Restructuring the Value Chain

Restructuring the Value Chain

As in the real world, success in e-commerce has more to do with choosing the right "fit" for your company than selling the right product or service. In most cases, using the technology of the Net, companies can create value–and thus a business–where none existed before. An e-business should keep in mind that at every point of contact with a buyer, a company can generate information. This information can then be processed, stored, and transmitted. An e-business must focus on being an information company first and a service or product supplier second. Any company can develop an infomediary component to their business and those companies that do can define and dominate the different information pathways that consumers use. In e-commerce, that information pathway is called the Customer Buying Cycle. In addition, e-businesses have to differentiate their offerings to avoid comparison. The best way to do this is to differentiate the customer–one by one. On the Web, the only effective way to do that is to build a relationship with the customer. Whether your target audience is the consumer or other businesses, creating the right position for your e-business will be critical to your success in the New Digital Economy.

Several years ago, Jack-in-the-Box differentiated themselves from McDonald's by showing a boardroom full of McDonald executives happily singing the praise of "billions and billions" of hamburgers sold. The commercial then went on to show that Jack-in-the-Box had a more varied menu of meal offerings thus differentiating them from the other burger competitors.

As in the real world, success in e-commerce has more to do with choosing the right fit for your company than selling the right product or service. Like the old saying about trying to sell refrigerators to Eskimos, your e-business needs to position itself properly on the playing field of the New Economy. The Net has opened many opportunities providing unique services to consumers and businesses alike that cannot be replicated in the real world. The old distribution channels that delivered products and services to consumers are being reborn on the Net and with them the value to the buyer.

In most cases, using the technology of the Net, companies can create value–and thus a business–where none existed before. The trick for your company is to find these new opportunities, add value where there was none before, and then exploit them for profit.

Information is the engine that generates wealth in the New Economy. e-Commerce means selling products, services, and information over the Net–but not necessarily inventorying or shipping them. Every e-business not only can capture information at each point of customer contact, but also provide it.

The old approach to providing information was the Web site. It either provided content at the site–information, products, or services–or linked to other resource sites on the Web. And the new technologies of the New Digital Economy will provide even more ways to provide information. At every point of contact with a buyer, a company can generate information. This information can then be processed, stored, and transmitted. When a sale is made, a company captures a certain amount of information about the buyer.

Companies can even generate information on a potential buyer before they make a purchase through newsletter sign-ups, free downloads, and so on. This information can then be processed, stored, and used to market to the buyer or potential buyer at some time in the future. With a focus on being first an information company and second a service or product supplier, selling products and services becomes easier and more efficient.

A well positioned e-business must not only find the right market fit but also provide consumers with the information they need to make a purchase at every–and any–point in the buying cycle. With proper positioning, a company can differentiate itself from the competition and create a brand. And brand recognition is what makes business a success in any kind of economy–old or new.

The Three IPs

During the atomic age the distribution channel for products was from manufacturer to distributor to retailer to consumer. In the Information Age it is electrons that are moved–not atoms. The new distribution channel of the New Digital Economy is what I call the three IPs–the Information Producer, the Information Provider, and the Information Packager.

Several decades ago there was a little company that carried no inventory and manufactured no products, as we know them today. What it did was collect, organize, and publish a well-packaged listing of television schedules. These scattered bits of information were available to anyone from a number of different sources but a small publication pulled all these bits of information together and created a new business.

That publication was sold in 1987 for $2 billion, a market valuation higher than any one of the major broadcast networks–ABC, CBS, or NBC–whose schedule they listed at the time. The publication was TV Guide and it was one of the first examples of an infomediary and an excellent example of an Information Packager. TV Guide packaged and sold the information from the producers–the TV and film production studios–and the information from the providers–the three major TV broadcast networks, and built a thriving company.

TV Guide knew that the TV networks had the schedule of their own shows but would not create a method of information dissemination to TV viewers. Why help their competitors by listing theirs? The studios made the sitcoms, dramas, and movies but could not provide a schedule of when they would be broadcast–nor did they want to. It wasn't their business. This situation opened the door to TV Guide to become an infomediary between the Information Producers and Providers and the TV viewer, building a value in the company that exceeded any individual TV network.

The Official Airlines Guide or (OAG) is a monthly listing of flight schedules. OAG, like TV Guide, simply aggregated existing flight schedules that the airlines provided and made it available to the flying public. It sold for almost a billion dollars–almost triple the value of Eastern Shuttle at the time and slightly less than the market valuation of US Air. AOG was another successful infomediary.

These businesses owned no inventory nor sold any product and the information they used didn't even belong to them. They merely took the information that the producers and providers created, repackaged it, and sold it to the end user.

Think of the movie Miracle on 34^th Street.

When a mother complained that Macy's doesn't stock a toy that Santa promised the child, he tells her the name of a rival department store–Gimbals–that does have it. The mother is shocked that the Macy's Santa would recommend Gimbals. So Santa says to her, "The only important thing is to make the children happy. Right? It doesn't make any difference if Macy's or someone else sells the toy."

This new merchandising concept does not endear Santa to the Macy's VP of Sales. The VP plans on firing him but has second thoughts when customers start expressing their undying loyalty to Macy's because of the gimmick. Seeing the public relations, Mr. Macy decides to promote it storewide and in their advertising. In the end, Santa Claus performs a miracle of commerce. Both Gimbals and Macy's compete to make the customer happy and both gained more sales and customer loyalty than ever before.

Other than the meaning of Christmas, you can learn a lesson here from e-businesses. Understanding what their customers' needs and wants are going to become more and more important to the survival of companies–online or off. Once known, an e-business can either fill that need themselves or pass the customer on to someone that can. Now, the Internet is perfectly suited to the "pile them high and sell them cheap" strategy, interacting with a consumer only when he or she is ready to buy. But that's about to change.

As I said before, most companies on the Net today are mere reflections of the brick and mortar world. The Net, with its new technologies and distributed nature, will radically change both online and offline ways of doing business. If shopping agents can query catalogs of products online returning the best prices on a product or service, then what's left to differentiate merchants from one another other than price? If more and more manufacturers are taking a leaf out of Dell and Gateway's book and selling direct to the consumer, what will be the role of the e-tailer in the future?

Sure there are issues involved in both of these developments. Shopping agents are getting more and more sophisticated as time goes on and will return more of the value proposition of a merchant to the consumer–that is, their complete selling position–and not just the price. And manufacturers that want to sell direct to consumers have the challenge of selling products one at a time to customers. Compaq and IBM are struggling with that issue now to compete with Dell and Gateway.

Still, e-businesses have to differentiate their offerings to avoid comparison. What's the best differentiator? How about differentiating on the customer–one by one? And on the Web, the only effective way to do that is to build a relationship with them.

Price is a concern to consumers. But consumers are looking for more than just price–they're looking for value. They want a relationship with a brand, one that understands them and meets their needs. The unique nature of the Web gives companies the ability to segment markets down to a market of one, then develop products and services to reach these individual market niches. And thanks to the Web, consumers now have a quick and easy way to tell you what they want and what personal information they are willing to share to get it.

This will open up a whole new opportunity for e-business besides selling products and services. Companies will increasingly become personal agents for their customers, know them intimately, and recommend products and services for each individual. The end result will be e-businesses looking and operating more like infomediaries.

This is important because infomediaries own the customer. Owning the customer means that a business has developed a strong relationship with a customer. And this is done by building a profile of a customer from his or her personal information gathered by the business. This profile is used to better target and serve the customer's wants and needs. Every e-business today must have as its primary strategy the capability to build a close relationship with its customers. The tighter the relationship the less likely a company will be disintermediated by some unexpected competitor and the less likely that the manufacturers it represents will bypass it and own the customer. By developing an infomediary component, e-businesses can protect themselves by being infomediaries for consumers and a service to buyers.

And becoming an infomediary is not hard. Any company can develop an infomediary component to its business and those companies that do can define and dominate the different information pathways that consumers use. In e-commerce, that information pathway is called the Customer Buying Cycle.