How the Net Changes the Marketplace

Wally Bock There seem to be two opinions about whether the net changes business, or not. Some folks will tell you it really doesn't do much, that the business fundamentals still hold. Others subscribe to the "net changes everything" theory. Reality, as usual, is somewhere between the two.

The fundamentals of business do still apply. The laws of nature and economics have not been revoked. But that doesn't mean that the net has no impact. It has an immense impact, and in very specific ways.

There are three characteristics of the Digital Age, and especially the Net, that act on marketplace forces and change the way business is done. The forces they act on are the ones identified originally by Harvard Professor, Michael Porter, in his book, Competitive Strategy. They include things like Barriers to Entry, Intensity of Competition, Bargaining Power of Sellers and Buyers, and Threat of Substitution. The three factors of the Net that are at work here are called Transparency, Reach, and Frequency.

The characteristic of the Net that we call "transparency" is the thing that makes us able to see things that we couldn't see before, because they were hidden by a cloud or a curtain. Probably the most obvious is "price transparency."

Not long ago, I had to buy a new vehicle. Like about two-thirds of the new vehicle purchasers in the United States today, I used the Net for some of my pre-buying research. The reason we all do that is that you can find out things you couldn't find out before.

Using the Net, you can find out all about prices. You can find out what dealers pay for vehicles, what the average price for vehicles is, what the price of new vehicles is, and just about anything else. You can find out all about option packages, and features, and maintenance records, and repair records, and even the maintenance details on specific vehicles. That's what transparency is about - seeing information you couldn't see before.

In the automobile business, this has had an incredible effect. Buyers are turning up at showrooms equipped with information to bargain in ways they never could before. For many dealerships, it's meant changing the way that they go about selling new vehicles, at least to those folks.

But that hasn't happened in all industries. Take houses, for example. Just about an equal percentage of folks use the Net to research a new house purchase as do for automobiles. But there hasn't been that much of an effect on houses, compared to cars. Why?

The reason has to do with the role of the salesperson. In automobile buying in the United States, the salesperson in very often seen as the adversary of the buyer. They struggle, and tug, and pull back and forth to see who can get the best of the deal. That's not true for the real estate salesperson most of the time.

In fact, in speeches to the National Association of Realtors, I've described the realtor as the "spirit guide to the home buying process." You pretty much know what a car is like, and what features are available. You might even have some idea of what they might cost

But very few folks have the knowledge or the time to go through the multiple pages of a real estate agreement, let alone analyze it effectively. That's where the realtor helps out. That's also why the Web has had less of an effect on the way homes are ultimately sold and the commissions of realtors than it has on the prices for which cars are sold and the commissions of automobile salespeople.

Transparency doesn't only have to deal with prices and features. You can also have process transparency. If you've ever bought a book from Amazon or a computer from Dell, you know what I'm talking about. Once you've placed your order with them, process transparency becomes a factor.

With Amazon or with Dell, you can go back to the Website and check on the status of your order. You'll be notified when the order is shipped, complete with information that lets you track the shipment all the way to your door.

There's also supply chain transparency. This is the feature of the Net that gives us the ability to do things like automatic replenishment. Inventory is a substitute for information. For all practical purposes, we keep lots of inventory, because we don't have information about exactly what people are going to want and when. So we stack up inventory to meet demand that we're unsure of.

The closer you can get to understanding demand in real time, the less you have to depend on forecasts. Not only that, the more accurate the forecasts you have are, and the less you have to massage them.

There's one more kind of transparency that you need to be aware of. That's information transparency. Public companies now have their information much more readily available than they used to. It's on their Websites, and in their news releases, and their Securities and Exchange Commission filing - all of which were available on the Net.

So, what's the effect of transparency? Transparency shifts power down the value chain. In other words, buyers get more benefit from this and pick up more power from this while sellers lose.

The second characteristic of the net that changes the marketplace is reach. Reach comes in several forms. There's reach across geography, reach across time, and reach in relationships.

Take geography first. We call it the World Wide Web for a reason. Once you're on the Net, you're effectively global. Once you go on the Net to shop, you can buy from anyone out there who will sell to you, no matter where they're located.

Last Christmas I wanted to buy something special for the Most Beautiful Woman in the World. She mentioned in conversation one day that she'd never gotten a gift from a fine jewelry store. I think the phrase she used was, "Everything came from the mall."

Well, I thought, every woman in her life should get at least one gift from Tiffany. The more I thought about that, the better I liked the idea. Years ago, that would have been a problem, because I live in Wilmington, North Carolina, where Tiffany's does not have a store. In fact, Tiffany's does not have a store in the state of North Carolina. But Tiffany does have a Website, which is one of two things that helped me achieve my objective.

The Website had a neat search feature, which let me find gifts that I could afford - which was the other thing that Tiffany had. An hour or so of shopping, and I came up with a wonderful necklace that went under the tree at Christmas time in the fabled Tiffany blue box.

Reach also lets you move stretch across geography to handle a process. British Petroleum currently checks drill rigs in the Gulf of Mexico from onshore, using the Net. That cuts the amount of labor-intensive time to accomplish this down from several days to a few minutes. Not only that, the information that they get is far closer to real time than anything gathered in the old way. It's a strategy of substituting bits for atoms.

Reach also works with time. On most financial services sites - like banks, and credit unions, and loan companies - there are calculators. It turns out that those calculators, and the site as a whole, are used in a particular time pattern.

During the week, usage starts to pick up at about seven o'clock in the evening. If you're dealing with a financial Website with a national customer base, you can actually watch that peak move across the time zones in the United States. Usage goes up until around ten, when it begins to tail off and drops precipitously after midnight. On the weekends, usage picks up at about two o'clock in the afternoon, rises until about 10:00 p.m., drops again, picks up mid-morning Sunday, and then tails off late Sunday evening.

What's significant about this is that the offices of most financial institution aren't open at those times. What the Net does is enable them to reach across time or, conversely, allows their customers to reach across time to do their banking or other activities when it's most convenient for them.

The major impact of reach is that it lowers barriers to entry. That means that you or any company can enter markets far more easily than you could when you had to set up a location, hire a sales force, and invest lots of time and money.

The down side of this is probably obvious, though. While it lowers barriers to entry for you, it does the same for other competitors and potential competitors. Reach also increases the threat of substitution of other like products or different products that meet the same need.

The third characteristic of the Net that changes the way markets work is speed. We don't actually have to talk a whole lot about this one. Today our world seems to be going faster and faster and faster. If you know the name of any neurotransmitter at all, it's probably adrenaline.

I'm old enough to remember when business communication moved by letter. First you got a letter from someone else. You could look at it, think about it, draft a reply, have the letter prepared, review it, and send it off via the postal service. The whole cycle -- from the time that your correspondents sent their first letter until they received their answer back -- was likely to be measured in weeks.

No more. Today, people expect answers to emails within twenty-four hours, if not immediately. They not only want to apply for a loan online, they want an answer in seconds.

So what does speed do? In some ways, it doesn't do anything specific as much as it magnifies the effect of all of the other characteristics. Speed increases the intensity of competition in a marketplace.

Understand that not all marketplaces are very intense. Some are vicious, and the speed characteristic of the Net increases that viciousness, especially in terms of price. But some are more laid back, and there the Net injects a level of intensity that simply wasn't there before.

Those are the big three: transparency, reach and speed. Together they give you a more intense, more competitive marketplace, with more of the bargaining power moved down the value chain. What do you do about it?

Craft your business strategies for the Digital Age to take account of the new situation. Find ways to use net and web tools to compete more effectively and efficiently. All the basic business principles apply, it's just the landscape and the tools that are different.

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