As we enter the twenty-first century, the business world is consumed by questions about e-commerce. Internet is presenting unlimited possibilities – as both a conduit and disrupter of business models. To shed some lights on these changes the editors of Harvard Business Review ( January-February, 2000, p39-47) asked some close observers of electronic commerce to share their thoughts and speculations about the future.

Traditionally, companies create fixed product lines that represent their best guesses about what buyers will want, and buyers make do with what they’re offered. There may be some minor tailoring at the point of purchase – a few optional features or add-ons – but by and large the set of choices is fixed by long before customers even begin to shop. Whether they’re purchasing cars, or clothes or computers, customers always get too little of what they want and too much of what they don’t.

Now, thanks to internet, an alternative to the traditional unhappy model of supplier(read as companies)-customer interaction is finally becoming possible. The author calls this alternative as Choiceboard. Choiceboards are interactive, on-line systems allowing individual customers to design their own products by choosing from a menu of attributes, components, prices, and delivery options. The customers’ selections send signals to the supplier’s manufacturing system that set in motion the wheels of procurement, assembly, and delivery.

Choiceboards are already in use in many industries. Customers can design their own computers with Dell’s on-line configurator, create their own dolls with Mattel’s My Design Barbie, assemble their own investment portfolios with Schwab’s mutual fund evaluator, and even design their own golf clubs with Chipshot.com’s PerfectFit system. This Choiceboard is still in its infancy, as it is involved in less than 1% of the $30 billion world economy.

Three things are holding Choiceboards back :

1. Many manufacturers can’t even imagine doing business through a Choiceboard model, as it would mean restructuring their entire manufacturing and sales systems.
2. Lack of highly responsive supply networks that can deliver components and services as needed.
3. The lack of critical mass of customers able to use Choiceboards. That is, digital readiness, which the author defines as the number of PCs times the degree of PC literacy times the breadth of broadband access, remains low.

This roadblock may however not last long, as PC sales are strong, digital literacy is spreading rapidly, particularly among the young, and the expansion of broadband access is inevitable. The future of commerce will be dominated by those who control the Choiceboards.

THE CHANGING RULES OF COMPETITION

Choiceboards enable companies collect precise information about the preferences and behaviour of individual buyers. With each transaction, a company becomes more knowledgeable about the customer and hence better able to anticipate and fulfill that customer’s need. This knowledge can be used to tailor, in real time, the design of the Choiceboard itself, customizing the options presented to the customer and promoting up-selling and cross-selling. It also allows companies to guide the evolution of entire product lines and to spot new growth opportunities at the earliest stage.

As we are in the early stages of the Choiceboard revolution first movers stand to gain and can use its store of customer information to expand into new industries. Take the case of Dell. If first used its Choiceboard to sell computers. Subsequently it began selling computer peripherals and related services such Internet access.

The author predict three types of competitors vying for early Choiceboard control :

1. The individual manufacturer or assembler, such as a Dell, or a Schwab.
2. A consortium of existing manufacturers; an example is the MetalSite Choiceboard launched by a group leading metal producers.
3. The threat of intermediaries (they also go by other names like, electronic brokers, go-between service providers, cybermediaries, etc..). Choiceboards are essentially design tools and conduits of information, they needn’t be controlled by the companies that produce products. As the intermediaries amass more and more information, further refining the Choiceboards, they will pose greater threat the companies that are slow to launch their own Choiceboards.

The author expects a war of Choiceboards and the companies that control.
Choiceboards will also control relationships. And they are the ones that hold power in an industry and reap the lion’s share of the profits. One-stop shopping will take on a whole new meaning, and commerce will take on a whole new look in the coming years.

The retailing has undergone transformations in the past. The essential mission of retailing has always had four elements: getting the right product in the right place at the right price at the right time. The way the retailers fulfill that mission has changed as a result of a series of what the authors call disruptive technologies. A disruptive technologies enables innovative companies to create models that alter the economics of their industry.

Retailing was originally dominated by local merchants who provided value to their customers by keeping large inventories, extending credit, and offering personalized advice. The merchant’s high-inventory, service-incentive business model resulted in slow turnover, struggling to turn their inventories over twice a year involving high costs, as a result, the retailers were forced to charge high prices to earn margins necessary to stay in business.

The launch of department stores by men like Marshall Field and R.H.Macy in the late nineteenth and early twentieth centuries underperformed the existing retailers in many aspects of customer service. Departmental stores did a superior job of getting the right products into the right place. They brought together an enormous number of different goods in one location, making it much easier for shoppers to find what they needed. The aggregation of customers and products enabled department stores to outperform local stores in pricing. By accelerating inventory turnover rates, they could earn the same returns on much lower gross margins. The catalyst to the birth and growth is attributed to a new technology at that time – the railroad. With an infrastructure of rails in place, department stores could aggregate the goods from all over the country, the rail trolleys could transport customers from their homes at the fringes of town to the department stores at the centre. Site location became a source of competitive advantage and was managed scientifically.

Catalog retailing was targeted at rural customers who could not easily visit department stores, mail-order catalogs were made possible by the introduction of rural free mail delivery. Sears touted its catalog ‘the cheapest supply house on earth’, and it compensated for the lack of personal service with money-back guarantees. Catalogs were, in essence, an early equivalent of today’s virtual department stores. And just as we are now beginning to see virtual retailers branch out into real stores – the so called clicks-and-mortar strategy – so Sears expanded beyond its catalog to create a chain of physical outlets.

The establishment of department stores in 1960s and the increased mobility of shoppers enabled discounters like Kmart, Wal-Mart to set up shops in less expensive real estate at the edge of the town, effectively avoiding department’s stores’ competitive advantage of prime locations in city centers. The discount stores made money through a completely different business model – a low-cost, high-turnover model that enabled successful discounters to achieve five inventory turns a year with gross margins of between of 20% to 30%. As the discounters invaded the low ground, the department stores systematically closed down their hard-goods departments and moved upmarket. Successful discount stores like Wal-Mart have managed to succeed and remain in business, they have been able to use their purchasing clout and logistics-management capabilities, while other weaker discount stores had close their businesses.

Of the four dimensions of the retailer’s mission – product, place, price, and time – Internet retailers can deliver the first three remarkably well. The right products? In categories ranging from books to chemicals, Web stores can offer a selection that no bricks-and-mortar outlet can match. The right price? Internet retailers enjoy unparalleled margin flexibility. To earn 125% return on inventory investment, an Internet retailer such as Amazon.com, which can turn its inventory 25 times each year, needs to earn only 5% gross margins.

And the right place? Internet negates the importance of location. Anyone, at any time, can become a global retailer by setting up a Web page. It’s no wonder, with these advantages electronic commerce is attracting so much attention.

How would the e-tailing would evolve? Leading internet retailers like Amazon.com have rapidly migrated toward the department store strategy. The logic is, Web is a vast and confusing place, and it is next to impossible to remember which dot-com name is associated with which product or service. Hence Amazon.com has seized this opportunity. If you need to find a product, you don’t need to search in the thicket of the internet. You only need to remember how to type ‘Amazon.com’. The largest bricks-and-mortar department stores stock only the items with the highest turnover rates within each product category. Internet department stores face no such physical limits. The inevitable emergence of better search engines, together with the availability of greater breadth into homes, will make it increasingly easy for consumers to find specialized e-tailers.

We are now seeing signs of upmarket migration. The transformation of some Internet-based retailers – establishing warehouses and physical stores to give customers faster access to inventory and to handle returns and service issues conveniently and personally – is not an admission that the retail internet doesn’t work. This migration is likely to happen fast, as internet enable retailers to communicate rich information about a broad set of complex products to a very large set of customers, which the traditional retailers are unable to do.

Initially, many thought that the internet would do away with the middleman. The presumption was, the producers of goods and services would use their Web sites to connect directly with consumers, bypassing wholesalers and retailers altogether. This presumption has been proved wrong. With few exceptions, manufacturers have not been able to do much direct selling over the Web. Even Levi Strauss, whose e-commerce site was launched way back in 1994, announced recently that it would stop selling jeans through its site. In the virtual world as in the physical world, people want a broad selection of goods when they go shopping; they don’t want to be limited to single product line. Transactions over the Web, even very small ones, routinely involve all sorts of intermediaries, not just the familiar wholesalers and retailers, but content providers, affiliate sites, search engines, portals, internet service providers, software makers, and many other entities that haven’t been named yet. The middlemen who manage the hypermediation will be in a position to capture most of the profits.

So what does hypermediation mean for the future of on-line business? The author argues that the lion’s share of the profits in e-commerce will likely flow to two very different types of intermediaries.

The first type are the owners of specialized content sites. When people head for the big sites – Amazon, Yahoo, and the like – because those are the easiest to find. But as they become used to the Web and more familiar with searches and other navigation aids, they start to seek out sites tailored to their particular interests – sites that might get only few dozen visitors a day. The specialized content sites or microbusinesses seem insignificant at first glance. But again, volume could change everything in the virtual world.