In Search of e-Success

Twenty-two battle-scared CEOs debate the formula for a workable e-business model

January 1 2000 by Chief Executive


Just a few years ago talk of the importance of “establishing a presence on the Web” meant creating a Web site, not necessarily doing business on it. And today? For a start, there are a lot more Webcentric businesses-from pure-play launches like Mind- spring to post-transition bricks and clicks like DLJ’s DLJdirect-that were profitable as of 1999. There are also still hoards of widely known startups-Priceline.com, Inktomi, and, of course, Amazon.com-that aren’t. That’s the irony; despite all the hoopla, profitability remains the exception rather than the rule.

Perhaps equally ironic is the prevailing focus on business-to-consumer sites when it’s the business-to-business arena that’s expected to prosper most in the Internet era. Forrester Research predicts that only 8 percent of e-commerce will be B-to-C; 92 percent will be B-to-B.

Both points were among the issues discussed by CEOs at the E-Business Is Business roundtable, held in partnership with PricewaterhouseCoopers and Chief Executive. Having skirted the hurdle of building an Internet business, attendees debated the next steps-integrating the e-business unit with existing operations and delivering value. Expressing frustration with current metrics for measuring success, Value America’s Rex Scatena suggested, “Measurements like stickiness or page views need to be challenged. I bet the chairman of Nordstrom doesn’t give a hoot about how many people walked in the door, how long they stood in front of a rack, and, therefore, was it sticky. He wants to know about revenue ratios.”

Business leaders also compared and contrasted workable business models, in pursuit of how best to leverage B-to-C experience to succeed in the B-to-B arena. “On the B-to-C side, 45 of the top 50 sites in terms of traffic today are i-brands vs. incumbent brands,” pointed out Andy Zimmerman of PricewaterhouseCoopers. “In the B-to-B side, all 10 of the most trafficked sites used their existing incumbent brands.”

The emphasis on marketing over service was one of several points of contention. Spending $2 billion on advertising “and giving people a bad experience won’t cut it,” contended VitaminShoppe.com’s Kathryn Creech. “You spend all that money to bring people to your site and they can’t find what they want, they can’t order efficiently, or they order and they don’t get it, and you lose them. It shouldn’t be just about building a brand presence; it should be about the customer’s experience with your brand.”

The “if you build it, they will come” operating philosophy is no longer acceptable, the group agreed. In fact, the old issue of the wisdom of launching Internet divisions and potentially cannibalizing existing business has been resurrected. “It will be interesting to see the outcome of the moves on the chess board that are contrary,” noted Ron Watson of Custodial Trust, citing the auction house Christie’s decision to walk away from the on-line auction sector. “It makes me want to be at Harvard in 10 years, reading through all the case histories of the positions people decided to take.”

With speed to market a cornerstone of Web success, participants agreed that waiting for a proven formula to emerge is simply not an option. As Ned Lautenbach of Dynatech put it, “The gold rush has begun, and the people who jump on their horses and head for the gold fields are going to win and those that are home grooming theirs are going to have the prettiest horses in a dead race.” -Jennifer Pellet

Andrew B. Zimmerman (Pricewaterhouse-Coopers): I’ll talk about four different things to think about in developing a strategy: the customer experience, the business model, getting the capital markets to recognize what you’re doing in e-business, and branding.

The latest thinking holds that business-to-consumer is different from business-to-business. B-to-C has been covered quite a bit, and is what there’s been the most learning about. One of the questions that we’ve been struggling with is how much of that is transferable to B-to-B.

Clearly, customers’ experiences drive value in B-to-C, because most of the metrics for valuation revolve around customers’ eyeballs, stickiness, and the like. Some of the learning on the B-to-C side has centered around creating a concept of communities-loyalty programs, personalization, markets of one, markets of fractions of one-finding ways of not only marketing to the individual but to the individual’s relatives and family. Obviously, customer service enhances the experience. Interestingly, what doesn’t necessarily add a lot to the experience is new products and services. It’s improved experience. It’s not as if new books are being introduced on the Internet that are not otherwise available.

The B-to-B channel, on the other hand, will often provide opportunities to bring additional products and services to a customer. The way the customer experience is developed is also different. Where the B-to-C side centers around promotion and advertising, on the B-to-B side, it’s more customer conversion. You have a relationship and now you have to convert it into an electronic format. That requires more of a direct sales and personal touch. It also creates opportunities for efficiency, cutting costs, and customizing channels.

Another opportunity it creates is in product development. At National Semiconductor, for example, when new chip families are introduced, measuring the number of hits-engineers principally-from their customer base helps determine how

likely it is that this particular chip family will be adopted. They’re using how people are reading their Web site for market intelligence and for product development.

Next is brands. I’d suggest that the early adopters on the consumer side are of a generation that actually doesn’t like old brands. People who buy MCI don’t like other telephone brands. That’s part of the reason why they buy it. I-brands play against incumbent brands on the B-to-C side. B-to-B is a bit different.

Currency is another issue. On the B-to-C side, it’s getting to the point where you really can’t compete as an incumbent without creating a currency. It plays in a number of ways. One is somehow spinning out or making the investment in a dot-com, but if you’re embedded in your B-to-C company, the market generally is not providing you with any credit for Internet investments you’re making. If anything, they’re just treating it as a dilutive effect on an earnings-oriented stock.

The other is you can’t attract people because you don’t have an Internet currency or the promise of one, and the third is you can’t roll up. And because these models change so quickly, a lot of times what you need to do is roll up and buy other compa?

nies to complete some sort of portfolio of offerings. On the Bto-B side, we believe analysts are beginning to give companies some credit for successfully implementing B-to-B Internet channels. That suggests that you don’t have to worry as much about creating a separate currency.

Finally, the greatest difficulty is time to market and acquiring talent. We think that associating with venture funds and pre-IPO dot-com companies is currently the fastest way to attract the kind of talent you need, because it’s becoming almost impossible as an incumbent company to attract the technical or other talent necessary to build these Internet plays.

J.P. Donlon (CE): How do companies deal with the issue of channel-cannibalization?

Zimmerman: I think one of the key things is you have to make your existing distribution channels feel that you’re enabling them in the same way. In other words, these VARs, or distributors, are bringing some value to whatever customer set that they’re selling to. If you at least make sure that they’re Web-enabled in ways that enhance their relationships with you, and through that to their customer, you’re giving them a level playing field. If you introduce a Web channel that provides for-sale information or configuration capability that your VARs can’t offer through their customized version of that channel, then you will create tremendous conflict. Web-enable your existing channels as well and let the channels battle it out, whether it’s direct, VARs, or direct-to-consumer.

BUILDING THE FRAMEWORK

Zuheir Sofia (Sofia and Co.): We’re a private company, so the public market issue is not a consideration for us. Our issue is that we really haven’t gotten involved in this yet, and I’m looking for a framework. First, how do you think about whether this is appropriate for you or not? Second, how do you overcome the inevitable resistance in the organization? You’re pointing to the direct sales force being a plus, but in many ways, the direct sales force can also be a minus because they’ll be resisting it.

Kathryn Creech (VitaminShoppe.com): It’s easier for us because we’re B-to-C with a retail parent that owns a significant part of the dot-com. But our pricing structure is quite different than what we have in the stores. The stores are required to place the URL on the window, and we’re placing kiosks in each store. If the store doesn’t have an item in stock, the store manager is supposed to take them to the kiosk, show them how to order on the Web. Obviously, they have to be incented to do that. So, first, don’t wait for consensus to emerge that it’s a good thing in your company. There will always be resistance to change, and if you wait until everyone agrees, you’ve probably missed the opportunity. Try to manage the resistance with appropriate carrots. The store manager doesn’t want to give up the customer, but getting a bounty for delivering that customer to the Web might make a difference.

Clive Mendelow (Chesterton Blumenauer Binswanger): We’re in an industry where we sell products and services. Andy, what’s your experience in terms of a business model-and I know this is complex-for creating a value proposition for the customer? Zimmerman: On the B-to-B side, the three kinds of models we see are customer-centric, vertical hubs, functional hubs. With customer-centric, the idea would be that a company links to its customers and potential prospects. Typically, the model benefits are reduction in cost, transaction processing being an easy one, on the part of the company offering it. You can point to things like stimulation of demand of 10 to 20 to 50 percent, where the same customer buys more from you because you’re on-line and the experience stimulates them to buy more.

On the vertical hub side, the model is an intermediary of some sort, maybe with some participants from industry, which tends to be more of a market-making model. So there, the benefit depends. You have to look on the buy-and-sell side and how aggregated it is. Say, if the buy side’s highly aggregated and the supply side is highly disaggregated, usually the flow of benefit goes to the buy side because they can aggregate demand, and then they can squeeze costs out of the disaggregated supply side. And there’s the reverse as well.

Then you have the functional hub-procurement is a good example-where there will be offerings that say, “We will do your procurement for you across an industry or even horizontally.” There’s a host of these underway and about to be rolled out: paperexchange.com, e-steel.com, e-chem, chemdex. These are not mutually exclusive. For example, if you’re in real estate, I’d imagine you will have a company-centric channel to enhance your existing customer relationships. You might also want to play in the vertical hubs, which are auctioning space and performing other services, or the functional hubs in terms of real estate financial services. You can play in all three. William Adams (Agile Web): We’re a vertical hub. For the last six years, we’ve been trying to state the theory of the case: of how to organize in this environment for B-to-B without using the Internet, because we strongly agree you have to build those relationships first, and you have to figure out what your business processes are. We’re taking those lessons and migrating them towards the Internet using IBM and some other big companies to create an operating system.

The key to this working for businesses across the world is to have a common operating system where some high percentage of your business processes are common, no matter what business you’re in. You can put that in a secure environment, an operating system for the Internet. Then, within your company or industry group, you can buy the operating system and the plug-in tools that you need, and adapt them to your works. That way, you get around some of the problems with “we’re running out of good, smart technical people that can help us migrate our business to an e-strategy.” Why not use the intelligence that’s already in your business that made you successful? Use the IT community to put an operating system in and configure that similar to how your business is successful today, just adapt it to the Internet with the operating system.

Thomas Hardy (Trans-Resources): I’m wondering about the following: There’s no question that there’s a great infatuation with all this space. The financial markets are in love with them. There are all kinds of sophisticated ways of looking at the different models that Andy described, but the thing that perplexes me is to what extent is anyone actually making money at it? Because everything that I read and everything that I see suggests that people are giving it away for free.

Ned Lautenbach (Dynatech): We said that 90 percent of the business is B-to-B. What do you get out of B-to-B? You get real stuff: You get lower costs for doing business, you get much better service, and thirdly, you have a chance to build a relationship. Dell didn’t start out to be an e-business company, but they don’t just operate in one dimension, they have a relationship now that IBM, HP, and Compaq can’t intercept. Cisco has a relationship as well as lower cost, but what is that relationship? Well, you [can] just look right inside their company. You can see where your business is, where it stacks up, when you can get it-much more efficient, much clearer. All of a sudden, they’re a much easier company to do business with and you like them.

Donlon: Are you saying that you’re trying to build an e-relationship to parallel your other relationships?

Lautenbach: In a B-to-B world, when you’re doing business with customers on an ongoing basis, the ability to look all the way through supply chains is what you get, and the ability to reduce cycle times, give better service, cut cost. This isn’t an auction. A guy doesn’t wake up every day and say, “I’m going to go out and auction off my supply chain at the back of manufacturing,” like you do for a retail sale. There’s a commitment there, and once those commitments become good, you know they’re efficient, low cost, and they work. You stay.

Rex Scatena (Value America): That works for B-to-C also because businesses want a relationship with the customer. The person who makes a spoon would love to be able to tell me why it’s a better spoon. The same principle applies in B-to-B-half of our business is B-to-B, the other half is B-to-C. Although the B-to-C side is growing rapidly and represents the larger market ultimately, they’re both equal in that people who make products sold to businesses want to communicate to the customer just as badly as people who make products that go to consumers.

The problem in the consumer world is that the retailer, by and large, stands in the way of that relationship, because it is the retailer that has to communicate the quality, features, or functions, or benefits, or applications to the customer. With more than 90 percent turnover in the sales force on the retail floor, let’s face it, you’re not going to get a whole lot of people out there who are qualified to intelligently explain a product and therefore allow the manufacturer to have an intimate relationship with his customer. What the Internet does is it gets that salesperson out of the way and allows the manufacturer to talk directly to their customer.

EMBRACING CHANGE

Tim McAlear (Bill’s Dollar Store): Maybe we’re just in a stage of the evolution of channel conflict, rather than channel replacement. To me, Rex’s business is a lot easier than mine, and to him, mine is easier. I think my side of it will have to rely on the entertainment factor, that people will still want to go to a store, look around, and shop. I think the buying evolution that’s going to take place will be more in Rex’s favor. We will have to manage our way through the conflict to find out what the channels will be a couple of years from now.

Tami Longaberger (Longaberger Co.): What Rex said has helped ground me in thinking that this really is not rocket science, it’s basic business practices. All we’ve ever done is sell direct in people’s homes and our perspective on e-commerce, QVC, infomercials, is “that’s our turf.” Now every product is beginning to figure out that this is a real good place to sell.

We have intimate, personal relationships as the manufacturer, and also through our salespeople with those customers. That’s incredibly powerful. And that’s how you sell $1 billion dollars worth of baskets. What’s interesting to us is that eBay is now influencing our business. There’s a secondary collector’s market for our baskets. We’re finding that people are reselling our products via eBay. Also, our sales force, each of whom gets products in advance of product introduction, are selling the product before it gets to market on eBay at 10 times the price. So there’s a better mark-up when you sell it the second time, which has us saying, “Hmmm. What’s going on here?”

Arnold Pollard (CE): Ten billion in baskets on eBay. [Laughter]

Longaberger: We say we’re not on the Internet, but other people have our products on the Internet. So we’re trying to catch up.

Gert Munthe (Alphanna): What amazes me about the Internet is that every time something new comes along, there’s a great opportunity to change it for the better. The value chain in B-toB is one example. But the pricing model in B-to-C may be most intriguing. The local telephone minute used to be free. Wireless started at 25 cents per minute and it’s still much more expensive. My favorite example is a cup of coffee in America. It’s free everywhere except at Starbucks, where you pay $4 to $5 for it. And your baskets, 10 times as expensive. It’s a fabulous opportunity to recreate the whole pricing mechanism-create the i-basket or whatever.

Larry Austin (Austin Travel): The travel agency business is changing dramatically every single day, and we’ve been fighting it as much as we could. About three years ago they started to bring on e-ticketing, electronic ticketing. Everybody fought it, saying, “I’ve got to have that piece of paper to go to the airport.” About a year ago, we were doing about 2 to 3 percent of our tickets on e-ticketing. It’s now up to 62 percent of our corporate business. I’ve been using it myself; it’s a non-event. And it’s saving us a lot of money on delivery.

Our business is changing. What do we do to make up for the airlines taking away the 5 percent commission? One of the things we do is charge fees. If you want a ticket, it’s $10. We’re going into the Internet business, and the funny part about it is my Internet company is competing with my core company. But this is what you have to do-change with the times.

William Hickey (Sealed Air): The fear that a lot of established firms have in terms of e-commerce is that the road to e-commerce is a road to lower profitability. You can make money in e-commerce on a B-to-B basis by taking costs out of the system. It’s up to the CEO to be sure that you’re at least as profitable in your e-commerce business. We hope to be more profitable by taking more costs out of the channel than we pass on to the ultimate customer.

We have a large customer, for example, that buys from us every week. They spend X number of hours and dollars preparing their purchase orders that they send to us, and we spend X number of hours putting it in the manufacturing system, loading it on trucks, and shipping it out. By having their production communicated to us via the Internet, they don’t submit purchase orders, we don’t receive purchase orders, go through credit checks and processing. They know they’re getting X amount per week for the next 52 weeks. It takes significant costs out of the system, and the price reductions we give them are shared between us in terms of that cost.

Andrew Carter (Hyperion Capital Management): This conversation’s been mostly about using the Net to market either services or goods, and that’s a business I’m not in at all. I’m in the business of selling ideas as expressed in investment portfolios for my clients. My clients by and large are multibillion dollar institutions, and I can’t sell to them on the Net. I give them my reports on the Net but that’s a relatively trivial matter.

What isn’t trivial is the ability of the Net to distribute-among all of us in the investment business-information. Bloomberg, a long time ago, started doing this on a net of his own, just to take an example. Everybody in my business has a Bloomberg, and everybody can see the prices of lots of securities, and all kinds of news and economic materials, which we were unable to see as recently as 15 years ago.

Pollard: We’ve been skirting around what I regard as one of the gut issues in this: People are at a premium in the dot-corn business marketplace. That has to be one of the biggest pressure points for anyone who is trying to succeed in that space.

Patrick Pittard (Heidrick & Struggles): We did a handful of dotcom engagements last year. This year, we’ll finish with more than 15 percent of our revenues from dot-corn searches. If you think the situation is bad now in terms of human capital, next year it will be desperate. It’s only going to get worse.

There are a lot of issues that surround that. One is the actual supply of leadership-babies being born-is reducing. The need for leadership is increasing. Those companies that try the same old tricks to attract important human capital are going to fail. Those that think in different ways to attract and maintain-and I would say retaining is more important than attracting-are going to succeed and survive.

Donlon: To what degree will each of your products or services be fundamentally different when you become an e-business? Do you think your products or your services will be fundamentally different or simply slightly different and recognizable?

Arthur Mirante II (Cushman & Wakefield): I’ll hedge in one way. We’re a service organization, and I think that as much common ground as there is between products and services, there’s a big difference in the application. I’m sure you can buy vitamins, without a great deal of risk, from the Web. But advising a client without spending a lot of time in understanding that client and customizing your response to that client is something that’s missing in buying advice from the Web. It’s there, in a pre-existing way. And that, I think, is the essence and the advantage of the service companies not being disintermediated. I think we’ll be a hell of a lot better, faster, more reliable, and we’ll be giving our clients even better advice in the future.

Barry Feld (PCA International): We’re very much a business in transition. We operate portrait studios. We have 3,300, in WalMarts primarily, and in Kmart in the U.S., Mexico, and Canada. We also operate an institutional company that does a lion’s

share of the photography in schools around the country. Technology has had quite an impact on our industry, and so we embarked on a fairly straightforward e-commerce and technology initiative. Today, we are transitioning our company from a paper products company, if you will, to a digital strategies company. My challenge is how to take a very successful, very profitable business and not turn it into a business that doesn’t make money as a result of embracing new technology. Although we would dramatically improve our valuation, I don’t know how long we would last in the marketplace. [Laughter]

Richard Rowe (RoweCom): We’re in the publishing business. I foresee, similar to what other people have said, three basic changes: far more customized, more customer-driven; far more interactive, particularly around virtual communities that will be global in nature; and I think the economics will change dramatically. I think subscription revenue will be negative-we’ll be paying people to come to our site, rather than their paying us to come. The major revenue for publishing will be a combination of some advertising and a lot of transactions. A publication will become a transaction site for a virtual community.

Ron Burns (J. Walter Thompson): If we do this the way we’ve done it for 138 years, which is growing and building brands built on fundamentals-based on consumer insights, points of difference, building relationships with customers-and making those recommendations as smart and as basic and as solid, without mad-dashing, without panic, then all good things will happen. If the industry misses that, then we will carry too many clients into other directions.

Ronald Watson (Custodial Trust): We’ve long been in the business of electronic communication with our customers. The convenience and the benefit of the Internet, and e-commerce as it’s developing, is the efficiency with which we can do it. The fact

that the platforms are becoming standardized, that technology is easier for the customer to use, the throughput rates are very high, and we can get the job done cheaper and better, and to a higher level of customer satisfaction, than using the old versions of essentially the same technology, is a major plus in adding value to the business.

But the key elements of the investment banking business-the high level of quality and execution of customer orders, the adding of insight and giving of advice-still remain a personal kind of business, and we will have to continue to deliver those in the more standard ways, using the tools available through the Net as a way to add some value to it, build relationships.

Heidi Hutter (Swiss Reinsurance America): Our business is largely selling promises to pay if certain events happen. We make our money by diversifying risk, which means collecting baskets of these things. In many ways this makes us an aggregator, which means we’re vulnerable to being disintermediated, as is everybody, I think, who stands between the person who has original risk and the capital provider who pays for that. As a consequence, I think the Internet will radically change every single thing we do, every single thing we’re thinking of doing.

In terms of our products, it will massively widen the breadth and the scope of what we do. At one end, there will be radical simplification. Why does anyone have to fill out an application? Shouldn’t we be able to search the Web? Let’s take a business like Dollar Bill’s. Why can’t I, as an insurance provider, search the Web, get all the information about you that’s already in the public domain, and come to you with a quote, without you filling out an application? At the other extreme, I think we’ll see the development of a much more complex product, keyed off the ability to search out and use intelligent agents.

When we start thinking that there are sacred cows, that’s usually the path to oblivion.