The Renaissance in eBusiness
Kirthi Kalyanam, J.C. Penney Research Professor, Leavey School of Business, Santa Clara University
March 24, 2004
Summary: Overview of the state of eCommerce and a framework for what kind of impact it will have and where.
Why be interested in eBusiness? The impact is very hard to prove, the word is dirty since so many people lost their shirt back in 1999. Is there a renaissance?
The Nasdaq is climbing again, but that is the wrong reason to be interested in the Internet. You need to look at the fundamentals, not the investor psychology. What are the fundamentals of eBusiness? People shopping. Good companies, such as eBay, outperform the index. Interactive Corp (IACI) that owns http://www.expedia.com is doing very well, holding company for interactive businesses, owned by Barry Diller. Key point is that as they get to scale, interactive retailing businesses are very profitable (QVC, Home Shopping Network as example).
There is a steady growth of eCommerce, but still very small part of overall commerce. Just 1.5%. Customers are happy with eCommerce – Customer Satisfaction Index, a survey put together by the University of Michigan, has eCommerce companies doing very well, much better than retail. Had a dip initially because the sites were immature and logistics were spotty, but it is improving very well.
This is not news to retail – people in the PC industry has known the qualities of the direct model for years. They all have “http://www.Dell.com envy”.
Profitability better: Pure internet retailers losing money as a group, store-based companies’ Internet operations 7% profit, best model for retail is catalogue operations that use the Internet. Rule of thumb: Internet channel adds 4% to EBIT if leveraged correctly. Key lesson: At scale, at volume, the Internet model will have a higher rate of profitability than the retail model.
eCommerce scorecard: Growth is steady, customer satisfaction is high, profitability is good, variability of impact is hmmmmm…..how to assess that?
Three basic factors on the Internet: Digital, network, and interactive.
Digital impact: Moore’s law: William D. Nordhaus (2001) showed that the cost of computing has been declining ever since vacuum tubes, long before the microprocessor came on the scene. Rate of decline has accelerated during the microprocessor regime, but not that much. Cost of computing has improved by a factor of 5 trillion since 1950.
Network effect: eBay and other examples. Self-organizing networks: Sid degrees of separation etc.
Interactivity: Personalization has not worked well, because the marketers don’t really know what to show you. Personalization based on what people actually are doing, trigger marketing, getting notified when something is changing.
Seven sweet spots for using the Internet – the Magnificent Seven. Derives 7 ways you can use the Internet, in a framework with two dimensions:
– Can you digitize the product or service?
– Does the Internet improve delivery of a critical channel flow?