The dawn of the Dynamic Trade.DELL leading the pack.
Hi Kemble:
Here is an interesting take on the emerging Dynamic Trade and its implications.Since Dell is one of the leading companies defining this new trend I thought it might be interesting to learn more about this new phenomenon.The following is an excerpt from a research report done by Forrester Research.
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Business Trade & Technology Strategies
Forrester Research, Inc.
1033 Mass. Ave.
Cambridge, MA 02138
617/497-7090
Fax 617/868-0577
forrester.com
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Dynamic Trade
INTRODUCTION
The Internet economy is moving from early Web marketing and selling experiments to a new business trading model that Forrester calls dynamic trade -- the ability to satisfy current demand with customized response (see Figure 1: Dynamic Trade Vs. Traditional And Early Web). This report looks at the impact of this new model and concludes that:
Dynamic trade will fundamentally alter the relationship between products and services, how production schedules are determined, and what pricing models are used in which industries.
New commerce software will help companies exploit the promise of dynamic trade by enabling firms to capture information, analyze it, and respond quickly to customers.
Industries will adopt dynamic trade at varying speeds based on companies' needs to meet key competitive challenges like inventory management and complex product configuration and delivery.
To understand the nature of the change ahead and its implications for industry, Forrester sought out companies at the frontier of dynamic trade. We gathered experiences and expectations from executives at ACE Market, Ariba, Auto-By-Tel, Bonsai, Calico, Cambridge Technology Partners, Dell, Elcom Systems, GE Information Services, Hensley Segal Rentschler, i2 Technologies, iCat, Internet Shopping Network, Lear, MuniAuction, National Transportation Exchange, NECX, Net Perceptions, Netscape/Actra, Office Depot, Open Market, Pandesic, pcOrder, priceline.com, Proxicom, Sabre Group, Thomas Register, TPN Register, TRADE'ex, Trilogy, U.S. General Services Administration/Federal Supply Service, Williams-Sonoma, and W.W. Grainger.
WAKE UP TO THE INTERNET ECONOMY
The Internet economy is taking off: More than $20 billion in goods and services will be sold electronically this year, and Forrester expects that to soar to more than $350 billion worldwide by 2002. Internet trade introduces several factors that will make traditional commerce inadequate in the new economy:
Instant globalization increases scope. Internet sites are receiving international orders on their first day of operation -- despite geographic distances and language limitations. So companies must begin to enlarge their business scope by anticipating worldwide customers and arranging international delivery.
Educated consumers demand certainty and self-service. Is it in stock? Can it be delivered by Tuesday? How will I know if it got there between 9 a.m. and 10 a.m.? Companies and consumers work in a just-in-time world where on-time deliveries make or break the relationship.
Value is derived from data capture. Companies that capture every piece of data in a customer's trading experience can mine the data to make on-line buying more efficient, market products more effectively, and optimize supply chain activities.
Dynamic Trade Defined
To thrive in the new Internet economy, companies need a new model for trade that addresses these requirements. We call this new model dynamic trade:
Dynamic trade is the ability to satisfy current demand with customized response.
Early Web efforts extended traditional trade with reams of easily accessible product data, 24x7 shopping hours, and customer self-service for simple inquiries like reviewing account history or checking order status. Dynamic trade goes much further: It enables companies to create product and service bundles based on actual consumer preferences, use transaction data to react to market changes, and go beyond merely making the sale to maximize the lifetime value of a business relationship.
UNDERSTANDING DYNAMIC TRADE
Dynamic trade is far more than taking orders on-line -- though that is a critical first step. It fundamentally changes how companies view products, production, and pricing as (see Figure 2: Dynamic Trade):
Services eclipse products. As the economy develops toward dynamic trade, the emphasis will shift from dumping product information onto Web pages to delivering customized services like buying assistance for consumers and proactive inventory management for business partners. Service will emerge as the central theme of every process -- from selecting product attributes to requesting a repair.
Demand drives production. With on-line purchasing and extended supply chain management, companies will respond to current demand as it develops rather than crystal gazing for anticipated needs.
Pricing matches market conditions. Firms will raise prices in times of scarcity or lower prices to move excess inventory on a minute-by-minute basis. Tiered pricing models that reward customers for buying on-line or accepting delivery in off-peak hours will become the norm.
Services Eclipse Products
Dynamic trade leverages Internet-based self-service. Instead of staffing up customer centers, companies can deliver complex presales, configuration, product upgrade, and maintenance request services through the Web. There is a big investment up-front on servers, high-speed Internet connections, and software development, but firms will incur almost no marginal cost for each new customer served. These new service economies of scale will enable companies to compete on service quality by offering:
Custom self-service. Custom self-service shows customers only what is relevant to them -- personal account histories and products that match their stated preferences. Early leaders in this area include NECX, which set up a custom computer store for MIT, and CDnow, which delivers music recommendations. As dynamic trade evolves, custom self-service will become more sophisticated, linking into loyalty reward programs, purchasing history, and shipping preferences to eliminate a lot of redundant customer data entry up-front.
Service bundles. In dynamic trade, companies will differentiate products based on included service levels. In addition to power locks and a CD changer, top-of-the-line luxury cars will include delivery to the customer's home, annual replacement with a new model, prescheduled maintenance, and guaranteed roadside service. MRO suppliers for businesses will offer to set up and prestock new office locations.
Smart substitutions. When one product will work as well as another, customers shouldn't be the ones to have to parse through the options. At GE Lighting, for example, if a customer selects 20,000 12-packs of bulbs, the system has to be smart enough to suggest 40,000 six-packs if the 12-packs are out of stock -- and make sure the volume discount is applied.
Subscriptions. In some cases, products won't be sold at all -- they'll be provided as part of a service contract. This model already exists in cable TV -- the set-top box comes free. But dynamic trade will bring subscriptions to industries that have never seen it before. Instead of buying an HVAC system, a firm could contract with its utility provider for 72-degree air for the term of its lease.
Demand Drives Production
Here's how it works now: Chrysler produces a hundred white minivans and sends them to Houston, where no one wants them. People want hunter green. But the eager young salesman on the lot somehow sells the white minivans anyway. Back in Detroit, the monthly data comes in: White minivans are hot -- make more! In dynamic trade, data capture and analysis makes it easier to respond to actual demand -- what customers really want, rather than what they will settle for. As a result:
Buyers will make requests. On-line RFPs already are altering response cycles from weeks to days in business-to-business engagements. Consumers haven't had this option. But commerce sites like Auto-By-Tel, priceline.com, and Chrysler's kiosk at the Mall of America are now emerging to help consumers configure preferences and then search for quotes.
Supply chains will open up. Immediate customer demand data from on-line catalogs and purchasing systems will ripple through supply chains. Just as Wal-Mart pushed inventory management to its suppliers, a big fleet order from a new Hertz location will impact not just Ford's systems but metal and paint suppliers down the chain -- allowing Ford to commit to a delivery date.
Assembly will move closer to customers. In traditional trade, products are assembled, distributed, and then sold. In dynamic trade, assembly occurs after the sale. Today CompUSA assembles PCs for IBM, and Honda dealers install air conditioning and stereos to fit customer specs. In the future, Forrester expects that car dealerships will become regional assemblers, grocers will become pick-and-pack experts, and Open Finance providers will let consumers create personal financial packages from an array of providers.
Pricing Matches Market Conditions
What airlines have been doing for years -- using computer networks to sell seats at the highest possible price -- will spread. Using the Internet, companies will vary prices to maximize profit by matching market conditions and buyers' pocketbooks -- a technique called yield management. Yield management will emerge under dynamic trading in three forms:
Auction and bid. The Internet economy will feature bid-ask market makers in any scarce resource or time-sensitive good because these live markets let companies maximize consumption of perishables and better manage inventory costs. Early leaders include National Transportation Exchange in trucking and Altra Energy in natural gas. ACE Market won its contract to auction California pollution rights partly by proving that its game theory programming pushes buyers to maximize their offers in any bidding scenario.
Value tiers of customers. In dynamic trade, management will be able to use information to rank order customers into pricing tiers based on their behavior (see the November, 1997 Media & Technology Strategies Report, "Valuing On-line Audiences"). Volume pricing mechanisms will kick in not just in a single purchase instance but over the lifetime of the account. Infrequent buyers will be charged a premium for add-ons and service.
Embedded systems. Yield management pricing will become a ubiquitous part of automated purchasing environments. Within five years, subway turnstiles and parking meters might automatically lower prices during off-peak hours, and gas station chains could offer bulk prices to loyal consumers.
WHAT DYNAMIC TRADE MEANS FOR BUYERS
The bottom line is that buyers face a tradeoff. They get more information and far better service, but sellers will price these benefits at whatever the market will bear. Buyers will choose among several tactics to take advantage of dynamic trade including:
Open-market purchasing. Corporate buyers will head for auction and bid markets for commodities like energy and raw materials like lumber, newsprint, and microchips -- seeking basic service at minimum prices. Consumers will compare a shortlist of sites or use software agents to locate low prices mainly for discretionary items.
Relationship buying. Companies that coordinate on design and manufacturing and consumers in loyalty reward programs will forgo bare-bones pricing in return for the benefits of customization and service. In these cases, any price premium will be outweighed by high switching costs and lower purchasing risks.
Aggregating demand. Some buyers will band together -- settling for fewer choices but lower prices. As an example, Ariba has been approached by a group of hospitals to create a buying hub for gloves and gowns. Consumer groups like the AARP and AAA will use Internet communities to pool the buying power of geographically dispersed constituents and match them with cooperative merchants.
TECHNOLOGY ENABLES DYNAMIC TRADE
Commerce software, a new class of technology, is enabling these new buying and selling behaviors to take hold -- leveraging the Internet as the new trading channel (see the May, 1998 Commerce Technology Strategies Report, "Sizing Commerce Software"). Products like auction and bid software, catalog servers, personalization engines, search tools, and product configurators enable companies to capture information, analyze it, and respond to customers -- fast. Many commerce products are still in their first generation, but Forrester expects them to mature within five years. Commerce software includes:
Buy-side. New procurement systems from vendors like RightWorks and Ariba extend purchasing to company desktops, funnel rogue buyers toward preferred vendors, and control expenses. Over time, these products will extend from general categories such as travel and MRO to connect to ERP systems from Baan, SAP, and PeopleSoft. In addition, bid systems such as Digital Market and FreeMarkets Online let buyers obtain lowest prices on RFPs.
Sell-side. At a basic level, sell-side software takes orders, clears credit, and checks inventory. Beyond that, software from vendors such as Open Market, Netscape, and iCat also help sellers customize catalogs for specific buyers and manage account information. On-line auction houses like FastParts and ONSALE let buyers and sellers meet to negotiate prices.
Customer service. New customer service software from players like Aptex and WebLine upgrades call centers to incorporate both automated and human e-mail response as well as teleweb -- "call-me-now" Web help buttons. Self-service offerings from Edify and Roving walk customers through interactive scenarios and notify them of product changes -- helping them reach decisions and solve problems by themselves.
Security and integration. Behind the scenes of dynamic trade are vendors like VeriSign, Checkpoint, Harbinger, and CrossWorlds, which supply software for digital IDs, security firewalls, integration with EDI, and middleware that connects new customer-facing applications back to mainframe transaction systems in the data center.
Tools. Commerce tools allow firms to deliver custom responses and product-selection assistance to customers. This very broad category of mostly start-up vendors includes personalization and recommendation engines from Broadvision and Net Perceptions, configuration and assisted selection from Trilogy and Calico, search tools from Junglee, as well as basic site production software from Vignette.
HOW DYNAMIC TRADE AFFECTS MARKETS
Companies will adopt these new technologies and use them to implement the service, production, and pricing models of dynamic trade in order to address key competitive challenges in their particular markets (see Figure 3: Where Dynamic Trade Addresses Industry Challenges):
Drive volume in commodity markets. Commodities can be traded in large volumes in auction-bid markets because they are interchangeable and always in demand -- and on-line transaction costs are negligible. In this category, targeted pricing models can move surplus volume or drive purchases in new markets. Traditional pure commodity markets include raw materials like coffee beans and crude oil, but products like electricity, PCs, and generic pharmaceuticals are near commodities too -- responding well to dynamic trade pricing.
Maximize consumption of perishable inventory. Goods that deteriorate over time like foodstuffs and volatile chemicals can leverage spot markets to find where demand is highest. Likewise, products like hotel rooms, concert tickets, temporary staff, or train seats also become worthless when not used. Industries working in a just-in-time world will move quickly to dynamic trade because auction-bid trading helps companies manage inventory more effectively, while open supply chain data allows them to commit to delivery dates with certainty.
Enable flexible packaging of highly configurable products. Products that can be sliced and diced into multiple offerings and subscription bundles will leverage dynamic trade to create tiered deliverables from stripped-down to service-laden. These businesses include computers, automobiles, insurance, banking and brokerage, and publishing.
Minimize risk in high-investment decisions. Industries like health care, where the buyer's emotional investment is high, or brokerage, where customers deal with significant risk, are strong candidates for dynamic trade. Customers will be willing to pay for customized information and personalized service as a way to manage risk.
Address radically new competition. Firms in recently deregulated or privatized industries will adopt dynamic trade models to meet the needs of new competitive pressures. In telecom, companies will create voice, paging, and Internet service bundles to stave off cable competitors. In energy, firms in the CAL-ISO electricity coalition will use on-demand distribution and variable pricing to attack new geographies.
Industries that face many of these challenges, such as financial services and telecom, will move most quickly to adopt dynamic trade (see Figure 4: Industry Challenges Determine Dynamic Trade's Adoption). Leaders will be determined by which companies within an industry demonstrate two characteristics: 1) creative recognition of dynamic trade opportunities, and 2) willingness to bet on new technologies. In some instances, early adopters like SABRE Group and FedEx will become market leaders that rewrite the rules for an entire industry.
Changing The Status Quo
Dynamic trade will change whole industries. Forrester expects to see:
Closed markets stagnate. Dynamic trade will take hold most quickly in open economies. Closed or highly regulated markets will be stymied in their attempts to benefit from dynamic trade. Bureaucratic red tape and fear of change will severely inhibit companies from bundling products and services, implementing variable pricing, and assembling to order.
Middlemen emerge as market makers. Over time, leaders like GE's TPN Register and Netscape's Actra will reinvent themselves as managers of dynamic trade -- offering credit and clearing services in addition to enforcing market rules. Start-ups like Proxicom with its Transport 4 -- an oil industry transaction hub -- will strive to set the standard for entire industries.
Inefficient companies struggle. Dynamic trade in the Internet economy promotes process efficiency and cost reductions. Inefficient companies that survive quarter to quarter by stuffing channels or trying to create uncertainty among buyers in order to prevent switching will suffer in a world of easy product searches, low transaction costs, and product offerings with a high service component.
PREPARING FOR DYNAMIC TRADE
Dynamic trade's radical service, production, and pricing changes will make flexibility a key success factor for companies. Rather than creating a hard and fast strategic plan based on guesswork, Forrester recommends that firms take a five-step approach to developing sufficient agility to compete in dynamic trade.
Get IT's house in order. To play, companies will need a robust Internet-based infrastructure. Firms must upgrade desktops to 32-bit operating systems, install ubiquitous IP connections, interconnect internal directories, and establish adequate firewalls. Beyond this, IT needs new skill sets including Java-based application development and Transactive Content production (see the September, 1997 Computing Strategies Report, "Internet Computing Voyage").
Get early experience on the buy-side. Firms should start by developing an intranet purchasing system that lets the company aggregate its own demand to influence suppliers. Ditch the old paper approval process and opt instead for desktop purchasing with group pricing and budget approvals built in. Begin with non-critical items like travel expenses and MRO, and move into direct materials as the application matures. Later, the same customization and integration skills can be applied to the sell-side.
Get ready for spot markets. Most companies will need traders who specialize in buying and selling in spot markets. Energy, chemicals, telecommunications, standard parts, raw materials, computers, and surplus for nearly all industries will be actively traded in the Internet economy -- with all the attendant complexity.
Optimize products for buyer selectability. Ideally, making a decision about any product in the Internet economy should boil down to less than 20 questions. Complex business equipment can be packaged into snap-together choices to radically simplify configuration. In consumer products just four or five attributes can be varied to create the appearance of highly personal tailoring. Products that are fairly standard by nature can be customized around service components such as automatic replenishment, guaranteed upgrades, or periodic maintenance.
Segment customers. To cope with dynamic trade's new pricing mechanisms, companies must get a handle on exactly which customers are most valuable -- by name. For many companies, this means assembling customer data into a single datamart or buying access to a demographics database for the first time; for others, it will mean undertaking an extensive data mining effort. |
