Taking the Plunge
How does this example relate to real businesses in the real world? The approach to be employed in this book is to identify the drivers, investigate the relationships among the drivers, and then use the drivers to extract some fundamental principles of e-business. These principles will then be used to nurture and develop a framework that is relevant to e-business strategies. It will become evident that e-business and e-commerce are successful only in the context of an integrated approach. A technology-only approach will not work no matter how powerful the technology.
Enough has been published on the definition of e-business and the differences between e-commerce and e-business. In our observation of the e-world, we have developed models and definitions for e-business and e-commerce and their subcategories. While we felt it was important to distinguish them, our criterion was mainly focused on the degree of change the different categories of e-business/e-commerce imparted on organizations. Throughout this book, we use the words "e-business" and "e-commerce" loosely, often interchangeably.
To build a set of principles and a framework for e-business, this chapter discusses the fundamental forces that are driving the e-business phenomenon. The focus is holisticwe look at all the basic building blocks, namely business, people, process, and technology. We observe that with disruptive technologies like the Internet and wireless, it is very important to approach e-business with an integrated view, and think in terms of all the basic building blocks in parallel rather than serially. The four fundamental forces have also become so intertwined that it is often hard to distinguish which driver belongs to which category. The old way of thinking looked like Figure 11 (not necessarily in sequence).
Figure 1-1The original model and its four fundamental forces
Our proposed model looks like Figure 12.
Figure 1-2 The four primary forces of our new model
It is usually pragmatic to start with one driver (usually the business driver), but a sound business strategy needs to be developed in parallel from the very start. As depicted in Figure 12, the four primary building blocks are overlapping more and more with increased connectivity to technology, but also from the business impact of the process, business, and people perspectives. These are the four building blocks that have the most impact on the "New Economy" organization.
We should interject here that any business strategy devised, even with the 4D Framework, will fail without a full understanding of the current economic playing field. One does not build a boat unless one knows whether it will be used to cross a river, a lake, or an ocean. The financial conditions today are drastically different than just five years ago with varying opinions about just what those differences are. Simultaneously, we find ourselves in the "New Economy," or "Knowledge-Based Economy," or "Internet Economy." By whatever description you call it, technology has fundamentally affected the world economy forever. Experts are still determining the overall impact to all of us, but that is well beyond the scope of this book. For our purposes, we will focus on the economic conditions and realities of what we will call the "Net Economy."
The Net Economy has been created by new technologies, the skills and knowledge of people using these technologies, new and ever-changing business processes made possible by these technologies, and, of course, the defining and redefining of old businesses and new businesses focused on these technologies.
Figure 13 illustrates this point very well. The value creation in a Net Economy is a combination of the forces of all four building blocks. Here, the opportunity creation results in business value creation; customer attraction and retention create people value, and operational efficiency adds to process value creation. All of them combined create effective value creation. The technology building block is implicit in this diagram.
Figure 1-3 The Net Economy
It is still too early to tell where the Net value curve is heading. In the recent past, growth rates of technology companies were as high as 60 percent, but recently these growth rates have slowed down considerably, creating the first economic downturn in 10 yearsbut a downturn like no other. The forces of optimism and pessimism both have clear-cut grounds on which to base a conclusion on the immediate and distant future of our economy as a whole. That may be beneficial as we develop sound business strategies for a less certain future, but build safeguards for future downturns while factoring in results for possible upturns.
As the 4D Framework is introduced, the realization of this fuzziness and fusion in the real world of e-business is emphasized. The basic building blocks are fused to give exponential value creation to the customer (see Figure 14). The multiplicative nature of these forces is clearly evident in this figure.
Figure 1-4 Customer value creation effectiveness
The multiplicative nature of these four forces (drivers) can be expressed in terms of an equation for customer value creation effectiveness:
Customer Value Creation Effectiveness = (B+T+P+Pr)
B = Impact of the business drivers
T = Impact of technology drivers
P = Impact of people drivers
Pr = Impact of process drivers
But how can we use this formula in a real business using real dollars and cents? We'll use the first of many theoretical case studies to clarify the concepts of the 4D Framework. Let's start with the mythical YXZ Widget Manufacturing Company:
YXZ manufactures several different kinds of widgets and uses various components from outside vendors to manufacture each type. They must buy these components ahead of time to ensure ample supply and must keep a regular inventory of completed widgets to meet unexpected demand, if any.
The YXZ manufacturing process suffers from inefficiencies because of changes in demand. For example, YXZ produces the Type A widget and the Type B widget in equal proportions, since the market demand, on average, is equal for both. However, Type A widgets are made of iron and Type B widgets are made of steel and steel is roughly twice as expensive as iron. So at the beginning of each month, YXZ purchases a half-ton of steel for $1000 dollars and a half-ton of iron for $500. It then produces 1000 steel widgets and 1000 iron widgets. They then sell 900 steel widgets to their distributors for $1.10, 900 iron widgets for 60 cents, and keep 100 of each as inventory just in case. This gives them a gross profit margin of $180 for steel and iron widgets, respectively. However, they do have 100 steel widgets, which could be sold for a $10 dollar profit, and 100 iron widgets, which could be sold for a $5 profit. YXZ must swallow $15.00 when this inventory sits on the shelf. Fortunately, widgets are seasonal, with steel widgets selling well in the spring and fall and iron widgets selling well in the winter and summer. By the end of the year, their inventory is all sold off.
This is life in the "Old Economy."
To move YXZ forward into the Net Economy, suppose the new chief technology officer (CTO) of YXZ Manufacturing has decided to go to a "just-in-time (JIT)" manufacturing system using Internet technology at its core. This means YXZ can now use the Internet to do the following:
Know exactly how many widgets are needed by using the customer site to preorder exact amounts.
Use a vendor intranet to order the exact amount of supplies needed to produce that order.
Eliminate the need for inventory.
In addition, widget supply descriptions can be fed directly into the automated e-design system so both iron and steel widgets can be made simultaneously without having to "refit" for one type of widget or another. This reduces overhead considerably and is much less labor-intensive. Now, let's take a look at our Net Economy drivers and numbers.
BusinessReduce Inventory/On-Demand Product Personalization
Since widgets are manufactured "on-demand," there is no longer a need to create an inventory of 200 extra widgets. This extra $15 can be seen as savings, added into gross revenue.
ProcessSkilled Labor/Technology Specialists
It now takes an assembly line worker/supervisor who has some knowledge of the new intranet/supply/e-design system, and he or she needs additional training at a one-time cost, plus an additional $5 dollars an hour for an 8-hour day. If each worker produces one order per day, the additional $40 is easily offset by the $105 dollars the technology saves. YXZ is still ahead $60 per order.
ProcessApplying Skilled Labor with High-Technology Processing Systems
The process of combining the $60 saved by "upgrading" labor and technology with the $15 dollars savings in inventory means a net of $60 per order plus the $15 dollars. For 1,000 widgets we save a total of $60,015.00!!!
Of course, these numbers are hypothetical and based on ideal assumptions, but the point should be clear. Small incremental value savings, mean a lot when aggregated.
TechnologyIntranet Order/Supply Systems/E-Design Technology
Because the new intranet/supply/e-design system reduces refitting time by, say, 3 hours, where each hour costs $35 dollars of skilled labor, $105 dollars is now saved per order.
Of course, this example is not only mythical, it leaves out a considerable number of other "real-world" factors the average business must deal with, such as marginal and unit costs of production and overhead, distribution costs, taxes, etc. But we believe the point is made. There are real economic advantages that the Internet and other technologies do add to a business, provided they are integrated thoughtfully into the core business. With that in mind, let's take a look at each of our drivers in more depth.