $5 per month. To do this they [planned to partner with Hewlett Packard, UUNet, and PeoplePC.

Ford also created CustomerConnect: linking consumers and factories with financiers, parts suppliers and designers. Planned components of this strategy included:

· Using Microsoft’s CarPoint for sales and information,

· Yahoo for direct customer contact,

· Price-line.com for on-line auctions

· TeleTech to help provide a call center system for customer support.

Ford also anticipated a host of new services: With Visteon, CutomerConnect plans to wire every Ford for wireless access to the net, and then provide email, navigation, news, voice recognition, and communication services –all at a profit for Ford. Services, sold on a subscription basis, would provide a continuous revenue stream from every buyer.

The objective is to change the business model from one which produces cars at a steady rate, inventories them for an average of 64 days, and then sells what it builds through rebates and marketing into one in which it sells cars, builds to order, and delivers promptly to customers. This change eliminates the need for the $60 billion inventory and allows production to immediately follow shifts in consumer taste. This is an ambitious undertaking that is far from certain to succeed. It also takes dead aim at the roughly $2000 dollar dealer contribution to end user costs.

Not surprisingly, this has many of the established dealers and suppliers in a nervous state of watchful waiting. It has also led some dealers to take pre-emptive political and legal actions to make it more difficult for auto companies to connect directly to the consumers, potentially bypassing the dealers. In Texas, the auto dealer associations pushed for and got protective laws in that regard.

As we shall see in the next chapter, Ford also anticipated wringing nearly $ 9 billion form the supply chain on the business to business side of the market when they formed AutoXchange. These plans were superceded by the formation of Covisint jointly with GM and Daimler Chrysler.

Microsoft

It may seem audacious to lump Microsoft with the Dinosaurs, but with businesses changing at rate consistent with “Internet time,” Microsoft has been through two major eras of its existence and embarked on a third era on June 22, 2000. Bill Gates and Paul Allen founded Microsoft in 1975 based upon a vision of how the microprocessor chip (invented by Ted Hoff, RPI engineer, at Intel) would create of world of “personal computing” and bring computing to individuals, homes, and offices in an unprecedented way. By the middle of the 1990’s there was a new vision of computing developing. It would not be enough to have the latest and most powerful individual computer running the latest and most powerful applications. Instead, computing was about being connected. Those technologies that had been created by scientists for sharing of technical information suddenly became necessary for every personal and business reason imaginable.

Scott McNealy, founder and Chairman of Sun Computer, popularized the motto “The Network IS the Computer!” Netscape, HTML, and later Java were expected to change the rules of computing and render the operating system irrelevant. The hope in non-Microsoft circles was that these events would break Microsoft’s strangle hold on the industry. The fear at Microsoft was that the rest of the world was right.

Microsoft had built its business by created what had become the DNA of personal computing. It began with DOS and then continued with Windows. Microsoft owed its early successes to IBM, but it parlayed that lucky relationship into near total dominance of the industry. When IBM created the personal computer they needed to have an operating system for the computer. They might have licensed a popular operating systems of those times, CPM, but they concluded that they would be in a better business position f they created their own. Anxious to move quickly, they decided to go to a comparatively unknown company, founded by a couple of young college dropouts to create an operating system like CPM for the new IBM PC. Today they might wish they had done it themselves!

The Microsoft-IBM relationship resulted in a bitter split after Microsoft began creating OS-2 for IBM. Eventually friction between the two over OS-2 led to a split in which IBM took over OS-2 and Microsoft plunged forward with the development of Windows. Microsoft insiders cited IBM’s “arrogance” and IBM complained of Microsoft’s “duplicity” in the creation of Windows while working on OS-2. The ensuing split divided industry opinion for years as OS-2 won technical raves and Windows won market share.

Now Microsoft’s “DNA” of the computer industry was threatened with obsolescence. Window might not matter any more. All anyone needed to participate was a Netscape browser running on a computer connected to the Internet. Microsoft just did not “get it.” Personal computing was becoming connected computing.

On December 7, 1995 (ironically this was Pearl Harbor day!) Bill Gates dropped a bombshell on the industry and Microsoft itself. He declared the critics exactly right. The network is the computer, he admitted, but he then laid out the road map for how Microsoft would live and thrive in the new era. Microsoft was fond of using the term “jihad,” or holy war, to describe the way Microsoft responded to grand challenges like this one. Microsoft has also been described as placing a “fatwa” (death sentence) on Netscape on this day.

A key element of the Microsoft strategy was to adopt (some would say co-opt) the emerging Internet standards and to do them better and cheaper than the competitors. The core of that strategy was the creation of the Internet Explorer browser beginning from code licensed from the Mosaic spin off of the NCSA. The Internet Explorer code would then be intertwined with the Windows code and embedded in all of the popular Office applications such as Excel, PowerPoint, and Word. The goal was to create a seamless experience for users with Microsoft Windows at the core. The business goal was to create the DNA of networked computing, just as they had created the DNA of personal computing. Once again, Microsoft would be indispensable.

Only the most ardent of Microsoft opponents could deny that they were successful in doing exactly that. In fact, it was just that success that became the core of the anti-trust case. The real question here was whether Microsoft illegally “tied” its browser to Windows and other products in a way that used their monopoly on the desktop to crush Netscape and dominate the network-computing world. This part of the Microsoft case will be considered more fully in the “Anti-Trust” chapter on “Law and Ethics.”

Looking at these events from a business perspective (leaving aside the legal questions for a later chapter) is a revealing event. By this time, Microsoft was large and well established company. It had a virtual monopoly on the desktop, and monopolies are not necessarily illegal. The fear was that the battleground had shifted. Microsoft had won the high ground, but everyone else had left for a new territory! When Gates called for the Internet “jihad,” Microsoft was not well positioned to respond.

Microsoft did not have first mover advantage. That advantage went to Netscape for the browser and to Sun for the networked computer. Still, Microsoft had overcome Apple’s first mover advantage in graphical user interfaces quite handily. A first mover advantage is only a competitive advantage if it can be defended. Unless patents protect the advantage, defending first mover advantage usually entails creating high switching costs for users or continuously innovating to make it impossible for the competitors to catch up.

Microsoft helped to lower the switching costs by making the Internet Explorer (IE) browser free to users. Anyone with a Microsoft operating system could download the browser anytime they were connected to the net. Microsoft used it’s dominance (legally or illegally –that is the question) to distribute IE with every new operating system, and since most new computers were delivered with Microsoft operating systems, this meant that most new computers were delivered with Internet Explorer. In a turn-about on first mover advantage, Microsoft even raised the costs of switching to Netscape by requiring manufacturers to preload IE with every computer they delivered with Windows on it. In order to switch to Netscape, users had to either remove or ignore IE and install Netscape. This clearly (legally or illegally –that is the question) raised the switching costs and encouraged use of IE.

Another way to lower switching costs from Netscape was to make IE a high quality browser that could do everything that Netscape could do. Unbiased observers generally feel that Microsoft did an excellent job at that. IE usually released support for standards that came sooner and performed better. As Java emerged as a potential standard, Microsoft both licensed Java from Sun and released a Java Virtual Machine that was at least as powerful as the competitors.

Where Microsoft ran afoul of competitors was in its propensity for “extending” standards with proprietary extensions that often took advantage of Windows specific functionality. This infuriated Sun, Netscape and other competitors since it often meant that developers would take advantage of these goodies and then tie their applications to Windows only environment in direct contradiction to the cross platform intent of the originators of the technologies.

Obstacles to success

What are the obstacles to the success of established enterprises? The following list enumerates many of these.

· Fear

· Ignorance

· Denial

· Culture

· Bureaucracy

· Cannibalization

· Channel Conflict

· Brand Identity

Fear: Jack Welch CEO of GE was ready to admit to fear when he said "I was afraid of it, because I couldn't type," but he decided to overcome the fear rather than give in to it. Businesses can feel fear for many reasons, including of all of the other items on this list, especially including ignorance, brand identity, cannibalization, channel conflict, and so on. Fear can be both rational and irrational. There are lots of things to fear when a company is about to change it’s business model and this is even worse when the outcome is far from certain. But, there is also something about the Internet, that generates fears, particularly in those who matured before it existed.

Many executives have seen their colleagues careers ended and/or shortened by either denial or missteps in their Internet strategy. They are caught between the frying pan and the fire. If they try to sit it out, they risk being labeled “old guard.” If they jump in with both feet, they risk making a horrible mistake. It should be no surprise that some executives chose retirement over these alternatives.

For those executives that have worked in a hierarchical institution for most of their careers, the rise of the internet has broken down the perquisites of rank. Rank means nothing when technology discussions start! Technology is the great leveler that can favor the entry level employee over the long experienced executive.

Ignorance: Ignorance is often the other face of fear. The generation of business leaders now in power did not come of age in the Internet generation. They had to learn! And they often learned from their juniors and their children. Jack Welch first was stimulated by his son and then decided to hire a young employee to mentor him. Many dubbed this the “geek mentoring” program.

Ignorance combined with fear often leads to bizarre and misguided efforts.

Denial: Where ignorance and fear are found, denial cannot be far behind. David Komansky, Chairman and CEO of Merrill Lynch, observed that “It took us a long time to get over our denial and accept the fact that the Internet is not a temporary phenomena but a true change in the market place.” It was fortunate for Merrill Lynch that he overcame that denial. Otherwise the pure Internet players and those that got it quickly, like Charles Schwab, would have eaten their lunch.

Denial is a timeless human strategy, and is often a successful defense mechanism against faddishness. A healthy dose of skepticism is a good thing for most executives. The hard part is knowing when skepticism ends and denial sets in. Skepticism mandates that the skeptic pay attention to the phenomenon but continue to test it in every way possible. Denial prefers to “avert one’s eyes” from the phenomenon rather than to have to deal with it. The skeptic is anxious to challenge the assertions of the “true believers.” Those in denial really don’t want to engage at that level.

Denial usually leads to delay and that often leads to managing from behind. As we have seen there are special challenges for those who are slow to “get it.” It is not impossible to be a fast follower, but you had better be pretty fast and a pretty good follower. Fall too far behind or let too many organizations get in front of you and recovery may not be possible.

Culture: Culture can be either an obstacle to change or an enabler of change. It depends upon the particular culture of the organization. In GE, change is an article of faith. In the transportation industry change is a slower event.

Computing has also established itself as an element of culture in corporations and indifferent geographic regions. Twenty years ago in the United States (and far more recently in Europe and Asia), computing was usually seen as the tool of underlings. It was used by secretaries for Word Processing, and by junior accountants and bookkeepers for Accounting. Armies of semi skilled and often lowly paid workers were classified as data entry workers. In fact, a computer on your desk was often a sign of LOWER status. This has changed rapidly and severely in the United States. What self-respecting young executive would want to be without her Palm Pilot, cell phone, or laptop? In many circles, technology has become a badge of honor, but that is not true everywhere.

Bureaucracy: Sometimes it is just the usual corporate inertia, characteristic of large bureaucracies, that is an obstacle to change. For many years, General Motors had a very restrictive computing policy that mandated exactly what everyone would have and use on their computers. If you wanted to do something innovative, it would have taken far more bureaucratic wrangling than most executives would be willing to undertake. This often meant that innovation could only be done by those who were given the official job to innovate. History has shown that large bureaucracies are very bad at setting directions for innovation. Bureaucracy is the enemy of innovation.

Cannibalization: One of the very toughest management decisions is the decision to do something that might take away sales and market from a successful product or service. Companies are loath to compete with themselves, and text books are full of stories about companies that would rather not, and then lived to regret that decision. As we saw in the section on “Strategy,” many companies are vulnerable to “disruptive technologies” that may be cheaper, simpler, and even less functional, but that can do the job for the customer.

If companies do not obsolete their own products, then there is always someone who will do it for them. When Andy Grove was Chairman of Intel, he was an ardent disciple of Clayton Christensen and disruptive technologies. Grove’s book was entitled: “Only the Paranoid Survive,” and that was they way he lived his business life. Intel has had number of close calls over the years. One of the most important cases came when AMD and Cyrix introduced less costly chips for consumer and low cost business computers. They could not rival the power of the Pentium –at first. But they quickly moved into the lowcost market and then began to drive improved performance into the more profitable sectors of computing. Ever the paranoid, Intel countered with the Intel Celeron and used their awesome power to produce at scale and low cost to drive the prices down and make things uncomfortable for the competitors.

Business leaders must always be cautious when they hear the argument that: “But… but ..if we do that it will kill our …….”

IBM had to face this dilemma with their mainframe and midrange computing business. The fast Unix (AIX) based systems rivaled the mainframes in power and the PC’s could take market share from all of the systems in one way or another. Once Lew Gerstner was on board, a strategy developed. He viewed the future as networked computing with every box a server! The Mainframe, the AS 400, and the Unix boxes were all seen as complementary solutions for network services. IBM also made the complexity into an advantage. IBM could sell services into complexity. They could even develop a credible claim to being technology agnostic. Since they sold everything from NT based servers to mainframes, they had no particular technology ax to grind. Theoretically, one might expect a less biased answer from an IBM consultant who had all of the systems to sell than from a Microsoft consultant who surely wanted to sell NT based servers!

The key to driving this strategy was to develop the cross platform solutions like Java, XML, Linux, and so on to allow customers to mix and match their systems.

Merrill Lynch was another organization to face the cannibalization choice. They had a high margin, fairly high service commission business for their brokerages. If they were to move to the Internet, it would surely cannibalize some of these high paying customers who would then take advantage of the low commissions in the internet business. Finally they decided that it would be better to have Merrill Lynch getting the low commissions than Charles Schwab, e-Trade, or AmeriTrade taking over their customer base and getting the low commissions. It was a difficult and gutsy call.

Channel conflict: If your business depends upon a channel for getting product to the customer, then any change to the business models means that you must consider the effect on the channel. If you won the channel, this is an easier thing to accomplish. If not, you have to be careful.

Examples of channel conflict abound. Dell Pioneered a direct asles model that was far less expesive and far more responsive to customers. When competitors such as Compaq tried to respond, they ran head on into their channel. Their dillema was that if they competed directly with the channel, the channel would boycott Compaq and damage their revenue stream. If they did not compete with the channel, Dell would eat their lunch. Dell ate their lunch.

Automobile sales are a very special case. Independent automobile dealers have a long history as the channel, and possess great political and legal clout. When the major manufacturers scu as Ford, began to make some noises about gearing up for on-line sales, the dealers, flexed their political and legal muscle to make that impossible. In the State of Texas, they obtained legal protection from competition by the manufacturers. Many other states had similar laws.

Merrill Lynch, we already noted that Merrill Lynch had to decide to compete with itself, but one of the aspects of that decision was that it put the local brokers off to the side. As the original company known to have brought Wall Street to Main Street, this was a difficult course for Merrill Lynch to navigate.

Levi Strauss, tried to initiate direct sales of Jeans over the web, but the retail chains retaliated with a boycott. Levi Strauss at first backed down and then relaunched the site with a much wider array of product and with more coordination with the retailers.

Competing with your own channel is never easy.

Brand Protection: Brand identity can be a powerful asset for the established enterprise, but it can also be an obstacle to success in eBusiness. Brand identity must be protected. As we saw with Victoria’s Secret, they had a reputation for a high quality visual experience for the purchasers. They could not afford to irritate the customer by providing less on the web. It was quite a challenge! In fact is was a challenge that they first failed, but eventually overcame.

Carve Outs

The “Carve-out” is one strategy often used by established enterprises to obtain value from an internet portion of their business and to give the business some insulation from the bureaucracy of the parent.[9]