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Tech Industry

E-business can return strong

Author John Hagel is not sweating the dot-com meltdown and is instead optimistic over e-business.

    John Hagel, one of the best-known authorities on the Internet, hardly appears to be losing sleep over the year-long decline of dot-coms. In fact, he is quite optimistic about the future of e-business in general, provided the industry wakes up to the need for new strategies.

    "I often talk about the fashion-oriented aspects of the financial markets," Hagel said during an interview with Knowledge@Wharton last week. "When you are dealing with major change, there will always be uncertainty. The problem with fashion is that unrealistic expectations are often not met. People then flee fashion. And that, in essence, is what is going on with e-commerce. The unrealistic expectations of the bubble of the last couple of years has led to a (negative) over-reaction."

    Currently chief strategy officer at 12 Entrepreneuring, a San Francisco-based Internet venture capital firm, Hagel will be one of the featured speakers at an upcoming conference April 6 in Philadelphia on "The Internet: e-Strategies and Virtual Communities." The conference is sponsored by Wharton?s Reginald H. Jones Center and the IBM Institute for Knowledge Management.

    Hagel, the best-selling author of "Net Gain: Expanding Markets Through Virtual Communities" and "Net Worth: Shaping Markets When Customers Make the Rules," has been known as an Internet guru since heading up the e-commerce practice at McKinsey & Co. Last year he joined 12 Entrepreneuring, whose founders include Eric Greenberg, founder of Scient and Viant; Halsey Minor, founder of CNET Networks, publisher of News.com; and Benchmark Capital, among others. Board members include Netscape founder Marc Andreessen, eBay founder Pierre Omidyar and Gateway founder Ted Waitt.

    Hagel is confident that e-business of all sorts is here to stay, even though the industry is barely out of its infancy. Companies large and small have yet to find a way to greatly benefit from their Internet forays, especially when it comes to making value and cost-cutting count, he said. "There have been efficiencies, but they have been limited by the focus of the market. Companies were being rewarded for setting up their markets with a lot of participants. True, this would match buyers and sellers, but when you look at the economics of business-to-business collaboration, that is a small part of the economic value of the Internet."

    Most of what the Internet has done for some companies is cut paperwork costs and reduce production time and inventories. The real savings, Hagel suggested, lie elsewhere.

    "It is all about shifting business from a build-to-forecast economy to a build-to-order one," he said, noting that the goal for businesses should be seeing what customer want and building it for them almost on the spot. Take the automotive industry. Dealers have a certain number of SUVs, sedans or sports cars on their lots because models predict that this particular number of vehicles should sell in a reasonable amount of time.

    "But what would be optimum is to have a customer walk in, say she wanted a sedan with this, that and the other on it, use your Internet capability to tell the manufacturing plant to build one, and get it back on the lot for her in a matter of days. Then you can have e-business dramatically shooting down inventory and manufacturing costs. Then the Internet can be enormously effective for businesses."

    Right now, though, Hagel sees a problem in businesses integrating the Internet as they should. "I think it is an irony that at one level, the demise of the dot-coms has created a large window for the bigger companies to be more aggressive in e-commerce," he said. "But the bigger companies now have become complacent. You never hear any more about the danger of being ?amazoned? out of business.

    "Consequently there has been a slowdown in terms of implementation of e-business practices," Hagel added. "The more aggressive players, the new entrants into the market, are not really threatening any more. Some middle players, of course, are working to adopt new technologies to strengthen their positions, but not enough yet to move the big players.

    "Layer on top of that the recessionary environment and you have little movement. Companies may be saying, ?Our core business is in trouble right now, so we have to shore that up.? They lose sight of the fact that e-commerce could be a tool to reach their core-business objectives."

    Hagel talked about two highly publicized Internet-based businesses as examples of just-ahead-of-their-times e-commerce models. One, Webvan, never had much of a chance to succeed as quickly as it needed to; the other, Amazon, may yet work out its kinks.

    "One problem we have in business is that day-to-day practices can significantly lag technology," as was the case with Webvan, he said. At one level, the idea behind the company included a very powerful proposition: "There is a lot of wasted time in grocery stores: locating what you want, getting there in traffic, finding only partially-stocked shelves, lugging packages back to the house. But to move from that model to a home-delivery model requires people to plan ahead more effectively than rushing to the refrigerator and seeing there is no milk left.

    "Reflecting on what you might need a couple of days in advance is a huge shift in terms of human behavior," he said. "It?s a great idea, but it would take a long time for people to get used to doing it." On the other hand, he noted, Amazon, despite its current troubles making money, may well be a rousing success.

    "I?m actually an optimist on Amazon. I think they will figure it out. The problem is that the business model for the Internet so far has been based on traffic, on page-counts and the like. You don?t run a business, though, on how many people come into your store. It?s how much you are selling.

    "E-businesses have to think more about the lifetime value of customers, to develop relationships with customers. That will reduce the cost of finding new customers, while still getting more from the current ones," he said. "Amazon has changed the way people buy books, and to the extent that they do relatively low-value, high-volume items like books, music and entertainment products, they give customers an incentive to come back frequently. It?s not like buying a car or a house, which you might do every five years. So I?m confident they will eventually figure out how to make money, and soon."

    But what Hagel doesn?t see on the near horizon is the next killer e-business application that will make us all stand up and wonder why we didn?t think of it first. Yet this, he said, is not a bad thing.

    "If the question is, what is the next hot business? then we continue reproducing our fashion problem: that some things get over-emphasized because they are the latest fashion and really don?t solve the other problems," he said. "It?s the very un-newsworthy issue of chipping away at costs on an incremental basis that will be the best use of e-commerce. And in the process, there will be the building of a foundation of technology that will create a much richer environment for all kinds of businesses. What we had in this last bubble was the idea of building a house without first finishing the foundation. Now we just have to learn all aspects of the technology."

    And for those who fret that we have lost momentum in e-commerce, Hagel says not to worry.

    "Most people are looking at the current performance of stocks and so forth relative to expectations of a year ago," he said. "But the adoption rate of the Internet and related e-commerce has been far faster than any technology in the past. A little slowdown isn?t really going to change that."

     
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