IBM is fast tracking in B-B ,see below. I wonder how IFM will be affected as Big Blue moves in
From SmithBarney research
-SUMMARY:----Equity Strategy
*The real power and value of the Internet is yet to be realized as investor
focus shifts from business-to-consumer to business-to-business
opportunities.
*To effectively compete in the e-business environment, companies will need
to transform their business models.
*With the development of cyber-markets, new e-business intermediaries must
provide a compelling value proposition in order to maintain any sort of
sustainable competitive advantage.
*International markets represent an enormous opportunity, as Internet
penetration is much lower in Europe and Asia than in the United States.
*We expect established technology companies to benefit disproportionately,
especially BMCS, CSCO, EDS, EMC, HWP, IBM, MSFT, and SUNW.
--OPINION:------------------------------------------------------------------
The real power and value of the Internet is yet to be realized, as
investor focus shifts from the business-to-consumer companies to the
business-to-business opportunities which may represent markets ten times
the size of the business-to-consumer marketplace, according to professor
Mohanbir Sawhney from Northwestern University Kellogg School of
Management. In our view, the Internet necessitates and will likely
facilitate the transformation of businesses across industries and around
the world. The emergence of the Internet forces traditional brick and
mortar companies to reassess their business models and develop new
strategies, which will allow them to compete effectively in today's new
e-business environment.
The Internet offers businesses the opportunity to reexamine their entire
value chain in order to reduce costs and increase productivity and
efficiency. The question that remains to be answered is, Will these
transformations be accomplished internally, with the benefits thereby
accruing to the existing companies, or will new competitors in the
e-business landscape emerge to take share and obsolete existing market
participants? The immediate threat to brick and mortar companies is that
the new breed of entrepreneurs have embraced the Internet, realized its
power to transform business, and have the financial resources in the form
of venture capital to develop new e-business capabilities and
marketplaces. Furthermore, the speed at which they can implement new
ideas and systems, coupled with the fact they are not constrained by the
need to be profitable immediately, are formidable obstacles for
traditional businesses.
Implications for Competition
First and foremost, investors must remember that the Internet has not
changed the laws of economics. At the end of the day, companies must
prove that they are economically viable and can deliver sustainable
profits to investors. Today's valuations for most Internet companies
may suggest otherwise, as the market has assigned valuations well in
excess of those accorded to established profitable companies. However,
brick and mortar players cannot discount these valuations as simply
market excess, which will be eroded over time. To the contrary, the rich
market capitalizations represent very real currency that e-businesses
could use to displace established intermediaries throughout the value
chain of industries. Clearly, if we combine the market capitalization of
the pure e-businesses and the traditional brick and mortar businesses in
any given industry, we would conclude that there is an
overcapitalization; however, it is by no means clear whether it is simply
that the e-businesses are overvalued or whether market capitalization
will be siphoned from traditional businesses.
Nonetheless, in order to effectively compete in the e-business
environment, companies will need to transform their business models from
the traditional make-to-stock model to a build-to-order and ultimately
fulfill-to-order model, which has been successfully implemented by
companies such as Dell and Cisco. This represents a huge challenge
because most established companies' information technology
infrastructures are geared toward the make-to-stock models. Implementing
a fulfill-to-order model necessitates developing an effective e-channel
that fully integrates the customer, manufacturer, suppliers, and
retailers. While anyone can establish a Web presence, few, if any, are
fully integrated and capable of executing consistently. The development
of e-hubs-cyber-marketplaces which aggregate supply and demand, increase
liquidity, and reduce transactions costs-should help facilitate this
process and allow industries to become more vertically integrated. The
recent announcements by Ford and General Motors to develop joint ventures
with Oracle and Commerce One, respectively, are examples of major
industry players realizing the need to develop online marketplaces.
The development of e-hubs and cyber-markets raises the question of how
profits will be affected. In such a marketplace, search costs are
essentially eliminated, and switching costs approach zero. Conventional
retailers and distributors have relied to some extent on an "ignorance"
premium, which they could build into their margins. This premium
resulted in part from spatial separation and lack of complete
information; however, the Internet has the potential to eliminate these
inefficiencies. To overcome this tendency to drive prices down to the
point where profits are eliminated, new e-business intermediaries must
provide a compelling value proposition. Offering value-added information
content is one way for these new intermediaries to reestablish switching
costs and develop customer lock-in. While we do not believe that profits
will go to zero, unless individual businesses within the value chain of
an industry can provide a rare, valuable, inimitable and
non-substitutable service or product, their ability to maintain any sort
of sustainable competitive advantage is questionable.
In this e-business environment, fulfillment along the entire value chain
becomes the major bottleneck. While technology can help reduce costs and
optimize the resolution of business problems, execution will be a
critical factor in determining the winners and losers in the e-business
world. From a business-to-consumer perspective, fulfillment may be the
greatest impediment to success. With order volumes up tenfold in the
past several years, companies that cannot fulfill orders in a timely
fashion will certainly lose customers to those who can. Satisfying
customer orders early on in a company's life cycle should help build
brand loyalty, which is especially critical on the Internet, as only 50%
of customers, when given price comparison information, chose the low-cost
provider, according to professor Erik Brynjolfsson of MIT Sloan School of
Management. Factors such as waiting time, advertising and branding, and
prior purchase experience were instrumental when buying on the Internet.
In business-to-business, the physical infrastructure will continue to be
important; however, without an e-business strategy, intermediaries risk
being displaced by those who can consistently and reliably transact
business over the Internet.
Enabling E-Business
While the Internet and e-business will have far-reaching implications for
how businesses operate and their future profitability, near-term
opportunities for investors can be found in those companies that are
building the infrastructure and providing the solutions that will enable
the e-business marketplace. Now that the Y2K scare has largely died
down, companies are focusing more on IT issues that will come after the
turn of the millennium. PC Software analyst Neil Herman believes that
the companies he covers are already beginning to benefit from this shift
in focus and points to his recent survey of Fortune 500 IT managers as
evidence. The survey suggests that software spending should rise
substantially over the coming 12 months, and that a broad-based spending
"lockdown" because of Y2K is unlikely.
Herman notes that having reliable and scalable systems in place will be
crucial for the transition to e-business, and that software will play a
major role in making sure that systems are ready. This shift is helping
drive the pipeline of new business that Herman sees developing and could
command serious spending dollars. We recently added Microsoft and BMC
Software to the Salomon Smith Barney Approved List and believe that these
two companies are especially well positioned to benefit from improving
sentiment toward the sector
We believe that, as companies build out technology infrastructures
capable of facilitating e-commerce, technology hardware manufacturers
could prove to be lucrative investments. Companies that build servers
and communications equipment are well positioned to benefit from the
e-commerce boom. Cisco, Sun Microsystems, Hewlett-Packard, and IBM all
manufacture products necessary for e-business solutions. Moreover, the
services side of helping companies set up an optimal solution should also
prove lucrative for the above-mentioned names, as well as for the likes
of EDS. Computer storage companies such as EMC should also realize
long-term benefits in the e-business world as the lifeblood of the
Internet, digital information, grows at an exponential rate.
The e-commerce revolution is already booming in the United States, but
international markets also present an enormous opportunity. Internet
penetration is much lower in Europe and Asia than in the United States.
With the rebound in global growth and Asia emerging from its slump, we
expect that other regions of the world will begin to catch up with the
United States in an effort to become more efficient and more
competitive. IDC estimates that the Western European e-commerce market
totaled $5.6 billion in 1998 and expects it to grow to $430 billion by
2003, a 151% compound annual growth rate. Granted, this growth comes off
a small base, but we believe it illustrates the point that Europe is
beginning to get connected in earnest. Our European analysts believe
that business-to-business represents the biggest opportunity in
e-commerce and that government online purchasing will also contribute to
the growth. For example, the European Commission has targeted 25% of its
purchases of goods and services to move online by 2003, and the U.K. has
stated that 90% of its procurement expenditure will be over the Internet
by 2001. This rapid shift to online purchasing will necessitate
beefed-up IT systems, and we expect that many of the larger companies,
many of them in the United States, will enjoy substantial new business as
this story unfolds.
Bottom Line
Regardless of the technology in place, the fundamentals of the Internet
will persist. It will enable businesses to create uncommon value through
depth and breadth of product offerings, increased speed, and instant
access-anytime, anyplace, anywhere, to anyone. The medium will be
digitally interactive and highly specialized. The interactive
capabilities will allow sellers to market to customers at the moment of
sale. Information can be rapidly and continuous updated, creating
"sticky" applications, which offer buyers a reason to return.
Furthermore, all buyers and sellers have global reach, and the ability to
form or dissolve business alliances should be extremely fluid, allowing
businesses to constantly adapt to dynamic marketplaces. While the e-com
merce revolution will take some time to play out, we believe investors
can benefit now by investing in the shares of hardware and software
providers. We expect established technology companies to benefit
disproportionately, especially BMC Software, Cisco, EDS, EMC,
Hewlett-Packard, IBM, Microsoft, and Sun Microsystems.
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