PracticeConsultingAccountancy Age Feature: E-Business – Making the business world a smaller place

Accountancy Age Feature: E-Business - Making the business world a smaller place

The Internet allows companies to reach around the globe. But, as John Davies and Chas Roy-Chowdhury explain, e-businesses are rewriting the strategy rule book.

In the middle of last year, General Motors announced a development that simultaneously accelerated the processes of globalisation and e-business.

It merged all its e-commerce and electronic trading activities into one coherent and logical entity – E-GM. The function of E-GM is to provide one focal point for all the e-business activities of General Motors.

Ultimately, as well as vehicle purchase, finance arrangements, online demonstrations and detailed information on services, customers will be able to contribute to the design of the bespoke motor car. But the most significant impact of the E-GM announcement was not encountered in General Motors. The GM decision sent a series of messages to the wider business community. It showed that important and influential blue-chip corporations had acknowledged and embraced the electronic future for commerce.

The impact of large organisations creating interactive websites with the capacity for e-business is acting as a major stimulus for widespread growth. Companies want instant internal and external communication, and they seek to enhance their business potential through electronic formats.

Their expansion patterns, merger and acquisition strategy, plans for the development of new markets and global personnel approaches are underscored by communication and IT policies which integrate organisations, promote efficient global functioning and enhance their brands throughout the world. In the enterprises that have embraced electronic business activity, key benefits are beginning to emerge.

Product development and distribution becomes more cost-effective. Marketing can be vastly more efficient through direct targeting to named individuals.

The core commercial activity is speeded up by automatic processing. Paper is eliminated and trade takes place instantly.

Corporations have already learned from the success of direct selling on the Internet. Dell Corporation sold $1m worth of computers every day in March 1997. Early in 1998 it had reached $5m a day. In January 1999, Dell’s daily Internet sales exceeded $14m, representing 25% of its total income., the now legendary Internet bookshop, reported $16m for 1996. In the fourth quarter of 1998 alone, it brought in more than $250m.

The impact of the early achievements of e-commerce is encouraging strategic planners to take a blue pencil to assumptions about strategic development.

Globalisation has encouraged e-business but at the same time realisable gains from e-commerce are forcing companies down a progressive route which must lead to greater globalisation. Making effective use of resources and promoting higher returns has always been a key strategic goal. E-business can, if properly managed, deliver both.

Two senior managers from the Boston Consulting Group – Philip Evans and Thomas S Wurster – have argued that e-business is creating entirely new commercial models. In their recent book, Blown to Bits, they suggest that e-business has produced an entirely novel concept of the functions of trading organisations and the new structures which are emerging must force business people to reconsider even their most basic commercial tenets.

The redefinition of markets, the capacity to remould products and services rapidly, the tendency towards co-operative activity even among hard-nosed competitors and the facility to reach finely targeted groups instantly, are changing the framework inside which commerce is conducted. In the past, companies grew to global giant size to have sufficient scale and scope – critical mass – to compete for the big markets. The electronic business revolution means – or can mean – that some of the fixed points in the traditional strategy for organisations can be completely dissolved.

Analysts agree that e-business is the most significant trigger to the achievement of economic globalisation. It is challenging established precepts about the way in which global demand can be anticipated and met. Bill Conner of Nortel Networks, told Fortune that ‘e-business is a full-scale approach integrating marketing, sales and service, bringing customers and channel partners closer together. The second wave of e-business is not about individual transactions it is about fostering personalised customer relationships.’ Advisers now have specialists helping major corporations on e-purchasing, which is a global buying strategy conducted – potentially – wholly on the Web. Disciplines of e-marketing and e-solutions are already doing substantial business.

What is different about the current trend is the sweeping and all-encompassing nature of the process. It is fuelled by an appetite among ambitious businesses for massive new markets, the power of concentrated investment, the potential for large-scale cost benefits and the multilateral facilities offered by new communications technology.

Intranet systems within corporations allow information to be shared and manipulated on a previously unheard of level. The development process for conceptual or idea-based products and services has been accelerated by new silicon chips and the processing power which they offer to business.

Communication with customers is much more sophisticated with high-quality messages sent to key targets in seconds. Data, especially financial information, is easier to source, apply and present.

This information can be easily differentiated and offered simultaneously in different formats to distinct markets. For example, financial figures can be organised in different packages for management, shareholders, analysts and employees but despatched at the same time. Technology allows managers to access vast quantities of information instantly but also in the same process to draw only that data which is relevant. This can then inform investment, product development, distribution or marketing issues. At a simple level, e-mail has revolutionised intra-office communication. It has also made the secure instant transmission of documents a commonplace occurrence.

It has obviated the need for many unnecessary meetings.

The progress of companies and sectors towards complete global operation is different. Also their definition of what constitutes full globalisation will vary according to the dynamics of each sector. In addition, the steps to achieving global consistency will vary according to circumstance.

The strategy director of a European multinational is clear about the lessons from his company’s international experience. ‘There is a keen search for scale. Almost everyone seems to recognise that by becoming more efficient, by pushing more volumes through, costs can be brought down and so more people can enjoy more and better things.

‘Second, there is greater convergence in markets around the world. So it is becoming more possible, more feasible to satisfy global markets.

The differences in the customer base are becoming narrower and so in an economic scale it is more possible to meet that demand.

‘The third issue is that world commerce is becoming increasingly mutually interdependent. As more people are doing more trade with more people in different countries, it becomes more difficult for purely national or even regional players to continue as they are. They simply become less relevant. That is emphatically true for larger businesses; it is somewhat less true for smaller businesses.’

In a positive sense therefore, it is possible to conclude:

By becoming global in scope and operation, companies can produce greater efficiencies, costs savings and promote higher quality;

as the commercial world shrinks, it is easier to satisfy global markets;

as trade becomes more global, differences between markets erode;

with the advance of world commerce, national and regional players must change.

He goes on: ‘A lot of people have failed when they have tried to start from a home market position and simply tried to introduce into new country markets that which is successful at home. While there are a lot of common factors you need to recognise that there are local differences. You need to make sure that the proposition which you are selling is based on genuinely common global factors instead of a domestic market niche position.’

The efficiencies and scope for creative development offered by e-business mean that considerable proportions of transactions will be dealt with by electronic means. This will revolutionise customer relations, design, delivery and payment. It also means traditional businesses with a legacy of infrastructure and property will be at a perceived disadvantage to competitors which operate purely on the Web. The capacity to reach large volumes of targeted customers instantly will mean that the global business can operate to common standards from a single source. This may ultimately be the definition of the profitable global enterprise.

John Davies is secretary to ACCA’s business law committee and Chas Roy-Chowdhury is secretary to ACCA’s taxation committee

THE ASTONISHING GROWTH OF E-BUSINESS In early 1998, some multinationals still regarded the Internet as peripheral or, at best, a bolt-on to existing arrangements. The scope of the change in the nature of business – and in the pattern of corporate strategic thinking – since then have been remarkable.

All the best estimates for the volume of commerce conducted on the Internet have been rapidly overtaken. Forecasts by reliable sources in 1997 said that by 2002 around five per cent of all transactions worldwide would be conducted by e-commerce. It is already seven per cent.

The professional services market in e-business alone is estimated by GartnerGroup/Dataquest to be worth $19.2bn in 1999. This is forecast to grow to $99.3bn by 2003.

The scope of e-commerce and the accelerating speed of its influence is astonishing. In October, BusinessWeek reported that business-to-business transactions over the Internet amounted to $43bn in 1998. But this is a mere bagatelle compared with its projected 2003 figure of $1.3 trillion.

This will be a little short of ten per cent of all business-to-business sales.

The magazine examined six industrial and commercial sectors which were most likely to be affected.

E-business in computing and electronics totalled $52.8bn by the year end 1999. In 2003, this will have risen to $410.3bn. In percentage terms, the market next most significantly affected is the travel industry. At present, some $12.8bn worth of transactions are conducted electronically – in four years this is anticipated to grow to $67.4bn. Indeed, it is surprising that the estimate is not more robust. The cost per ticket when processed conventionally is $8 whereas the administration costs on an e-business ticket are $1.

In financial services, analysts estimated that in 2003 around six per cent of all transactions will be online. Complicated regulatory regimes are seen as inhibitors to more rapid expansion but once these are overcome the floodgates could well open.

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