Hype or reality?..........E-business can return strong
From Knowledge@Wharton
Special to CNET News.com
April 3, 2001, 4:00 a.m. PT
John Hagel, one of the best-known authorities on the
Internet, hardly appears to be losing sleep over the year-long
decline of dot-coms. In fact, he is quite optimistic about the
future of e-business in general, provided the industry wakes
up to the need for new strategies.
"I often talk about the fashion-oriented aspects of the financial markets," Hagel said during an
interview with Knowledge@Wharton last week. "When you are dealing with major change,
there will always be uncertainty. The problem with fashion is that unrealistic expectations are
often not met. People then flee fashion. And that, in essence, is what is going on with
e-commerce. The unrealistic expectations of the bubble of the last couple of years has led to a
(negative) over-reaction."
Currently chief strategy officer at 12 Entrepreneuring, a San Francisco-based Internet venture
capital firm, Hagel will be one of the featured speakers at an upcoming conference April 6 in
Philadelphia on "The Internet: e-Strategies and Virtual Communities." The conference is
sponsored by Wharton’s Reginald H. Jones Center and the IBM Institute for Knowledge
Management.
Hagel, the best-selling author
of "Net Gain: Expanding
Markets Through Virtual
Communities" and "Net
Worth: Shaping Markets
When Customers Make the
Rules," has been known as
an Internet guru since heading
up the e-commerce practice
at McKinsey & Co. Last year
he joined 12 Entrepreneuring,
whose founders include Eric
Greenberg, founder of Scient
and Viant; Halsey Minor,
founder of CNET Networks,
publisher of News.com; and
Benchmark Capital, among
others. Board members
include Netscape founder
Marc Andreessen, eBay
founder Pierre Omidyar and Gateway founder Ted Waitt.
Hagel is confident that e-business of all sorts is here to stay, even though the industry is
barely out of its infancy. Companies large and small have yet to find a way to greatly benefit
from their Internet forays, especially when it comes to making value and cost-cutting count, he
said. "There have been efficiencies, but they have been limited by the focus of the market.
Companies were being rewarded for setting up their markets with a lot of participants. True,
this would match buyers and sellers, but when you look at the economics of
business-to-business collaboration, that is a small part of the economic value of the Internet."
Most of what the Internet has done for some companies is cut paperwork costs and reduce
production time and inventories. The real savings, Hagel suggested, lie elsewhere.
"It is all about shifting business from a build-to-forecast economy to a build-to-order one," he
said, noting that the goal for businesses should be seeing what customer want and building it
for them almost on the spot. Take the automotive industry. Dealers have a certain number of
SUVs, sedans or sports cars on their lots because models predict that this particular number
of vehicles should sell in a reasonable amount of time.
"But what would be optimum is to have a customer walk in, say she wanted a sedan with this,
that and the other on it, use your Internet capability to tell the manufacturing plant to build one,
and get it back on the lot for her in a matter of days. Then you can have e-business
dramatically shooting down inventory and manufacturing costs. Then the Internet can be
enormously effective for businesses."
Right now, though, Hagel sees a problem in businesses integrating the Internet as they should.
"I think it is an irony that at one level, the demise of the dot-coms has created a large window
for the bigger companies to be more aggressive in e-commerce," he said. "But the bigger
companies now have become complacent. You never hear any more about the danger of being
‘amazoned’ out of business.
"Consequently there has been a slowdown in terms of implementation of e-business
practices," Hagel added. "The more aggressive players, the new entrants into the market, are
not really threatening any more. Some middle players, of course, are working to adopt new
technologies to strengthen their positions, but not enough yet to move the big players.
"Layer on top of that the recessionary environment and you have little movement. Companies
may be saying, ’Our core business is in trouble right now, so we have to shore that up.’ They
lose sight of the fact that e-commerce could be a tool to reach their core-business objectives."
Hagel talked about two highly publicized Internet-based businesses as examples of
just-ahead-of-their-times e-commerce models. One, Webvan, never had much of a chance to
succeed as quickly as it needed to; the other, Amazon, may yet work out its kinks.
"One problem we have in business is that day-to-day practices can significantly lag
technology," as was the case with Webvan, he said. At one level, the idea behind the company
included a very powerful proposition: "There is a lot of wasted time in grocery stores: locating
what you want, getting there in traffic, finding only partially-stocked shelves, lugging packages
back to the house. But to move from that model to a home-delivery model requires people to
plan ahead more effectively than rushing to the refrigerator and seeing there is no milk left.
"Reflecting on what you might need a couple of days in advance is a huge shift in terms of
human behavior," he said. "It’s a great idea, but it would take a long time for people to get used
to doing it." On the other hand, he noted, Amazon, despite its current troubles making money,
may well be a rousing success.
"I’m actually an optimist on Amazon. I think they will figure it out. The problem is that the
business model for the Internet so far has been based on traffic, on page-counts and the like.
You don’t run a business, though, on how many people come into your store. It’s how much
you are selling.
"E-businesses have to think more about the lifetime value of customers, to develop
relationships with customers. That will reduce the cost of finding new customers, while still
getting more from the current ones," he said. "Amazon has changed the way people buy
books, and to the extent that they do relatively low-value, high-volume items like books, music
and entertainment products, they give customers an incentive to come back frequently. It’s not
like buying a car or a house, which you might do every five years. So I’m confident they will
eventually figure out how to make money, and soon."
But what Hagel doesn’t see on the near horizon is the next killer e-business application that
will make us all stand up and wonder why we didn’t think of it first. Yet this, he said, is not a
bad thing.
"If the question is, what is the next hot business? then we continue reproducing our fashion
problem: that some things get over-emphasized because they are the latest fashion and really
don’t solve the other problems," he said. "It’s the very un-newsworthy issue of chipping away at
costs on an incremental basis that will be the best use of e-commerce. And in the process,
there will be the building of a foundation of technology that will create a much richer
environment for all kinds of businesses. What we had in this last bubble was the idea of
building a house without first finishing the foundation. Now we just have to learn all aspects of
the technology."
And for those who fret that we have lost momentum in e-commerce, Hagel says not to worry.
"Most people are looking at the current performance of stocks and so forth relative to
expectations of a year ago," he said. "But the adoption rate of the Internet and related
e-commerce has been far faster than any technology in the past. A little slowdown isn’t really
going to change that."
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