To explain how industry value chains are changing and understand how companies are responding, the Economist Intelligence Unit conducted a global research programme in co-operation with KPMG. They interviewed 42 senior executives at companies ranging from Ford and Hitachi to Celanese and Aventis. To provide a context for these discussions, they also surveyed 331 industry executives in North America, Europe and Asia. What has emerged is an examination of e-business best practices in seven industries: automotive, chemicals, communications, consumer markets, electronics, financial services and pharmaceuticals.
Face-to-face interviews and the written survey have led to the following conclusions:
– The Internet is transforming industry value chains. According to 57% of survey respondents, e-business is transforming their company’s role within their industry. For example, many electronics manufacturers are moving up the value chain to offer e-business advisory services. At the same time, new web-enabled competitors are appearing at each point on the value chain, threatening companies accustomed sources of value.
– Intermediaries are changing, not disappearing. Companies have found it difficult to bypass their traditional intermediaries – 37% of survey respondents say that a reluctance to cut out intermediaries poses a major obstacle to their e-business plans. Instead, companies are searching for new ways of working with the middleman. For example, some financial services firms are attempting to turn insurance agents into customer-service agents, and many pharmaceutical firms are web-enabling relations with wholesalers rather than selling directly to pharmacies or patients.
– For online distribution, companies are developing a “portfolio of options”. Rather than drive customers to a single sales channel, executives believe they must give customers several options. Many chemical companies, for example, are enabling their customers to buy through online marketplaces, corporate extranets and system-to-system connections, as well as through in-person channels.
– Online B2B exchanges will grow in importance, but must change to meet user demands. Online marketplaces such as ChemConnect and Global NetXchange are becoming an important tool for sales and procurement – 19% say that industry-specific online exchanges are important for their supply chain management today, and 48% say they will be in 18 months. But executives say they are dissatisfied with current offerings, and want to see more specialised and customised products. Of survey respondents, 55% note that the ability to customise an exchange’s products and services is a very important feature.
– The main obstacles to e-business are internal. The greatest barriers to e-business lie within the corporation: a need to re-engineer business processes (58% cite this as very significant), a lack of e-business skills (50%) and a lack of integration between front- and back-end systems (45%).
– Senior management involvement is too low. The research indicates that successful e-business strategies require highly involved senior managers. Of companies surveyed, 58% say senior management is very involved in implementing e-business strategy. This means, however, that at the remaining 42% of companies, senior management involvement is inadequate.
– Companies are using e-business to expand products and services. To meet escalating customer demands and to keep products and services from becoming commodities, companies are using the Internet to provide value-added products and services. According to 74% of respondents, this is a very important objective for their e-business plans. Examples include the “virtual ISP” service offered by some communications firms – a service that allows companies to brand their own ISP service – and the efforts of carmakers to allow consumers to order customised cars online.
– Companies are using e-business to reach new groups of customers. The Internet is turning out to be an effective way of reaching new customers, particularly overseas. According to 62% of respondents, this is a very important strategic goal. In interviews, executives said that they consider online marketplaces as the most efficient way to do this.
– E-business improves internal and external collaboration. The Internet is turning out to be more than a sales and purchasing channel. According to 71% of respondents, improved collaboration with business partners is a highly important objective for their e-business strategies, and 70% say that improved knowledge management is highly important. Alliance-intensive industries, such as pharmaceuticals, are especially concerned with collaboration, with 82% citing improved collaboration as highly important.
– No consensus has emerged on where to place e-business operations. Companies are evenly split on the question of whether to form a separate e-business unit – 46% believe they need to. Some argue that to compete with dotcoms, e-business operations must be independent and flexible. Others say that for the online and physical operations to truly support each other, e-business must be integrated into the lines of business. Our interviews suggest that the answer depends largely on a company’s culture and competitive strengths.
– E-business investment will continue to shift to B2B. Recognising that the quickest benefits of e-business are likely to come from business-to-business initiatives, companies are increasingly devoting their investments to B2B. Currently, companies spend an average of 57% of their e-business investments on B2B activities; in 18 months this figure will increase to 62%.
Each of the seven industries examined for this study is moving towards e-business, but at different speeds. Through the written survey of 331 executives in North America, Europe and Asia, the report considered the question of progress and momentum from a few angles: the degree of senior management involvement in e-business, the level of website development, and the percentage of revenues earned from online sales today and those expected in 18 months.
By now, most companies have an e-business strategy. But how likely are these plans to be implemented quickly and effectively? The research suggests that successful e-business strategies depend in part on the active involvement of senior managers.
Senior managers in the electronics industry received the highest rating from respondents by far, with 80% reporting high levels of involvement (see diagram). At the other end lies automotive/manufacturing, in which only 35% say that their leadership is deeply involved. This suggests that it may take longer for these companies – which confront thorny supplier and distributor issues – to implement their e-business plans.
To get a sense of how advanced each industry is technologically, the report asked what website features companies currently offer and what they plan to offer. At one end of the spectrum are companies whose websites offer information only – product descriptions, perhaps, or annual reports.
At the other end are those with websites that offer full transactions online, from ordering to payment, and with a link to the company’s back-end systems. This link is important, because it allows more of the transaction to be completed electronically and thus faster. It also enables customers to check product availability and, potentially, customise their own products.
Unsurprisingly, the large majority (71%) of company websites currently offer information only. Financial services leads overall, with nearly 25% having websites offering more than information and 11% having fully integrated websites. The electronics and consumer markets companies are close behind. At the other end of the spectrum are automotive/manufacturing, communications and chemicals. This disparity has much to do with timing.
E-business first began to sweep across the financial services and electronics industry a decade ago – many of these companies have been working to integrate their systems since then. By contrast, chemicals and automotive companies are relative newcomers. Although certain companies within the communications industry are among the world’s most advanced in terms of e-business, most telecommunications giants are still working to update their systems.
Within 18 months, however, companies expect to make dramatic progress. Financial services, electronics and consumer markets will still have the most advanced websites, with more than a third having fully integrated systems. But many companies in other industries will have caught up. Automotive/manufacturing will still trail, with only 12% offering websites linked to back-end databases, but on average, one quarter of communications, pharmaceuticals and chemicals companies will have such capabilities.