A Deadly New Game

BOSTON (06/26/2000) - Remember that 1975 movie Rollerball starring James Caan? It featured a game in which some players wound up dead. A game just as rough and potentially just as painful is about to erupt between some information technology companies and traditional businesses. I call it "ultimate disintermediation."

During the past several weeks, capital markets have knocked down the supports, the very underpinnings, of hundreds, perhaps thousands, of e-commerce businesses.

Investors and managers alike are now forced to face the possibility that a pure e-commerce business will never be profitable. Even the value of many of the so-called business-to-business models (which the experts earlier this year advised you to put your money into) is now being questioned.

But there's an encouraging side. Companies relying on e-commerce must prove the viability of their business models before venture capitalists will consider opening their checkbooks. This is good discipline - it will lead to the creation of more viable companies.

But this new discipline will also bring to the forefront another question: Will all those new digital marketplaces be disintermediated, in turn, by the newest products of IT companies?

The threat to businesses from IT comes from the prospect of powerful universal search engines. They will guide users to Web sites and sift through all the options.

Why should companies like Ford Motor Co., General Motors Corp. and DaimlerChrysler AG go through all the effort and expense of building a digital marketplace for purchasing parts or selling automobiles when a universal search engine will be able to sort through Web-based inventories and catalogs to find what a buyer wants?

Then there's the consumer side. Why should any major shopping site, like an Amazon, add more products and services when a buyer, with a mere click or two, can search across several e-retailers for a book at the lowest price?

Will those same IT companies, whose technology made digital marketplaces and electronic shopping sites possible, go one step further, seeking to dominate commerce with powerful search capabilities? I see rising tensions and conflicts on the horizon.

Will digital marketplaces be able to compete with more generic shopping sites?

Yes, but only if they offer a value even greater than best price. There are at least three ways that digital marketplaces can create additional value.

The first, service, should come as no surprise. But how can a company build a service capability at the lowest cost that price pressures will require? Here's where brick-and-mortar companies moving into e-commerce may have an advantage over dot-com startups. Most of the brick-and-mortars already have efficient service and logistics capabilities.

Second is content. Particularly in business-to-business marketplaces, variety and availability are critical to attracting and keeping customers. Marketplaces that are created by companies with complementary products, like W. W.

Grainger's Orderzone (www.orderzone.com), have the best growth outlook. At Orderzone, you can shop for nuts and bolts, office supplies and lab equipment - almost everything you need to run a plant.

Third, electronic marketplaces must deliver superior processes to their customers to achieve sustainable value and competitiveness. Those processes must include everything from requests for quotations to product inquiries to order fulfillment. And by executing these processes well, electronic marketplaces can dramatically reduce a buyer's operating costs.

By making traditional business models obsolete, technology has threatened business as it was once run. Consider the difference between retail banking operations 10 years ago and today.

I haven't yet seen IT companies become direct competitors to the businesses they have empowered. But companies that build sophisticated electronic channels may well compete with those businesses.

In the game of ultiate disintermediation, the winners will be IT companies or markets that in the end create more value for customers. I'm still betting on the markets.

Champy is chairman of consulting at Perot Systems Corp. in Cambridge, Massachusetts. He can be reached at JimChampy@ps.net.

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