INTELLIGENT SYSTEMS

 

Volume IX, Number 3 October, 2002

 

A quarterly newsletter for clients and friends of Chenault Systems

 


Electronic Commerce is Here to Stay

By Tom Chenault

The following article, formally known as “Electronic Commerce – The Light Bulb of the Next Century” and published on the Internet by the North Dallas Chamber of Commerce, has been brought back and slightly revised at the request of some of our followers.  This was part of our November 1999 newsletter.  The article is directed to persons who want to understand the meaning of electronic commerce in today’s economy after many corporate shakeouts.  In our opinion, the future for e-commerce stays the same as three years ago.  The potential is enormous.

Over one hundred and thirty years ago, in 1878, John D. Rockefeller and the Standard Oil Company were facing the prospect of re-inventing the kerosene lamp business because of a brand new technological development.  Before this, it seemed that nothing could stop them or even slow them down.  At that time, they controlled most of the refineries and railroads in the United States.

However, in the fall of that year, an unknown entrepreneur named Thomas Edison informed the media that he had invented a light bulb that could burn brightly for one hundred straight hours.  No one was willing to believe this, especially the staid banking community.  Four years later, in 1882, the new start-up, Edison Electric Light Company, gave an evening light bulb demonstration in J.P. Morgan’s offices in New York.  With a flip of a switch, the leading bankers in the United States saw a flood of light they never got over; and Edison received its first round of funding.  This was “disruptive technology”, to say the least.  Lucky for Standard Oil and the kerosene business, only 250,000 light bulbs were installed across the country by 1885.  In those days, it took a very long time to get things rolling and install power stations.  This bought time for Standard.  By the early 1900’s, the huge demand for fuel for the internal combustion engine, plastics, and other petroleum products saved the industry.

Now, more than a century later, traditional thinking companies, in any industry, do not have as much time regarding the advent of “electronic commerce” (or e-commerce).  Installing intangible assets, such as software, takes little time compared to Edison’s power stations, and the cost is nothing compared to steel and concrete.  E-commerce is simply doing business online.

The customer becomes the data entry clerk, resulting in enormous labor savings and accuracy for the company selling products over the Internet.  One hundred customers entering one transaction are better than one employee entering one hundred transactions.  This benefits both buyer and seller regarding ease-of-use and accuracy.

The power of pure physical assets has changed into the power of intangible (software) assets.  Constraints of location, time, and physical office space may longer play a role in customer choice, giving smaller companies the same opportunities as large companies.  Typically, small companies can move faster because of quicker approval cycles.  Because of this, organizations all over the world are investing in Internet systems to send and share information with other organizations through the Web.  With the increased speed and efficiency from this information flow, operations gain competitive advantage.  This is because customers, suppliers and other partners throughout the value chain benefit as profitability is increased through:

·         Shorter business cycle times

·         Improved customer service

·         Improved asset utilization

·         Reduction of cross-company redundant data entry

For example, one of our clients, Marfield Corporate Stationary, makes business cards for Fortune 1000 companies.  Now, with an Internet interface, customers will order business cards from Marfield through Web site links and data entry screens.  A proof (with logo, etc.) of a proposed business card comes up on the screen for approval.  Phone calls, handwritten faxes, and misunderstandings are reduced.  These elements further impact the Marfield organization by enabling:

·         Increased revenue through expanded capacities (which puts them on the same playing field as larger companies)

·         Increased market influences that only a physically larger company could have achieved in the past.

The customer becomes the data entry clerk, resulting in enormous labor savings and accuracy for the company selling products over the Internet.  One hundred customers entering one transaction are better than one employee entering one hundred transactions.  This benefits both buyer and seller regarding ease-of-use and accuracy.

In addition, Internet ordering systems are a great sales tool that are easy to demonstrate, which results in increased sales.

Outsourcing, a concept that is still not completely accepted, may become much more prevalent.  No amount of corporate policy may ever again justify the concept of large in-house staff for specialized services, such as information systems and human resources.  In the future, this will be accomplished by the “virtual organization.”

We have completed many successful projects, with both large and small companies, by using a team of our own employees, the client’s employees, and outside contractors, all located in different cities.  Of course, numerous on-site meetings took place because there is no substitute for face-to-face communication.  However, e-mail and the Internet made these projects possible without the client knowing (or caring) how or where things got done.  What they did care about were the results from a small temporary team of experienced consultants with less expense than doing it in-house or with a large traditional firm.

We believe the best way to build an organization is through dedicated long-term employees for long-term projects.  However, why hire long-term employees for specific skills needed only for the short-term?  Why pay for FICA, family leave, sick leave, health insurance, annual reviews (and disputes), raises, training, office rent, extra computer hardware and software, government regulations, endless paperwork, lawsuits, and office politics for short-term projects?  With today’s fast moving changes in technology, most systems projects are short-term.  After the project is over, the virtual organization goes on to the next challenge.  No one gets laid off.  No overhead concerning termination paperwork or severance packages is necessary.

Keep in mind the old concept of outsourcing to one large traditional firm may no longer be the best answer.  This is merely shifting the work from an in-house monopoly to an outside monopoly, which is unnecessary with today’s smaller and more agile consulting firms taking full advantage of the Internet and e-commerce.

The law of diminishing returns has always applied until e-commerce came along.  Historically, no business has remained profitable and grown without re-inventing itself over time.  For example, Microsoft spent an enormous amount on the development of Windows 98, but once this one-time cost was absorbed, the incremental cost of goods manufactured is next to nothing as a percentage of sales.  This cost is nothing with transactions made over the Internet, such as retail sales.  We are dealing with fast moving bytes, not molecules.

The entire planet will experience social change because of the Internet.  Political boundaries between countries may be blurred as more and more people throughout the world discover each other, not just for e-commerce, but also for enjoyment of obtaining information through e-mail and the Web.  Business and political information that would have been prohibited and controlled by governmental institutions in earlier times may become readily available to individuals and organizations that will use this information to gain knowledge of future security problems so we can protect ourselves.

In all likelihood, no government or company will control the Internet the way Standard Oil controlled the railroads a century ago.  Improved wireless technology, instead of traditional phone lines, may put power in the hands of individuals and small organizations instead of large institutions.  Governments will be scrambling to find some way to tax and regulate the Internet with great frustration.

Technology will always be ahead of the legal process.  While a Federal judge’s ruling that Microsoft Corporation is a monopoly should surprise no one, we need to understand that this is becoming an arguable point regarding the new Web technology.  Ever since Microsoft took over the PC operating system business, Microsoft competitors have began looking for alternatives to Windows.  Since then several products, such as Linux, have hit the market with good success.  Years ago the PC revolution made thirteen years of IBM anti-trust litigation a moot point and a poor use of taxpayers money.  Now, the Internet and e-commerce revolutions have brought the same questions to the Microsoft lawsuit.

The concept of business-to-business e-commerce is very simple.  Intangible assets, such as Internet and database software, are less expensive and easier to build and maintain than office buildings and warehouses, which may someday make the concept of downtown obsolete.  Informed investors understand this very well.  One reason the price/earnings ratio is 34 for Dell Computer and 17 for Sears demonstrates the effective use of these intangible assets, which also includes strong customer and vendor goodwill.  In other words, the people at Dell are using the Internet to maximize utilization.  They sell products over the Internet.  In conclusion, the profits of tomorrow will be driven by electronic commerce, and those who understand this will survive and prosper.

Quotes Worth Noting

“If an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it.  Most economic fallacies derive from the neglect of this simple insight; from the tendency to assume that there is a fixed pie that one party can gain only at the expense of another.” -- Milton Friedman

“Being intelligent is not a felony.  But most societies evaluate it as at least a misdemeanor.” -- Robert Heinlein

“The future ain’t what is used to be.” – Yogi Berra