Rethinking the Internet 1. The Web In Perspective: Cuts Interaction Costs 2. 3. Where is the Value for “Brick-and-Mortar” Companies? - IBM & Herman Miller 4. 3. High-Value Applications - Customer Self-Service : Cisco, U. S. Govt. – Income Tax Dept. - Human Resources On-line: Cisco, Dell - Know Your Customers Better: P&G 4. Customized Products: Land’s End, P&G, Dell 5. Customer Contact Through Email: Schwab 6. E-Communities: King Arthur Flour Case Example 7. The New Business Lens 8. E-Business is Finally Living Up To Its Hype! L. Mohan 1
Technology In Perspective Pre-1980 : Mainframes, Minicomputers - Expensive, Remote 1980 s : PCs - Desk-top computing at an affordable price 1990 s : Internet, World Wide Web - ”Any-to-any” connectivity at a low cost Post-Web : Wireless Net, Peer-to-Peer L. Mohan 2
Power of the Web - CUTS THE COST OF INTERACTION - Communication - Coordination - Collaboration Can connect previously unconnected processes - Internally : Employees - Externally : Customers Suppliers Partners - Community L. Mohan 3
Going Back to the 1930 s - Ronald Coase’s Theory of “Transaction Costs” When a company tries to determine whether to “build or buy”, market prices are not the sole factor. There are significant transaction costs in dealing with outside suppliers, including the search for the right suppiers and negotiating the contract. High Transaction Costs Vertical Integration - Bundling of diverse activities into a single company L. Mohan 4
Today. . . Transaction Costs Are Crashing Virtual Integration - Unbundle functions to Customers, Suppliers & Partners “It enables you to have more specialization. . . You will get more small firms as a result, but large firms will get larger, because they can concentrate on core activities. ” - Ronald Coase in a telephone interview to “The New York Times”, October 2000. L. Mohan 5
The Net Has NOT Affected Coase’s Law ü Coase’s Law holds that a firm should expand until the cost of performing a transaction inside the firm exceeds the cost of performing the transaction outside the firm ü The law is still valid! ü But the Internet has caused transaction costs to plunge so steeply that it is much more useful to read Coase’s law in effect, backwards: Firms should shrink until the cost of performing a transaction no longer exceeds the cost of performing it externally. L. Mohan 6
Juniper Networks. . . - 35% market share in 3 years Core competencies : - Design of high-end Internet routers Outsources 100% of production Supplier orders Juniper Web Portal orders Customer Delivery Revenue: $3. 8 M in 1998 $673 M in 2000 Revenue / Employee : $726, 000 vs Nortel Networks : $320, 600 L. Mohan 7
Big Blue Gets Wired. . . . IBM Saved $1 Billion in 1999 üOn-line Procurement : $13 Billion - Eliminated 5 Million pieces of paper - Time for approvals : 2 hours vs 30 days - Cost savings : $250 Million Automated Customer Service - Handled 43 Million online calls - Saved $750 Million L. Mohan 8
IBM Getting Smarter Too. . . IBM has a contract with supplier, ABC Corp. , for PC motherboards. IBM asks ABC to zap a list of all the chips that go into that product along with names of ABC’s suppliers and the prices ABC pays them. IBM has wired 12, 000 such Tier II suppliers (suppliers of IBM’s suppliers) to IBM’s network. All the information from these Tier II suppliers is stored in a data warehouse along with IBM’s own information on what IBM pays for every chip or part that IBM uses to make other products. Using data-mining software, if IBM finds that it uses the same chip X as ABC but pays less to the Tier II supplier of chip X, it will approach that supplier to demand that ABC get the same price as IBM. ABC has to then pass the savings to IBM since IBM got the Tier II supplier L. Mohan to reduce the price for ABC. 9
Herman Miller’s Move to the Web ü Traditional business: Build-to-order office furniture - Second largest manufacturer of office furniture - Customer had to wait 2 – 3 months for furniture to arrive ü Started a sideline business - Buying back used furniture from big customers - Reconditioning the furniture and selling it to smaller companies ü Reconditioned furniture was sold in the form of complete systems: - It was cheaper - It was easier to order - It arrived much sooner ü Sales soared - Showed the high value customers placed on speed and L. Mohan convenience 10
The SQA Division was founded in 1995 “Simple, Quick, Affordable” Office Furniture - New Market : Smaller Companies (5 -150 employees) IT made it happen. . - Cut Costs Inventory Turns: 40 vs <20 for industry Order Entry Errors : Nil vs >20% - Cut faulty shipments - Fast Turnaround Design : 2 hours vs weeks/months Delivery : 3 days-2 weeks vs 6 -8 weeks - 99% on-time SQA is now a blueprint for improving efficiency in the main company Total IT Investment : $500 Million in 5 years L. Mohan 11
IT is the Key to SQA - Getting Orders - Special 3 D design software for the laptop for use by 1, 200 salespeople - Customer can select styles, colors, configurations - Each variant can be seen in 3 D - Software also give the prices - Salesperson transmits customer’s order via the Web to factory L. Mohan 12
IT is the Key to SQA - Manufacturing - Software for production scheduling reserves time and day of production and space on delivery truck - Customer gets email confirmation of delivery date within 2 hours of placing order - Local dealer get e-mail notice to schedule a crew to install order L. Mohan 13
IT is the Key to SQA - Procurement - 500 suppliers have Web access to SQA’s ordering system - Supplier can check factory’s needs weeks in advance and plan production to replenish SQA’s stocks when they drop below agreed level - Supplier rated on punctuality of deliveries and quality of goods L. Mohan 14
The Web Impacted Herman Miller’s Big Customers Too! - Built a customized website for each of its big accounts - Website reflects the customer’s specific business practices, pricing schedules and product preference - Site sells product lines that, like the SQA line, represent simplified versions of its broader product offerings Concept is akin to Dell’s Premier Pages for its corporate and government customers - Personalized “extranets” exist securely within the customer’s firewalls - An interactive catalog of all the configurations authorized by the customer and the specific prices negotiated with Dell - Employees can then price and order the PC they want - Eliminates the paperwork and sales time for corporate purchases L. Mohan 15
Customer Self-Service - A “MUST-DO” Extranet Application 1. On-line Ordering - Product Configurator to get order right and price options - Check status of pending orders - Update service contracts 2. 24 x 7 After-Sales Support - Get answers to questions - Diagnose problems and provide expert solutions L. Mohan 16
Customer Self-service: Cisco Ø Cisco Connection Online : for 24 X 7 technical support to customers Ø Customers answer questions to describe their problems Ø Expert system diagnoses underlying network problems from information provided and provides expert solutions Ø Customers find answers for over 80% of their questions Ø 150, 000 active registered users worldwide Ø 50 different country versions of select pages for international customers Ø Accessed by customers 1. 5 million times each month L. Mohan 17
Benefits of Customer Self-service Ø Lowers cost of doing business for customers and, of course, Cisco. Ø$150 M annual savings in ‘ 98; $650 M in 2000 Ø 1, 000 engineers re-allocated to R&D ØR&D spend boosted to 12% of sales from 9% in 1997 L. Mohan 18
Cisco Connection Online (CCO) Real-time Online Support & Information Service • Launched in June 1996 – Realized it could not hire enough qualified engineers to support growing customer base – Strategy : Empower customers and give them Web access to the information they need. • Interactive user applications : – Open Forum, a powerful search engine for Cisco’s Q&A database – Technical Assistance (Case Open, Case Query, Case Update) – Bug Navigator: Finds known bugs in Cisco’s software L. Mohan 19 – Bug Alert : Proactively advises customers of known
U. S. Income Tax Dept. Has Adopted Customer Self-Service - A Telling Headline…. People. Soft sells CRM software to a friendlier IRS • The deal, valued at more than $10 million, will provide the Internal Revenue Service with the full People. Soft 8 CRM suite to make it easier for taxpayers, professional tax preparers and the IRS itself to obtain tax records and other information online around the clock. • • The package will enable the agency to create separate tax data Web portals for taxpayers and professional preparers as well as build a private portal for IRS employees. The first phase of the deployment will begin in summer 2002, with full implementation expected by 2004. (Computerworld, August 23, 2001) L. Mohan 20
The Benefits…. 1. Moving data access online will reduce costs by pushing more customer enquiries to the Web instead of costly telephone interactions with live agents and call centers - Get customers out of the call centers and into self-service 2. The decision to use CRM software is part of the agency’s desire to modernize and become more customer-friendly. It will enable customers to access the information they want when they need it. I do find it humorous to hear ‘IRS’ and ‘CRM’ in the same sentence together. I think it’s important that the government is realizing that it may have a monopoly but it can’t get away with acting like one. L. Mohan 21
- Moving Human Resources On-Line Employee Self-Service through Intranet - Company Policies and Procedures Manual - “My Information” Website. . . updated by employees - Information about Health Insurance and Retirement Benefits - Travel Planning & Expenses Reporting - Distance-learning modules activated at desktop - Company-tailored version of “My Yahoo!” to push information of interest Web gets HR staff out of the routine administrative tasks into more important strategic tasks such as designing a better package of benefits, succession planning and better recruiting. L. Mohan 22
Smaller Companies Can Also Reap Benefits BEFORE : Only 2 Options: Build or Buy - HR software (Peoplesoft, etc. ) expensive TODAY : Outsource to Web Service Provider Employease Inc. : A 5 -year-old Atlanta Company - Manages HR programs for clients via the Web - Monthly Charge : $5 -$6 per-employee - Employer needs only a modem to access their HR files HR Outsourcing Market : $10. 2 B by 2003 Share of Net-based Companies : Over 15% L. Mohan 23
Savings from HR Self-Service - Not Just Cost But Also Time 1. HEWLETT-PACKARD - Put HR Policies on Web - Cost to print, shrink-wrap, package and ship 600 -page volume to 14, 000 managers in U. S. - $130, 000 - Today : 100, 000 global employees; Cost - $200 2. SUN Microsystems – Expense Reporting - 27, 000 employees submit 150, 000 reports a year - $25 cost to process each report - Saved $3. 6 million from Web application - Time: 5 days before vs. 2 days now to get reimbursed L. Mohan 24
Cisco: Hiring Online Ø 85% of aspirants apply online A series of pull-down menus for employment and educational data instead of asking applicants to fill in blanks. Based on their selection, applicants asked a series of questions Ø Saves time : Applicants : To write and submit a resume VP for HR : Easier to review resumes - “Where would we put 25, 000 paper applications each month, much less read and sort them ? ” Ø Can also mine the resumes for interesting nuggets Routinely analyze e-mail addresses and current employers of applicants, as possible indicators of rivals’ troubles Ø Save hundreds of millions of dollars in recruiting expenses L. Mohan 25
Cisco: E-Learning - Cisco’s online sales : 75% to retailers or “ channel partners”; 25% direct to huge, sophisticated consumers - Objective : Faster learning at reduced cost Increased access to learning Keep up with change that occurs on Internet time - Cisco Interactive Mentor (CIM) offers an interactive learning approach through : Self-paced CD-ROM products Support and shared resources in a Knowledge Community site Technical competency in networks is increasingly critical to a corporation’s success. CIM helps our customers and partners quickly build and refresh their networking knowledge base to optimize performance and maximize availability from their network L. Mohan 26
Knowledge Management - Stealth Learning at Dell We try to put knowledge on the critical path of people’s work…. . In manufacturing, during a quality assessment for example, people can call up a tool to do a Pareto chart on-line. They don’t think they are going to school on quality. They just do it as they need for their work. It doesn't feel like training, but it is. That’s why we call it “Stealth Learning”………… …. We talk about the micro-bite, a chunk of knowledge about 5 minutes long, which we think is an ideal chunk to deliver………. …. . Give people what they need to know to do the work; learning embedded into the actual task ……. …. . No longer meaningful to measure hours of training given by HR or taken by the employee. - John Cone, VP of Dell Learning L. Mohan 27
Know Your Customers Better - P&G Uses Web for Faster, Low-Cost Consumer Research Ø Internet Surveys vs Personal Interviews Ø Time: 10 days vs 3 – 4 weeks Ø Cost: $ 10, 000 vs $ 50, 000 PLUS Benefits of anonymity to facilitate sharing of sensitive personal information Ø Testing Consumer Interest for New Products Ø www. pg. com site transformed into a virtual laboratory for displaying new products which visitors can buy – e. g. , VS Sassoon brand “molding clay” which promises to “create matte, earthy hair styles with moderate hold. ” L. Mohan 28
Dedicated Websites for Test-Marketing - Example: Crest Whitestrips home tooth-bleaching kit - used TV and print ad campaign to get customers to the site; tracked purchases; - found 80% were women, 35 – 54 years old; - tailored advertising campaign accordingly $ 150 M Consumer Research Budget 1999 (1 st year): 20% for online research; 2000: 40%; 2001: 50% L. Mohan 29
The Net Enables Personalization - Build-To-Order vs. Build-To-Forecast Every Dell system is built to order. Customers get exactly, and only, what they want - Factory inventory levels : 3 days - Finished good inventory: Near zero L. Mohan 30
Example: Clothing - Land’s End (Catalog Store) ØStarted selling custom-made pants on its Web site in 2001 ØCustomers enter measurements on weight, hip size …. ØMix and match fabrics, styles and colors ØValue-Add to customer: More Choices; Perfect Fit ØSoftware calculates the pant dimensions ØInformation sent to manufacturing plant in Mexico ØCustom-tailored pants cost $54 vs. $30 -40 for catalog pants ØDelivery in 3 weeks vs. one week from Web site Ø 40% of jean and chino sales on Web site are custom orders despite no advertising ! - ØExpanded to selling custom-made men’s dress shirts and dress pants online in Nov. 2002 L. Mohan 31
P&G’s Foray into the Net - Customized Cosmetics F Spun off in Sept. ’ 99 an online company: reflect. com – Did not repackage existing powerhouse brands F Interactive business model based on : “No one knows you better than you know yourself. ” F Developed a technology to create as many as 50, 000 hair, skin and makeup formulas - goal of 100, 000 in 2001 L. Mohan 32 At other beauty sites, you basically enter a mall and
P&G’s Foray into the Net - Customized Cosmetics F Product is personalized for each customer through an online Q&A process covering everything from skin tone to type of clothes she likes to wear - Right down to the packaging with her name on it F Price is competitive with high-end products in dept. store - Delivery in 3 to 5 days F High customer loyalty - 50% of sales from repeat buyers - Customers mixing their own shades are not likely to try comparison shopping We don’t see reflect. com as a brand. We see the customer a brand, and I come from P&G, where saying that is heresy. Business. Week, Sept. 27, 1999 L. Mohan 33
P&G’s Web Strategy - Partner with a well-known Silicon Valley VC - Not for the money but for the assets that P&G lacked: • Internet know-how • Startup culture • Access to right people for expertise - reflect. com was based in San Francisco; employees had to resign from P&G – will take pay cuts in exchange for stock options. - Objective: “ We want to learn to do something born and bred on the Net. ” - Not easy to bridge cultural differences: “The process (of ironingn out the details of the partnership), which typically takes a day, dragged on for three weeks. From P&G’s point of view, closing a deal is what’s relevant. For us, once we L. Mohan 34 have a handshake and a term sheet, the deal is done. ” VC Partner
General Mills Follows Suit ! Ø Testing a Website called mycereal. com Ø Adult visitors can create cereals based on their specific tastes and nutritional and health-related needs Ø Asked a series of questions, such as : . . . Are you diabetic ? . . . Is cholesterol an issue for you ? Ø Given a basic list of ingredients from which to choose, such as oat rings, granola clusters, flakes made of corn, wheat or oat Ø Option to add ingredients not included in the list, such as fruit pieces, nuts, etc. Source : Business 2. 0, March 20, 2001 L. Mohan 35
Dell Online F 1996 - Expanded the Direct Sales Model to the Net – Enables us to be even more intimate F Online sales : $30 M / day in Q 2, ‘ 99 - 40% of Revenue F www. dell. com - largest direct company in the worldwide home and small business market – Allows customers to configure and order using credit card 21 different features (e. g. , hard drives, printers, speakers) 3 to 10 options for each, hence, millions of configurations – Check status of order online – Access to same tech. L. support information as Dell staff Mohan 36
Dell Online F Dell Portal, Dellnet. com : Bundles Web services with sale of PCs F “Breakfast with Dell”: Online forums with Dell executives – Expanded beyond big corporate buyers to small bus F Virtual Account Executive “ Interested in a notebook but can’t fly to Austin for a demo? Go to our Website and get a full-motion video of someone explaining it!” L. Mohan 37
Personalization on the Net F “My Dell” Web pages For small business and home-office customers – Enable conversations about service, industry trends, new products Get weather, business information and tech support papers F Online knowledge bank To respond to service questions – Using artificial intelligence software L. Mohan 38
Schwab’s Fourth Channel for Customer Contact : E-mail F Existing Channels: Branch Offices, Telephone, Website F E-Mail : “Huge opportunity to reach out and talk to customers” Research found that Schwab customers spend an average of two hours daily on e -mail Lot more e-mail users than Web users F E-mail messages: Permission-based - On topics or products customers have asked L. Mohan 39 - Marketing angle is more subtle – a message in
Three Categories of Outgoing E-mails 1. Microcast Customized e-mails to 500, 000 people e. g. , “Full Closing Bell” service Gives end-of-day services and news abstrac on the positions customers hold and have on their watch lists L. Mohan 40
Three Categories of Outgoing E-mails 2. Narrowcast 1. 2 M Customers have signed up to receive these e-mails e. g. , A customer volunteers that she is interested in three topics: mutual funds, the basics of investing and Schwab’s CEO Speaker Series. L. Mohan 41 She would then receive e-mail bulletins at
Three Categories of Outgoing E-mails 3. Broadcast All Schwab customers can potentially get the e. g. , General interest announcements such as pricing changes and IPO announcem to eligible customers L. Mohan 42
Creating e-Communities (like e. Bay) - To Foster Customer Loyalty King Arthur Flour (Norwich, Vermont) - Selling flour online is unviable … … It’s heavy, yet cheap … Shipping costs are a big % of price … A commodity which is available everywhere - Sees the web not simply as a place to get some orders… BUT to consolidate and build a customer base it has cultivated for decades - King Arthur brand – over 100 years old … More a marketer than a miller … Sells only flours milled by others to its specifications … 50 different flours, 9 different kinds of yeasts, 8 different kinds of salt …King Arthur’s flours are not just another commodity - Cult–like following among many bakers – will go to extraordinary lengths to get the product sold only in a handful of specialty grocers in many states L. Mohan Source: The Wall Street Journal, Special Report on E-Commerce, Oct. 29, 2001 43
How King Arthur Flour Taps Into the Community of Bakers - 1980 s: Launched a catalog to satisfy the demand of New Englanders, who moved out to other parts of the country - 1996: Set up the web site designed mainly as a place to get recipes and to track down stores selling King Arthur products … Map for finding the stores was the third-most-popular part of the site (after recipes and requests for a catalog) – 250 visitors a day - Online Baking Classes – basically a recipe accompanied by pictures and detailed instructions; includes a list of FAQs for baking, and links to a schedule of in-person classes - Recently added a new bulletin-board feature, called Baking Circle – web visitors can write in to pose questions or answer them, and share recipes and tips - 5000 new visitors signed up in the first two weeks; Over 1500 messages were posted L. Mohan 44
Value of the e-Community ü The Baking Circle: A resource-efficient way to reinforce company’s ties with current and potential customers - Eliminates the need for a staff of baking experts to answer questions ü Online Sales in 2000: $3 M; Total Sales: $25 M Not easy to measure how much the informationsharing e-Community contributes to total sales But, growth in traffic to the web site has coincided with sales growth outside New England ü Introduced a new loyalty program, called Baker’s Points, - Can track purchases by visitors to the Baking Circle. L. Mohan 45
The New Business Lens. . . L. Mohan 46
The New Business Lens. . . L. Mohan 47
Future of E-Commerce - According to Gartner Group in Early 2000 Ø Currently - at peak with inflated expectations Ø Next 3 -4 years - many failures due to failure of strategies, business models, and execution Ø Next 5 -20 years, - e-commerce will be completely embedded in organization’s business processes, not disruptive Source: The End of E-Business, Benjamin Eisman, Executive Edge, Feb/Mar 2000 L. Mohan 48
The End of “E-Business”? L. Mohan 49
Is E-Business Finally Living Up To Its Hype? E-B Survey Finding % of Companies Revenues Have Significantly Increased 42 Significant Cost Savings 59 Not Yet Tapped the Full Competitive Advantage of E-B Closely Track the Value of E-B Efforts 70 60 Source: 2003 E-Business Survey of 512 companies published by CIO Insight L. Mohan 50
Evolution of E-Business Phase I : “Brochure ware” Phase II : Phase III : Online Transactions & Order Status Tracking Move Core Business Functions to a Web - Centric Model Deploy Web-based applications for: - Increasing revenues - Cutting costs - Enhancing customer service - Improving employee productivity L. Mohan 51
How Can E-B Provide A Competitive Advantage? 1. SPEED 2. “Time is the biggest leverage point today when it comes to getting ahead and staying ahead of the competition, because getting to your cash more quickly allows you to make more money off the same margin. ” 3. “At Cisco, time was currency. We would have aggressively embraced E-B even if it had cost us more, because it allowed us to be faster than our competitors. ” 4. 2. COST “Today, the top priority of the CIO is to take cost out of the current business processes via E-B. ” “You need to find cost-effective ways to serve the “micro-needs” of your customers, and do so better than your competitors. ” L. Mohan 52
How Can E-B Provide A Competitive Advantage? 3. CUSTOMERS “Customer self-service is really on the top of every company’s E-B wish list. ” “When you make available Web-based services to your customers, like order management or logistics, you completely transform your relationship from a buy/sell one to a service-based relationship. ” 4. PROCESS “The smart CIOs are the one who understand how to tightly link their E-B initiatives with their companies’ business processes to get ahead. ” “With E-B, you’re trying to unlock process innovation. Can we modify the business processes in order to take advantage of the Web’s capabilities? Otherwise, it’s like putting lipstick on a pig. If all you are doing is putting Web-based GUIs on antiquated business processes, what’s the point? ” L. Mohan 53
In Conclusion. . . We are in the middle of a 20 -year march. We are just halfway there in terms of realizing the full potential of digital technologies to transform industry and commerce. We have only seen the beginning of the inter-enterprise efficiencies and customer relationships that are possible… Those who stay focused on innovative applications of new technologies to solve business problems will win big. - The CEO Challenge 2001 Survey L. Mohan 54
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