The Old World Meets the New

Technology...The Glue Between the Old and New Economy

by Arjun Malhotra
Chairman and CEO, TechSpan, Inc

Bangalore, March 13, 2001

With the advent of what has been touted as the "New Economy," it is important to remember that the old rules still apply. e-Business is a set of possibilities that allow you to improve and reinvent your business. It should be a part of the plumbing of an enterprise; it should not be the enterprise. It is also imperative that e-Commerce be treated as a channel, not a separate business. The key currencies of any business are still time, talent, and solid management skills. Finally, there are no e-customers, only customers. As so eloquently stated by Mohanbir Sawhney, "There is no such thing as e-business. There is simply business."

An example of the misconception that e-business should be separate from the core business is Toys "R" Us. They created separate Internet units with separate corporate structures and autonomous staffs. Venture capital was sunk into their separate Internet units. The strategy failed and their Internet units have folded. This example demonstrates that e-commerce is a channel, not a separate business. It should be a strategy to propel your existing business into new markets, reduce your cost of doing business, and aid in distributing information and knowledge throughout your organization.

The Internet has had a tremendous impact on traditional or "Old Economy" business. The smart business uses technology to enable business goals and objectives. The computer is no longer just a repository of data, but an enabler of productivity, internal and external communication, client management, supply chain management, etc.

Becoming digital allows companies to reduce the costs of client interaction. It enables clients to access them 24x7 online with ordering, inquiries, purchase tracking, etc. Companies can now track data on client wants, needs, contacts, etc.

The Internet has even cut the cost of doing business. Using today's web based procurement systems are providing lower procurement process costs, in some cases by as much as $100 or more an item; lower product and service costs; improved inventory turns; and, shorter cycle times for a company inventories.

Knowledge management (KM) is a key component to efficient process management and is a principal enabler for B2B and B2C electronic commerce. KM is defined as a principle, a collaborative approach, and an enterprise toolkit for initiating control of a marketplace. The benefits of working in collaboration, identifying expertise throughout the organization, and sharing key information on a timely basis are inherent, as is the value of extending knowledge sharing beyond the enterprise to customers, partners and suppliers.

Eastman Chemical is one example of how hyper-efficient Internet operations at old-line companies are quietly beginning to turn a profit. They had revenue of more than $5 billion in 2000, with $200 million coming from online sales.

In the year 2000, we began to see brick and mortar companies see their Internet investments produce real, old-fashioned earnings. For some businesses the Internet is boosting current profits. For others, the Internet is tapping new profit streams. These are not just companies that "get it" - these are companies that are doing it and making money at it. Some examples of this are:

• Office Depot - online sales increased 161% in the 2nd quarter compared to 'brick and mortar' sales increase of 8%
• Online transactions cost .35 cents vs. .90 cents for a faxed order and $2.50 to field a phone call
• Hilton Hotels booked $200 million in online reservations in 2000
• Online bookings 80% less expensive than bookings handled by phone
• IBM sold $9 billion online in first half of 2000
• Web-based transactions saved IBM $900 million
• 1/3 of employee training on web saved $150 million

  Traditional businesses are finding Internet income faster than dot-com's. Start-up's have to create a brand, create or procure products, and build infrastructure; brick and mortar's are established and have no need to re-brand.

  "The Internet will fundamentally change the way business is done in our industry," says Eastman Chemical. "The laggards will lose because the leaders will drive inefficiencies out and have a big cost advantage."
  
  Goldman Sachs analysts predict that lower costs from buying materials online would have the "shocking economic effect" of boosting the gross domestic product of the U.S. and other industrialized nations by almost 5%. For the U.S. alone that would mean $400 billion.
  
  U.S. workers have increased their output per hour by about 2.75% per year, double the average of the past 25 years. Of the 2.6% increase in U.S. labor productivity between 1996 and 1999, 1.5% was directly related to information technology. Out of a 5% improvement in U.S. production of goods and services in 1999, 1.6% was attributable to information technology. According to a new report by the U.S. Federal Reserve, how businesses uses IT and the efficiency gains in productivity accounted for roughly 60% of the improvement in labor productivity growth. They also predict that productivity growth is unlikely to slow given the amount invested in IT by U.S. businesses. Growth in IT investment would have to virtually cease to pull down productivity increases. e-Commerce is expected to represent 4.4% of the U.S. GDP by 2002.
  
  What we have witnessed over the last year has become to be known as the "Dot-Com Crash." What we have learned from this is that market share does not replace profitability. There is no "New Economy vs. Old Economy" business model - there are simply sound business practices, and there are new ways to leverage technology for business.
  
  What is left of the 'new economy' is the part that always mattered: the idea that networked technologies change the way business works. The Internet is universal, efficient, immediate, and virtual.

  A company's material assets and geography count for less than ever before; its ideas, people, speed and ability to cater to customers' specific wishes matter much more.

  The net does not just improve a company's business; increasingly, it will be the way a company does business. As stated by Eileen Buckley of The Standard.com, "...the majority of dot-com's expenses are too high and sales too low. Those with an early lead in their markets have a leg up. For the others, it comes down to business sense that is old-fashioned - if not old-economy."

  What I have tried convey through this presentation is that there is no "Old Economy-New Economy". There is simply business. Technology is a way to open doors to profitability and cost reduction. Disseminating information through web enablement is one of the greatest values a company can garner from the Internet. Finally, don't throw out the old for the new - build on it.
  
  The bottom line: All companies, online and off, must master components of both worlds. It's not a matter of being a dot-com or of being a brick and mortar; it's a matter of being a company. And all companies must manage relationships with customers, business partners, and suppliers. Customers are not e-customers; they are simply customers.