A quarterly newsletter for clients and friends of Chenault Systems
Over one hundred years ago, in 1878, John D. Rockefeller and the Standard Oil Company were facing the prospect of re-inventing its kerosene lamp business because of a brand new technological development. Before this, it seemed that nothing could stop them or get in their way. At that time, they controlled most of the refineries and railroads in the United States.
However, in the fall of that year, an unknown entrepreneur named Thomas Edison informed the media that he had invented a light bulb that could burn brightly for one hundred straight hours. No one was willing to believe this, especially the banking community. In 1882, the new start-up, Edison Electric Light Company, gave an evening light bulb demonstration in J.P. Morgan’s offices in New York. With a flip of a switch, the leading bankers in the United States saw a flood of light they had never seen before; and Edison received its first round of funding. This was "disruptive technology", to say the least. Lucky for Standard Oil and the kerosene business, only 250,000 light bulbs were installed across the country by 1885. Before the turn of the last century, it took a long time to get things rolling and install power stations. This bought time for Standard. By the early 1900’s, the huge demand for fuel for the internal combustion engine, plastics, and other petroleum products saved the industry.
Now, before the turn of this century, traditional thinking companies, in any industry, do not have as much time regarding the advent of "electronic commerce" (or e-commerce). Installing intangible assets, such as software, takes little time compared to Edison’s power stations, and the cost is nothing compared to steel and concrete. E-commerce is simply doing business online. The business world is undergoing another fundamental transformation and all the basic rules are changing at a rapid pace.
The power of pure physical assets has changed into the power of intangible assets, such as software, patents, copyrights, etc., known as intellectual property. Constraints of location, time, physical office space no longer play a role in customer choice, giving smaller companies the same opportunities as large companies. Clearly, the small companies can move faster because of quicker approval cycles. Because of this, organizations all over the world are investing heavily in Internet systems to send and share information with other organizations through the Web. With the increased speed and efficiency from this information flow, operations gain competitive advantage. This is because customers, suppliers and other partners throughout the value chain also benefit as profitability is increased through:
For example, one of our clients, Marfield Inc., makes business cards for Fortune 2000 companies. Now, with an Internet interface, customers will order business cards from Marfield through Web site links and data entry screens. A picture (with logo, etc.) of a proposed business card comes up on the screen for approval. Phone calls, handwritten faxes, and misunderstandings are eliminated. These elements further impact the Marfield organization by enabling:
Increased revenue through expanded capacities (which puts them on the same playing field as larger companies)
Increased market influences that only a physically larger company could have achieved in the past.
Outsourcing, a concept that is still not completely accepted, will become much more prevalent. No amount of corporate policy will ever again justify the concept of large in-house staffing for specialized services, such as information systems and human resources. In the future, this will be accomplished by the "virtual organization."
With today’s fast moving changes in technology, most systems projects are for the short-term. After the project is over, the virtual organization goes on to the next challenge.
We have completed many successful projects, with both large and small companies, by using a team of our own employees, the client’s employees, and outside contractors, all located in different cities. Of course, numerous on-site meetings took place because there is no substitute for face-to-face communication. However, e-mail and the Internet made these projects possible without the client knowing (or caring) how or where things got done. What they did care about are results from a small temporary team of experienced consultants, at less expense than doing it in-house or with a large traditional brand name firm (see www.chenaultsystems.com/articles/dbj-duo.html.)
Most agree the best way to build an organization is through dedicated long-term employees for long-term projects. However, why hire long term employees for specific skills needed only for the short-term? Why pay for FICA, family leave, sick leave, health insurance, annual reviews (and disputes), raises, training, office rent, extra computer hardware and software, endless government regulations, endless paperwork, lawsuits, and office politics for short-term projects? With today’s fast moving changes in technology, most systems projects are for the short-term. After the project is over, the virtual organization goes on to the next challenge. No one gets laid off. No overhead, concerning termination paperwork or severance packages, is necessary.
Keep in mind, the old concept of outsourcing to one, large traditional firm will no longer be the answer. This is merely shifting the work from an in-house monopoly to an outside monopoly, which is unnecessary with today’s smaller and more agile firms taking full advantage of the Internet and e-commerce.
The law of diminishing returns has always applied until e-commerce came along. Historically, no business has remained profitable and grown without re-inventing itself over time. Times have changed. For example, Microsoft spent an enormous amount on the development of Windows 98, but once this one-time cost was absorbed, the incremental cost of goods manufactured is next to nothing as a percentage of sales. This cost is nothing with transactions made over the Internet, such as retail sales. We are dealing with fast moving bytes, not molecules.
The entire planet will experience social change because of e-commerce technology. Political boundaries between countries will be blurred as more and more people throughout the world discover each other, not just for e-commerce, but for enjoyment of obtaining information through e-mail and the Web. Business and political information that would have been prohibited and controlled by governmental institutions in earlier times will become readily available to individuals and organizations that will use this information to gain knowledge and create more wealth.
No government or company will control the Internet the way Standard Oil controlled the railroads a century ago. Improved wireless technology and sending information over the power-grid (see www.mediafusioncorp.com), instead of traditional phone lines, will put power in the hands of individuals and small organizations instead of large institutions. Governments will be scrambling to find some way to tax and regulate the Internet with great frustration.
Technology will always be ahead of the legal process. While a Federal judge’s ruling that Microsoft Corporation is a monopoly should surprise no one, we need to understand that this is becoming an arguable point regarding the new Web technology. Ever since Microsoft took over the PC operating system business, Microsoft competitors have began looking for alternatives to Windows. Several products, from Internet accessible cellular phones and handheld computers have hit the market with good success. For several years, many companies, including Compaq, Dell and Sun Microsystems, are working on inexpensive computers that access the Web without Windows. Years ago the PC revolution made the thirteen years of IBM anti-trust litigation a moot point and a poor use of taxpayers money. Now, the Internet and e-commerce revolutions are bringing the same questions to the Microsoft lawsuit.
The concept of business-to-business e-commerce is very simple. Intangible assets, such as Internet and database software, are less expensive and easier to build and maintain than office buildings and warehouses. Investors and Wall Street understand this very well. One reason the price/earnings ratio for Dell Computer is 67 and 9 for Sears demonstrates the effective use of these intangible assets, which also includes strong customer and vendor goodwill. In other words, the people at Dell are using the Internet to its maximum utilization. In conclusion, the profits of tomorrow will be driven by electronic commerce, and those who understand this will survive and prosper.
Quotes Worth Noting
"The Internet will provide a dramatic drop in costs, destroy old competitive advantages and remake business models. The Internet is clearly reshaping the flow of capital. It is really the backbone of the company right now." -- Michael Dell, CEO of the largest PC maker in the U.S."Amazon.com is a very interesting retail concept, but wait till you see what Wal-Mart is gearing up to do." -- Lou Gerstner, CEO, IBM Corporation
"A quarter of IBM's revenue -- or about $20 billion -- is related to ‘e-business,’ including sales over the Internet, computer consulting and installation and software products that manage data and transactions. IBM sold about $2.5 billion of products and services over the Internet and expects 1999 Internet sales to be between $10 billion and $15 billion." -- Wall Street Journal
"Two hundred million people are currently using the information marketplace. I think up to $3-4 trillion is the potential maximum size of the marketplace by 2020." -- Michael Dertouzos, Director, MIT Laboratory for Computer Science
"As you look at the projections of the amount of Internet business two or three years out, there is going to have to be some resolution to the taxation problem. You’re not just going to rip the tax revenue out of the system." -- Craig Barrett, CEO, Intel Corp.
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