e-Business: Roadmap for Success (Information Technology Series) by Ravi Kalakota, Marcia Robinson, Don Tapscott (Foreword by)

From the Publisher

—Alan Taetle, Former Executive Vice President of MindSpring and General Partner of the Venture Capital Firm, Noro-Moseley Partners

This is the first book on e-business to combine a clarity of vision that will help you to appreciate the true significance of e-business, with a rigorous roadmap for reinventing your business design. If you want to avoid being blindsided by your competition, you must make this book required reading in your organization.
—Mohanbir Sawhney, Tribune Professor of Electronic Commerce and Technology, Kellogg Graduate School of Management, Northwestern University

As e-commerce solutions, enterprise applications, and business models converge in new ways, a tidal wave of change is transforming industries, redefining competitive strategies, and annihilating traditional thinking. To survive and thrive in the e-commerce world, all companies—from established industry leaders to feisty upstarts—are remaking themselves into lean, mean e-business machines that serve, delight, and retain customers better than ever before.

How do they do it? Not with new products or innovative technology, but with superior e-business designs. Startups and some nimble incumbents have each created an e-business design by which they serve customers, differentiate their supply chains, integrate their selling chains, procure products, and nurture relationships.

e-Business: Roadmap for Success illustrates how managers are rewiring the enterprise to confront the e-commerce onslaught—uprooting traditional business applications as we know them. The authors create an innovativeapplication framework for structural migration from a legacy model to an e-business model. Drawing on their experience with and research of leading businesses, Kalakota and Robinson identify the fundamental design principles for building the e-business blueprint.

Booknews

Surveys how some successful companies have redesigned their structure and practices to do business on the Internet, and glean from them fundamental design principles for building an electronic business blueprint. Annotation c. Book News, Inc., Portland, OR (booknews.com)

Product Details

• Table of Contents
• Forewords & Introductions
• Read an Excerpt
• Read a Sample Chapter

Table of Contents

Forewords & Introductions

e-Commerce is changing the shape of competition, the speed of action and the nature of leadership.

Managers everywhere are feeling the heat: Their companies are at the e-commerce crossroads and there are many ways to go. But which road will lead to success? What are the roadblocks they will be forced to navigate? Which business models, management strategies, and tactics will make them successful? What will be the characteristics of the next generation of business applications, and which vendors will lead in delivering them? And to whom can they turn for help?

If these are the questions you're losing sleep over, you've picked up the right book. We'll help you find the road to take. e-Business: Roadmap for Success tackles the nagging questions:

• Why are some companies successful at e-commerce while others flounder?
• What are businesses that are solving customer problems doing differently?
• How are successful companies moving from traditional applications to the new breed of integrated e-business architectures?

Through detailed case studies of some of the best-known companies, this book examines the e-business blueprint, offering step-by-step guidance in choosing and implementing the right strategies to survive the e-commerce onslaught and succeed.

Moving from e-Commerce to e-Business

e-Commerce is here to stay. As we approach the new millennium, the Web and e-commerce are key industry drivers. Few companies or industries are immune to the effects of the e-commerce tidal wave. It's changed how many companies do business. It's created new channels for our customers, making leaders in manydifferent industries sit up and take notice.

Are you e-commerce ready? Managers of established companies are struggling to comprehend this new phenomenon. And just as many have started to grasp e-commerce, the next wave—e-business—is already reaching the shore. Intensified competition and new e-commerce opportunities are pressing traditional companies to build e-business models that are flexible, fast moving, and customer focused. In other words, the core of the enterprise itself is going through a metamorphosis. The next stage of this structural evolution is e-business.

Are you e-business savvy? e-Business is the complex fusion of business processes, enterprise applications, and organizational structure necessary to create a high-performance business model. The message is simple: Without a transition to an e-business foundation, e-commerce cannot be executed effectively. Considering the inevitability of moving toward an e-business foundation, senior management is being galvanized into tactical action. Those who fail will pay a high price.

If managers seriously want to develop effective strategies for competing in the new economy, they must understand the fundamental structure of the next-generation e-corporation built on an interconnected web of enterprise applications. We wrote this book to provide a master blueprint for building an innovative e-corporation that can survive and thrive in the digital world.

What Makes This Book Different?

Many books have been written about how the old economic rules of scale, scope, efficiency, market share, and vertical integration are no longer sufficient. New rules must be applied, and that requires new organizational capabilities. Managers everywhere understand the urgency; they're itching to get going and make change happen.

Unfortunately, the first generation of e-commerce strategy books is long on vision but short on detail. Many organizations know it's easy to talk about the e-commerce future, but the real management challenge is to make it happen in a systematic way without derailing existing business. What does this mean to a CEO, CFO, and CIO? If customers are moving online, then the whole IT investment paradigm must shift toward creating an integrated e-business model.

The focus of this book is practical: How can senior management plan for and manage e-business investments? The first step is to design a comprehensive e-commerce strategy, then evaluate prospective line-of-business (LOB) application framework investments based on how well the technology or application advances the strategy. Companies often make the mistake of focusing first on e-commerce applications and then trying to bend a legacy IT strategy around this outline afterward. To succeed, managers must have a strong e-business strategy in place before considering specific e-commerce application investments. Otherwise, most e-commerce efforts are doomed to fail.

But what do these internal e-business architectures and investments look like? This is the focus of e-Business: Roadmap for Success.It's the first book on e-business that looks at the structural migration problem: how to transform an old company into a new agile e-corporation. It provides a unique view of the next generation, integrated enterprise and the LOB application investments necessary to compete. In this book, we highlight the critical elements—business processes, back-office and front-office applications, and strategy—that managers need to be successful in the digital economy.

In other words, corporations involved in e-commerce must rethink their visions of the future. e-Business: Roadmap for Success shows that understanding how to lead one's company into the e-commerce arena requires a new point of view about integration and the business design. It offers step-by-step navigation of the uncharted e-business terrain. This is a guide that executives in the Fortune 2000 companies need to succeed in the information economy.

Who Should Read This Book?

e-Business will play a significant role in determining the success of corporations. Management needs to learn that the real challenge surrounding e-business is the task of making it happen. This book focuses on the business architecture that managers must build in order to achieve e-business success.

Virtually every discipline is affected by e-commerce and e-business architectural efforts. This book's timeliness and insights into the changes in organizational practice make it appealing to a broad management market:

• Senior management and strategic planners who are charged with developing business strategies
• Corporate executives who must drive their companies' competitive future
• Information technology managers who need to lead their teams with strategic decisions

This book is a must-read for all managers, consultants, entrepreneurs, and business school students who have been discussing and reading about e-commerce and are interested in knowing how they can capitalize on e-dynamics.

How This Book Is Organized

Building the foundation for the era of e-commerce is very exciting! The first four chapters describe a new e-business design composed of building blocks called enterprise applications. Market leaders are developing intricate e-models resting on a set of intertwined enterprise apps—customer relationship solutions, enterprise resource planning systems, order management solutions, or supply chain solutions—and then building their strategies around it. Each enterprise app demands a distinct strategic fusion of customer-centric processes, information systems, management systems, and culture.

Most managers are apprehensive of tackling strategic fusion issues because they represent such a formidable task that transcends the organizational structure and line-of-business considerations. This book offers a way to structure this widespread strategy problem, slice it into manageable pieces, and create actionable plans that can be executed quickly.

Chapters 5 through 10 explore the various e-business design elements in the new e-corporation. The goal is to identify clear, rational, strategic design choices that are responsive to evolving customer needs. Each chapter ends with a "Memo to the CEO" that provides a set of normative questions that must be answered convincingly if the building blocks of strategic integration are to be constructed effectively and profitably.

The last two chapters are prescriptive. They focus on the challenges of moving your organization to an e-business firm. In today's business environment, the stakes are high and failure is swift and ruthless. How an organization mobilizes itself into constructive action will determine its survival and ultimate success.

Acknowledgments

Since this book contains information on many companies struggling with their e-business initiatives, we would like to thank them all for their hard work as they continue to tackle this tough issue.

We have learned much through our consulting engagements and extend thanks to the many people we have talked to. In particular, Kemal Koeksal and Peter Zencke at SAP, Shirish Netke at Sun Microsystems, Alex Lowy and David Ticoll at the Alliance for Converging Technologies, Angela Schwartz at Microsoft, and Nagesh Vempaty at Healtheon Corporation.

Thanks to the many people at Addison-Wesley who made this book possible, in particular, our editors Elizabeth Spainhour and Mary O'Brien. Many thanks to our reviewers, who took time out of their busy schedules to read through the manuscript page by page and indicate areas that needed attention. To Lorna Gentry and Jill Hall, thank you for your patience and expertise in editing and improving our book. We appreciate the long hours and honest feedback that made this book much better.

Thank you to Dean Harris, Dr. Richard Welke and colleagues at Mack Robinson College of Business, Georgia State University, for providing support of this project.

To our family and friends who have helped us throughout the writing of this book. In particular, Bill and Judy, who we miss every day; Shelley Cicero, whose regular e-mails brighten our day; and Lynn Lorenc, who always makes us smile.

Ravi Kalakota
Kalakota@mindspring.com
www.ebstrategy.com

Marcia M. Robinson
Marcia.Robinson@mindspring.com
www.ebstrategy.com

Read an Excerpt

e-Commerce is changing the shape of competition, the speed of action and the nature of leadership.

Managers everywhere are feeling the heat: Their companies are at the e-commerce crossroads and there are many ways to go. But which road will lead to success? What are the roadblocks they will be forced to navigate? Which business models, management strategies, and tactics will make them successful? What will be the characteristics of the next generation of business applications, and which vendors will lead in delivering them? And to whom can they turn for help?

If these are the questions you're losing sleep over, you've picked up the right book. We'll help you find the road to take. e-Business: Roadmap for Success tackles the nagging questions:

• Why are some companies successful at e-commerce while others flounder?
• What are businesses that are solving customer problems doing differently?
• How are successful companies moving from traditional applications to the new breed of integrated e-business architectures?

Through detailed case studies of some of the best-known companies, this book examines the e-business blueprint, offering step-by-step guidance in choosing and implementing the right strategies to survive the e-commerce onslaught and succeed.

Moving from e-Commerce to e-Business

e-Commerce is here to stay. As we approach the new millennium, the Web and e-commerce are key industry drivers. Few companies or industries are immune to the effects of the e-commerce tidal wave. It's changed how many companies do business. It's created new channels for our customers, making leaders inmany different industries sit up and take notice.

Are you e-commerce ready? Managers of established companies are struggling to comprehend this new phenomenon. And just as many have started to grasp e-commerce, the next wave--e-business--is already reaching the shore. Intensified competition and new e-commerce opportunities are pressing traditional companies to build e-business models that are flexible, fast moving, and customer focused. In other words, the core of the enterprise itself is going through a metamorphosis. The next stage of this structural evolution is e-business.

Are you e-business savvy? e-Business is the complex fusion of business processes, enterprise applications, and organizational structure necessary to create a high-performance business model. The message is simple: Without a transition to an e-business foundation, e-commerce cannot be executed effectively. Considering the inevitability of moving toward an e-business foundation, senior management is being galvanized into tactical action. Those who fail will pay a high price.

If managers seriously want to develop effective strategies for competing in the new economy, they must understand the fundamental structure of the next-generation e-corporation built on an interconnected web of enterprise applications. We wrote this book to provide a master blueprint for building an innovative e-corporation that can survive and thrive in the digital world.

What Makes This Book Different?

Many books have been written about how the old economic rules of scale, scope, efficiency, market share, and vertical integration are no longer sufficient. New rules must be applied, and that requires new organizational capabilities. Managers everywhere understand the urgency; they're itching to get going and make change happen.

Unfortunately, the first generation of e-commerce strategy books is long on vision but short on detail. Many organizations know it's easy to talk about the e-commerce future, but the real management challenge is to make it happen in a systematic way without derailing existing business. What does this mean to a CEO, CFO, and CIO? If customers are moving online, then the whole IT investment paradigm must shift toward creating an integrated e-business model.

The focus of this book is practical: How can senior management plan for and manage e-business investments? The first step is to design a comprehensive e-commerce strategy, then evaluate prospective line-of-business (LOB) application framework investments based on how well the technology or application advances the strategy. Companies often make the mistake of focusing first on e-commerce applications and then trying to bend a legacy IT strategy around this outline afterward. To succeed, managers must have a strong e-business strategy in place before considering specific e-commerce application investments. Otherwise, most e-commerce efforts are doomed to fail.

But what do these internal e-business architectures and investments look like? This is the focus of e-Business: Roadmap for Success.It's the first book on e-business that looks at the structural migration problem: how to transform an old company into a new agile e-corporation. It provides a unique view of the next generation, integrated enterprise and the LOB application investments necessary to compete. In this book, we highlight the critical elements--business processes, back-office and front-office applications, and strategy--that managers need to be successful in the digital economy.

In other words, corporations involved in e-commerce must rethink their visions of the future. e-Business: Roadmap for Success shows that understanding how to lead one's company into the e-commerce arena requires a new point of view about integration and the business design. It offers step-by-step navigation of the uncharted e-business terrain. This is a guide that executives in the Fortune 2000 companies need to succeed in the information economy.

Who Should Read This Book?

e-Business will play a significant role in determining the success of corporations. Management needs to learn that the real challenge surrounding e-business is the task of making it happen. This book focuses on the business architecture that managers must build in order to achieve e-business success.

Virtually every discipline is affected by e-commerce and e-business architectural efforts. This book's timeliness and insights into the changes in organizational practice make it appealing to a broad management market:

• Senior management and strategic planners who are charged with developing business strategies
• Corporate executives who must drive their companies' competitive future
• Information technology managers who need to lead their teams with strategic decisions

This book is a must-read for all managers, consultants, entrepreneurs, and business school students who have been discussing and reading about e-commerce and are interested in knowing how they can capitalize on e-dynamics.

How This Book Is Organized

Building the foundation for the era of e-commerce is very exciting! The first four chapters describe a new e-business design composed of building blocks called enterprise applications. Market leaders are developing intricate e-models resting on a set of intertwined enterprise apps--customer relationship solutions, enterprise resource planning systems, order management solutions, or supply chain solutions--and then building their strategies around it. Each enterprise app demands a distinct strategic fusion of customer-centric processes, information systems, management systems, and culture.

Most managers are apprehensive of tackling strategic fusion issues because they represent such a formidable task that transcends the organizational structure and line-of-business considerations. This book offers a way to structure this widespread strategy problem, slice it into manageable pieces, and create actionable plans that can be executed quickly.

Chapters 5 through 10 explore the various e-business design elements in the new e-corporation. The goal is to identify clear, rational, strategic design choices that are responsive to evolving customer needs. Each chapter ends with a "Memo to the CEO" that provides a set of normative questions that must be answered convincingly if the building blocks of strategic integration are to be constructed effectively and profitably.

The last two chapters are prescriptive. They focus on the challenges of moving your organization to an e-business firm. In today's business environment, the stakes are high and failure is swift and ruthless. How an organization mobilizes itself into constructive action will determine its survival and ultimate success.

Acknowledgments

Since this book contains information on many companies struggling with their e-business initiatives, we would like to thank them all for their hard work as they continue to tackle this tough issue.

We have learned much through our consulting engagements and extend thanks to the many people we have talked to. In particular, Kemal Koeksal and Peter Zencke at SAP, Shirish Netke at Sun Microsystems, Alex Lowy and David Ticoll at the Alliance for Converging Technologies, Angela Schwartz at Microsoft, and Nagesh Vempaty at Healtheon Corporation.

Thanks to the many people at Addison-Wesley who made this book possible, in particular, our editors Elizabeth Spainhour and Mary O'Brien. Many thanks to our reviewers, who took time out of their busy schedules to read through the manuscript page by page and indicate areas that needed attention. To Lorna Gentry and Jill Hall, thank you for your patience and expertise in editing and improving our book. We appreciate the long hours and honest feedback that made this book much better.

Thank you to Dean Harris, Dr. Richard Welke and colleagues at Mack Robinson College of Business, Georgia State University, for providing support of this project.

To our family and friends who have helped us throughout the writing of this book. In particular, Bill and Judy, who we miss every day; Shelley Cicero, whose regular e-mails brighten our day; and Lynn Lorenc, who always makes us smile.

Ravi Kalakota
Kalakota@mindspring.com
www.ebstrategy.com

Marcia M. Robinson
Marcia.Robinson@mindspring.com
www.ebstrategy.com

Read a Sample Chapter

Chapter One

From e-Commerce
to e-Business

What to Expect

New economy new tools, new rules. Few concepts have revolutionized business more profoundly than e-commerce. Simply put, the streamlining of interactions, products, and payments from customers to companies and from companies to suppliers is causing an earthquake in many boardrooms. Managers are being forced to reexamine traditional definitions of value as we enter a new millennium.

    To thrive in the e-commerce world, companies need to structurally transform their internal foundations to be effective. They need to integrate their creaky applications into a potent e-business infrastructure. In this chapter, we'll look at the mechanics of e-business and its impact. We describe what e-business is and how it is changing the market. Included are steps you can take to disaggregate and reaggregate value chains to create the e-business model.

·How did Amazon.com, an online bookstore that started in 1995 with two employees in a rundown warehouse in Seattle, grow revenues in only three years to more than $600 million in 1998, outmaneuvering the two 800-pound gorillas in the book retail business, Barnes & Noble and Borders Books & Music?

·Why is it that consumers can go online to buy a $1,999 built-to-order PC from Gateway Computer, but they cannot go online to buy a customized $5,000 color copier from Xerox?

·Why can you trade stocks and options online through Charles Schwab, butyou can't go online to view or make changes to your Cigna or Kaiser health insurance plan?

·Why does it take only a few minutes to choose a flight, buy an airline ticket, and reserve a hotel room and a car through Microsoft Expedia, an integrated online travel transaction site, but it takes twice that long to speak with an American, United or Delta travel agent?

·How can FedEx and UPS make it easy for customers to track their packages, create airbills, and schedule pickups on the Web, but banks cannot tell their customers the status of online bill payments made to the local phone company?

· Why is it that Cisco, an internetworking company that makes routers and switches, can overhaul its product line every two years, but Kodak cannot seem to deliver rapid innovations to meet changing customer requirements?

    In short, what makes some companies successful in the digital economy? Visionary companies understand that current business designs and organizational models are insufficient to meet the challenges of doing business in the e-commerce era. If you take a close look at such leading businesses as Dell, Cisco, and Amazon.com, you'll find a new business design, one that emphasizes a finely tuned integration of business, technology, and process. In many cases, these companies are tapping technology to streamline operations, boost brands, improve customer loyalty, and, ultimately, drive profit growth.

    Visionary firms are setting new rules within their industries via new technobusiness designs, new interenterprise processes, and integrated operations to support changing customer requirements. They realize that the next wave of customer-centric innovation requires businesswide integration of processes, applications, and systems on an unprecedented scale. We call this businesswide integration e-business, the organizational foundation that can support business in the Net economy, and it's forcing companies to ask three questions:

1. How will e-commerce change our customer priorities?

2. How can we construct a business design to meet these new customer priorities?

3. What technology investments must we make to survive, let alone thrive?

Look around your own company. Look at the problems that are preoccupying senior management, and look at current priorities: market share versus short-term profits, revenue growth versus cost. What are the high-profile projects that have been initiated or proposed recently to accomplish these priorities? Now think about the digital future and analyze your company's ability to compete with new entrants that don't have your company's baggage: legacy applications, calcified processes, and inflexible business models.

    Next, ask yourself questions about strategy: Does my senior management have a clear understanding of how our industry is being shaped by new e-business developments? Do they suffer from flawed assumptions, or blind spots, in interpreting industry-level changes? Do they recognize the threat posed by new and unconventional rivals? Are they willing to make changes to the business model before it's too late? Are they setting the right priorities to be rule makers, rather than rule takers?

    Now be brutally honest with yourself about your company's readiness to execute change. Does management understand the implementation side of strategy? Do they know that the entire business platform is being transformed by a new generation of enterprise applications? Do they understand the risks, challenges, and difficulties in integrating and implementing complex enterprise applications necessary for an e-business enterprise? Do they understand what it takes to build interenterprise applications such as supply chain management, which is the backbone of e-business?

    These are not rhetorical questions. Thoughtful answers will help you shape the transformation agenda that forms the e-business backbone. Our goal is to show the logic of e-business, so that everyone on your management team can participate in creating a new infrastructure. If understanding is to be our guiding principle, then many enlightened managers are better than one. If technology is to be our driving force, then its principles must be accessible to management, not reserved, as is sometimes the case, for only an anointed few who have managed to penetrate its thick fog and hype. So let's get started in linking today's business with tomorrow's technology.

Linking Today's Business with Tomorrow's Technology

It's happening right before our eyes: a vast and quick reconfiguration of commerce on an evolving e-business foundation. What is the difference between e-commerce and e-business? We define e-commerce as buying and selling over digital media. e-Business, in addition to encompassing e-commerce, includes both front- and back-office applications that form the engine for modern business. e-Business is not just about e-commerce transactions; it's about redefining old business models, with the aid of technology, to maximize customer value. e-Business is the overall strategy, and e-commerce is an extremely important facet of e-business.

    Why is e-business a big deal? CEOs everywhere are faced with shareholder demands for double-digit revenue growth, no matter what the business environment is. They've already reengineered, downsized, and cut costs. Consequently, CEOs are investigating new strategic initiatives to deliver results, and many are looking at using technology to transform the business model—in other words, harnessing the power of e-business.

    e-Business is being driven by a profound, evolving development: Every day, more and more individuals and companies worldwide are being linked electronically. While on the surface this does not appear to be a big deal, digitally binding consumers and companies in a low-cost way is as significant as the invention of the steam engine, electricity, the telephone, and the assembly line. It's causing the stodgy old conventions of business built on information asymmetry to be cast aside. So it's no surprise that the rules of the game are being rewritten (see Table 1.1).

    Let's start by looking at the first rule of e-business:

Technology is no longer an afterthought in forming business strategy, but the actual cause and driver.

While the effect of technology on business strategy may not be clear initially, it is relentless and cumulative, like the effects of water over time. Technology comes in waves. As the ocean erodes the shore, so will technology erode strategies, causing an entire business model to behave in hard-to-predict ways. Consequently, e-commerce is not something that businesses can ignore.

    e-Commerce poses the most significant challenge to the business model since the advent of computing itself. While the computer automates tasks, increasing business speed, it hasn't fundamentally altered the business foundation; e-commerce does. If any entity in the value chain begins to do business electronically, companies up and down that value chain must follow suit, or risk being substituted. Therefore, rethinking and redesigning the business model is not one of many options available to management, it is the first step to profiting— even surviving— in the information era.

    Are executives at large companies aware that the impact of these changes is of seismic proportions? Some are; most are not. The majority of managers are too busy dealing with a multitude of operational problems. Executives can't afford to think too much as they try to get more juice from their current business models. Time is tight; resources are tighter. If they sit around inventing elegant strategies and then try to execute them through a series of flawless decisions, the current business is doomed. If they don't think about the future, the business is doomed.

    To do business differently, managers must learn to see differently. As John Seely Brown, chief scientist of Xerox, puts it, "Seeing differently means learning to question the framework through which we view and frame competition, competencies and business models." Maintaining the status quo is not a viable option. Unfortunately, too many companies develop a pathology of reasoning, learning, and attempting to innovate only in their own comfort zones. The first step to seeing differently is to understand that e-business is about structural transformation.

e-Business = Structural Transformation

If e-commerce innovation is the cause of a revolution in the rules of business, what is the effect? In short, structural transformation. The results are a growing pace of application innovation, new distribution channels, and competitive dynamics that are baffling even the smartest managers.

    As technology permeates everything we do, business transformation is becoming harder to manage because the issues of change play out on a much grander scale. Increasingly, value is found not in tangible assets such as products, but in intangibles: branding, customer relationship, supplier integration, and the aggregation of key information assets. This observation leads to the second rule of e-business:

The ability to streamline the structure and to influence and control the flow of information is dramatically more powerful and cost-effective than moving and manufacturing physical products.

This rule is the core driver of structural transformation. Ironically, it seems that few companies have developed the necessary information-centric business designs to deal with the issues of business change and innovation. Changing the flow of information requires companies to change not just the product mix, but perhaps more important, the business ecosystem in which they compete.

    Unless an enterprise develops an explicit strategy to accommodate the accelerated flow of information, the enterprise will find itself scrambling, working harder and faster just to stay afloat. There is always hope that some magical silver bullet will appear and pierce the walls blocking the smooth flow of information, but that isn't likely.

Transformation Stakes Are Very High

Why do successful firms fail? The marketplace is cruel to companies that don't adapt to change. History shows that organizations best positioned to seize the future rarely do so. As Alvin Toffler pointed out in Future Shock, either we do not respond at all or we do not respond quickly enough or effectively enough to the change occurring around us. He called our paralysis in the face of demanding change "future shock." Too often, senior managers fail to anticipate change, become overconfident, lack the ability to implement change, or fail to manage change successfully. For example, in the 1980s, IBM and Digital Equipment were positioned to own the PC market, but they did nothing when upstarts such as Compaq, Dell, and Gateway took the market by storm. Why? Because their commitment and attention were directed elsewhere. Even as late as the early 1990s, Digital's official line was that PCs represented a niche market with only limited growth potential. Digital Equipment dug itself into a hole from which it was impossible to escape and consequently was acquired by Compaq, a company it could have bought many times over in the 1980s. In hindsight, Digital's management should have transformed its business design to rely less on mainframe computers and more on tapping into the PC, client/server, and Web revolution.

    As this case illustrates, perhaps the greatest threat companies face today is adjusting to nonstop change in order to sustain growth. Constant change means organizations must manufacture a healthy discomfort with the status quo, develop the ability to detect emerging trends faster than the competition, make rapid decisions, and be agile enough to create new business models. In other words, to thrive, companies will need to exist in a state of perpetual transformation, continuously creating fundamental change. Throw in the resulting time-to-market pressures, and you have a serious challenge indeed. This observation leads us to the third rule of e-business:

Inability to overthrow the dominant, outdated business design often leads to business failure.

    If a business design is faulty or built on old assumptions, no amount of fixing and patching will do any good for competing in the digital economy. It's become accepted wisdom that the survival of a company depends on its ability to anticipate, gauge, and respond to changing customer demands in a timely manner. Standing still and waiting for the silver bullet leads only to heartbreak, and working harder and longer leads only to companywide frustration. Neither is realistic for addressing an issue that affects the very future of the enterprise: How should a company design itself to compete in the new, networked economy?

e-Business Requires Flexible Business Designs

In order to deal with change, companies and autonomous business units need an effective business design that allows them to react rapidly and continuously, innovate ceaselessly, and take on new strategic imperatives faster and more comfortably. Are companies organized to deal with dynamic change? Not really. Virtually every enterprise finds itself stretched to the limit, attempting to maintain viability and profitability in the face of unparalleled uncertainty and change in every dimension of its business environment. And there is no relief in sight.

    To deal with dynamic change, many organizations have sought refuge in outsourcing, the argument for which is simple: Individual companies simply cannot do everything well. True enough. In the first generation of outsourcing, the focus was on gaining efficiency and cost reduction, not on pleasing customers. For instance, because of the increasing complexity of computers and networks, more and more firms began outsourcing their technology management. Among the biggest beneficiaries of this trend have been computer service firms, such as IBM, Andersen Consulting, and EDS. BellSouth outsourced its entire information technology (IT) function to EDS and Andersen Consulting in a contract worth more than $4 billion.

    But the outsourcing boom extends well beyond computers. In recent years, outsourcing in the form of contract manufacturing has caught on considerably as companies search for ways to cut costs. Examples of contract manufacturing abound in the high-tech industry: Solectron, Flextronics, and SCI Systems. Outsourcing is changing the nature of the relationship between contract manufacturers and the original equipment manufacturers (OEMs). In the past, they danced like detached partners, but now they're cheek to cheek. Why? If the objective is to please customers, the best relationship for both parties is to behave as a single company—truly cooperative and integrated. This means that firms have to share sensitive design information, link internal applications systems, and provide shared services throughout the supply chain. In a growing number of cases, outsourcers finish the product, slap on the logo, and ship it to the user or distributor. It's the wave of the future. As companies face complex business challenges, they increasingly farm out many tasks to cut down on time to market. Increasingly, new entrants in e-business use outsourcing alliances as a business model to gain market position against a leader. This strategy is often called GBF, "get big fast."

    This new generation of outsourcing alliances is called a variety of names, including e-business communities, clusters, and coalitions. While successful strategies differ widely from industry to industry, a common thread runs through them. They all seek to nullify the advantages of the leader by using outsourcing to quickly create reputation, economies of scale, cumulative learning, and preferred access to suppliers or channels. Amazon.com successfully attacked Barnes & Noble using this strategy, and Yahoo! used it to overtake Microsoft Network in the portal business. This trend brings us to the fourth rule of e-business:

The goal of new business designs is to create flexible outsourcing alliances between companies that not only off-load costs, but also make customers ecstatic.

With emerging technology, outsourcing alliances are becoming less painful to implement, especially if both sides are using similar business application software. This trend makes every market leader vulnerable. Distributors are especially threatened, because new online intermediaries are able to replicate their business model at a very low cost. New entrants in the distribution business are differentiating themselves in two key ways: They're easy to do business with, and they add value through innovative services, such as inventory management. Ease of doing business is seen as critical as costs go down, even if the new entrant does not lower prices.

    Complex outsourcing arrangements are not optional anymore: They are the only way companies can fill voids in their arsenals. Currently, there are very few guidelines for managers to follow as they go about the task of creating new business designs that leverage outsourcing. Still, in our work with several leading companies, we find a recurring theme that firms are implementing to fashion new business models: disaggregation and reaggregation.

Value Chain Disaggregation and Reaggregation

The value of any business is in the needs being served, not the products being offered. Disaggregation allows firms to separate the means (products) from the ends (customer needs). Disaggregation requires identifying, valuing, and nurturing the true core of the business: the underlying needs satisfied by the company's products and services. This approach allows managers to disassemble the old structure, rethink core capabilities, and identify what new forms of value can be created.

    Intel, with its constant innovation in chip design and manufacturing, is a prime example of the disaggregation and reaggregation strategy. Disaggregation is crucial for leaders such as Intel because successful organizations may need to abandon old paradigms (systems, strategies, and products) while they possess equity. The foresight to cannibalize a working business design takes courage because it involves risk, but the payoff can be enormous.

    Reaggregation enables businesses to create a configuration that streamlines the entire value chain. It can also help to create an unparalleled customer experience that satisfies a need while engaging, intriguing, and connecting clients. Evidence abounds that new reaggregated business designs are being built on a well-integrated set of enterprise software applications (or killer apps). These enterprise applications represent the backbone of the modern corporation.

    Reaggregation enables new entrants to compete differently, even though they're competing with the same scope of activities as well-established leaders. Amazon.com reaggregated the value chain to perform individual activities differently, although it offers the same scope of activities as leader Barnes & Noble. The objective of reaggregation is to either lower cost or enhance differentiation. Using technology to reaggregate value chains is central to the digital economy.

The Road Ahead: Steps to a New Beginning

The steps in disaggregation and reaggregation follow a systematic logic, and they're the same for everybody—startups, visionary firms, and established companies:

1. Challenge traditional definitions of value.

2. Define value in terms of the whole customer experience.

3. Engineer the end-to-end value stream.

4. Integrate, integrate, and integrate some more. Create a new technoenterprise foundation that is customer-centric.

5. Create a new generation of leaders who understand how to create the digital future by design, not by accident.

    Let's focus on established companies, because they need the most help in transforming themselves. It is critical for established companies to understand that we are at a crossroads in history, a time when e-commerce is making a transition from the fringe market, dominated by innovators and early adopters, to the mainstream market, dominated by pragmatic customers seeking new forms of value. Established companies that don't pay attention to this shift are going to face hard times.

    Why is it difficult for established companies to see the writing on the wall? Primarily because most want to "stick to the knitting," that is, to continue to do what made them successful. They don't want to cannibalize existing product lines, and they tend to fall back on simple formulas: lower cost, operational efficiency, increased product variety. They should look at technology as a way to make their lives easier and give them more value for their money. Established companies must challenge traditional definitions of value. They must learn to take advantage of new technologies to create and deliver new streams of value.

Challenge Traditional Definitions of Value

Customers want companies that they do business with to continuously improve the following:

· Speed. Service can never be too fast. In a real-time world, there is a premium on instant, accurate, and adaptive response. Visionary companies embrace constant change and consistently deconstruct and reconstruct their products and processes to provide faster service.

· Convenience. Customers value the convenience of one-stop shopping, but they also want better integration between the order entry, fulfillment, and delivery—in other words, better integration along the supply chain.

· Personalization. Customers want firms to treat them as individuals. Artificial constraints on choice are being replaced with the ability to provide the precise product customers desire.

· Price. Nothing can be too affordable. Companies that offer unique services for a reasonable price are flourishing, benefiting from a flood of new buyers.

    In every business, managers should ask how they can use new technology to create a new value proposition for the customer. If they figure it out, they will succeed. Lots of firms are already doing it, including such companies as Domino's Pizza, Dell, Amazon.com, and Auto-By-Tel. These visionary companies are meeting new customer expectations by improving products, cutting prices, or enhancing service quality.

    Domino's Pizzas mission is to be the leader in off-premise pizza convenience to consumers around the world. Founded in 1960 by Thomas S. Monaghan, Domino's owes its success to a few simple precepts. The company offers a limited menu through carryout and delivery, and every pizza is delivered with a Total Satisfaction Guarantee: Any customer not completely satisfied with the Domino's Pizza experience will be offered a replacement pizza or a refund. By raising the quality of service and the level of innovation that customers expect, market leaders like Domino's are constantly pushing the competitive frontiers into uncharted territories and driving their slower-moving competition back to the drawing board.

    The ability to view the world from the customer's perspective often prevents visionary companies from starting in the wrong place and ending up at the wrong destination. Innovators look for what new things customers value, rather than focusing on differences among customers. Often companies rely too much on market segmentation and forget that segmentation techniques work well only in stable settings. Segmentation is difficult to execute in a turbulent environment in which the value proposition constantly changes.

e-Commerce Is Changing the Notion of Value

In subtle ways, e-commerce is fundamentally changing the customer value proposition. In recent years, value innovation across all service dimensions—speed, convenience, personalization, and price—has accelerated due to technological innovations such as the Web and e-commerce. These innovations have substantially changed the underlying value proposition, which in turn has changed the capabilities and competencies needed by companies.

    What do we mean by value innovation? Faced with similar products, too many options, and lack of time, the customer's natural reaction is to simplify by looking for the cheapest, the most familiar, or the best-quality product. Obviously, companies want to locate themselves in one of these niches. A product or service that is 98 percent as good, isn't familiar, or costs 50 cents more is lost in a no man's land. Companies that follow middle-of-the-road strategies will underperform. This leads to the fifth rule of e-business:

e-Commerce is enabling companies to listen to their customers and become either "the cheapest," "the most familiar," or "the best."

    "The cheapest" isn't synonymous with inferior. It means a value-oriented format that has taken out many of the inventory and distribution costs, such as Southwest's "No Frills Flying" and Wal-Mart's "Every Day Low Prices." The best example of the value-oriented format is Wal-Mart, which helped define a revolution in American retailing with its discount superstore format. That format, combined with friendly customer service, superb inventory management, and an entrepreneurial corporate atmosphere, helped the company steamroll competition. Recently, Wal-Mart has taken "the cheapest" model and applied it to the grocery business. The company is experimenting with 40,000-square-foot Wal-Mart Neighborhood Markets that will compete head on with grocers.

    With "the most familiar," customers know what they're getting. McDonald's is a great example of a familiar brand. Often visitors to foreign countries seek local McDonald's just because they know what to expect. It took the brand giants of the past, such as McDonald's and Coca-Cola, decades to make their products household names. By contrast, it's taken so-called Internet megabrands, such as America Online and Yahoo!, only a few years to carve out strong identities.

    Being "the best" involves reinventing service processes, being able to turn the company on a dime, and raising relationships with customers and suppliers to unprecedented levels of intimacy. The most obvious example of the best in exceptional service is American Express, exemplified in their Return Protection Plan. This customer benefit refunds cardmembers for items purchased with an Amex card within 90 days from the date of purchase, if the store won't accept returns. Amex will refund the cardmember's account for the purchase price, up to $300 per item, up to $1,000 per year. By continuously generating innovative improvements to customer service and benefits, Amex retains high customer loyalty.

    Wherever firms are in the value continuum, customers want continuous innovation. Microsoft CEO Bill Gates calls it the "What have you done for me lately" syndrome. Faced with the burden of increasing time pressure and decreasing service levels, customers are no longer content with the status quo. They want companies to innovate and push service to a new frontier to make their lives easier in some way. Clearly, companies are caught in the midst of a tornado of spiraling business transformation. A good example is the book retailing industry.

Learning from Value Innovation in the Book Retailing Industry

The story of the Internet book retailing war between market leader Barnes & Noble (B&N) and upstart Amazon.com is one of the most written about in recent years. At stake is a significant share of the worldwide book market, estimated to be more than $75 billion (international sales constitute some 30 percent of several players' online business). Given the high stakes, Amazon.com forced the entrenched leader, B&N, and to a lesser extent Borders, to respond to its challenge.

    Conventional logic dictates that B&N would dominate Amazon.com on the Internet due to its high name recognition, already advanced fulfillment process (it can leverage its catalog experience), and low prices (in contrast to smaller players, B&N purchases a large number of titles directly from publishers). One would also assume that online customers fit the same profile as those who shop in stores, that their needs are the same.

    True? No! The needs and demographics of the online customer are different. In preliminary research, B&N indicated that online book shoppers buy five to ten times as many books as traditional book buyers. Online book customers have an interesting profile: They live in remote or international locations; they're interested in incremental price savings (an estimated "all-in" savings of around 15 percent); they are pressed for time; and they don't mind waiting one to three days for delivery. Clearly, value is influenced by the demographics of online shoppers.

    At this stage, it is too early to declare the winner in the online book wars. It's fair to say, however, that market leaders will need to provide value by finding the most interesting and simple way to use the Web, providing the best service (via speed and control) and giving customers the lowest price, because it's so easy to point and click to the competition.

    What does this example mean for executives? Amazon.com has identified and innovated one component of value to a level of excellence that puts its competitors to shame. Jeff Bezos, CEO of Amazon.com, isn't unique. He's following the footsteps of other business entrepreneurs who took advantage of technology to build giant businesses from scratch: Sam Walton, Craig McCaw, Bill Gates, and Charles Schwab, to name only a few.

    The role of an executive is to help the company understand the threat posed by value migration. Some industries will be profoundly affected, while others will feel little impact. It's vital that executives monitor the impact of readily available digital information on their industries. To do that, executives should answer these questions:

· Is there an Amazon.com that can squeeze margins in your business? If not, can you create one?

· Are there any new entrants in your industry that are leveraging the Web to rewrite the rules?

    Watch out for a new generation of infomediaries attempting to harness the efficiencies of the Web. Bottom line: Don't take your industry's conditions as a given. You must understand that technology can create conditions in which companies that once were king of the mountain can wake up one day to find no mountain at all.

Define Value in Terms of the Whole Customer Experience

Identifying new sources of customer value is an important step, but it is not enough. Firms need to innovate the complete customer experience. The ability to streamline the end-to-end experience provides a complete solution and sets visionary companies apart. Amazon.com, for instance, makes the mundane process of comparing, buying, and receiving books an interesting experience that customers find convenient and easy to use. This discussion leads us to the sixth rule of e-business:

Don't use technology just to create the product. Use technology to innovate, entertain, and enhance the entire experience surrounding the product, from selection and ordering to receiving and service.

    Amazon.com has undertaken revolutionary initiatives in customer experience through its user interface. We are aware of few other companies that have bundled experience innovation with traditional elements of brand building as successfully. Amazon.com's layout and linkages are logical, intuitive, and, just as important, entertaining. To create a satisfying shopping experience, the company created an e-retail infrastructure that meets the unspoken needs of customers. For example, hard-to-find, relatively unpopular, out-of-print titles can be traced through Amazon.com's special orders department. When a customer inquires about an out-of-print book, the special orders department contacts suppliers to check availability and, if a copy is located, notifies the customer by e-mail for approval of the price and condition prior to shipping the book. This level of service for a national and international audience is unprecedented in the book retailing business.

    Amazon.com also provides third-party content, a valuable part of the book purchase process. It includes author interviews and prerelease information, which build a sense of urgency and also help to cement the relationship with heavy users (bibliophiles, in particular); instant order confirmation; customized search engines; editorial analysis; and carefully managed delivery expectations (which set up the user for a positive surprise). These elements combine to create the richness of the Amazon.com experience and have garnered the company a very high customer loyalty rate of more than 58 percent.

    As business environments become electronic, firms need to think like Amazon.com in terms of resetting consumers' expectations and experiences. Established firms often discount the importance of the experience offered by a product or service as a key differentiator. Traditional customer experiences have temporal and geographic bounds: Customers must go to a specific store at a specific location between certain hours. But the online experience is quite different, and it needs to be familiar, informative, and easy to use.

    Any company that can wrap experience attributes around a commodity product or service has the chance to be an industry revolutionary. However, implementing an effective experience means more than having an attractive, interactive front end. In the first phase of e-commerce, too many firms got carried away by the interactive front ends that are so easy to generate on the Web, ignoring the fact that there must be an integrated business back end that drives the enterprise to success. Providing satisfying front-end and back-end experiences is a critical skill that separates the men from the boys in e-business.