Addendum
This book was written and published in 2000, at a time when expectations from the then new internet-related technology reached their summit. The times have changed since then: some ideas described in the book have indeed materialized today, e.g. internet has already become a "local" medium with lot of local content, and this process is continuing in the developments of new consumer electronics and new wireless "mass market" communication technology (namely Wireless Local Loop family of standards). Also the emergence of Web Services is already transferring the internet from a "manual" to an "automatic medium" (as described in Section 2.9 of the book). And, last but not least, some new terms have become very popular buzzwords these days (Web Services, CRM, etc.); these terms are not mentioned in the book, while the importance of other terms, that are included and discussed by the book (like "New Economy"), has diminished. Should I write this book again today I would certainly focus on different buzzwords. For example, I would explicitly mention the possible role of Web Services initiative in Chapter 5. But I feel that the main ideas of the book are not limited to the time of writing. This makes me to hope that at least some readers can find this book still inspiring.
Jiri Donat, September 2003
There is nothing mystical about business on the internet. That is the fundamental idea underlying this entire book. As at any time in history, the present has introduced certain new elements which are changing the existing business environment. As has been the case with every innovation so far, some of those new elements will become the foundations of business in general in the future. The changes underway can be regarded as a threat, but can also be used as an advantage in competition. So what is a threat to our company can be used for its benefit, becoming a threat to our competitors. This book is for people who can find a little time to reflect upon how our present world is changing and how to use the changes underway as effectively as possible to win a competitive advantage.
The situation today has much in common with the invention of printing. At the time, it seemed as though printing was only able to influence the technology for producing books, but that invention so greatly facilitated the dissemination of information that it led to the industrial revolution of the eighteenth century. Similarly, it may seem today that the advent of the internet and the dynamic changes in information technology are limited to technical branches. But the increasing importance of information technology in today's society gives good reason to expect that the present technological revolution will not be limited to information technology, and will affect society in what are seemingly very remote areas.
This book is therefore aimed not only at "start-up" technology companies; it is no less useful for "classic" companies, at whose existing customers the "start-up" companies want to focus.
A few words on the book's contents. If we look at how information technology is affecting our world, we may feel confused. On the one hand we feel that the influence of the internet and related technology is massive, on the other hand this influence is not particularly apparent in the world we live in. Dividing the world into two can help us out of this contradiction: the intangible "world of bytes"1, which includes the internet and information technology, and the tangible "world of atoms", which includes everything else. The following comparison may help: we can compare civilisation and its development (including technological development) to the development of a human being. In this comparison, the world of bytes corresponds to our world of ideas and plans; a world which gives our tangible world - our acts in the real physical world - dynamism. It therefore has supremacy over the material world. It is a plan which features a description of our future behaviour as individuals. There is therefore a lag between the world of atoms and the world of bytes: first of all we think about something, then we put our ideas into practice.
If we turn from our analogy back to the present and its specific features, we find that we can see a similar lag in the ordinary world around us. Plans by corporations or governments, developments in technology - all these are factors which are projected, with a certain lag, into the tangible world in which we live. Familiarity with the "world of bytes" can therefore help us to foresee future developments in the business environment. An understanding of developments in the intangible world can be the key to distinguishing between an average business plan and an exceptional one, which may achieve global success.
We shall return to these two viewpoints - the viewpoint of the world of bytes and the viewpoint of the world of atoms - in various places in this book, whenever it is possible to apply them.
The common denominator of electric commerce and the entire New Economy2 is the internet. In a later chapter we shall therefore look at the internet environment in greater detail. We shall not be concerned with its technical features, but rather with the question of what its basic features are which can be used for business. The internet is a highly dynamic phenomenon and we shall therefore look at how the basic features of the internet today are developing. At the end of the chapter we shall produce a graph for the development of internet applications.
Running throughout the book is a theory of building a brand in the internet environment. Brands are one of the parts of traditional business which are no less important in the New Economy. Quite the reverse. No business can withstand competition without a brand. Even less so in the world of electronic commerce, where competition has reached new heights. Building a "start-up" company must therefore be governed by the needs of building a brand for the entire lifespan of the project. There are separate chapters on the role of brands in internet business and the specific features of Project Management in the tornado of the internet market.
The logical outcome of the book is a general classification of electronic commerce. The model presented in this chapter brings together the previous deductions into a consistent whole. It can therefore be used to assess the quality of an internet project under consideration, and help identify a suitable position for it on the market. It may inspire us to reflect on possible future developments in commercial applications for the internet.
We are living in a time of transition. Electronic commerce is gradually coming to include all the traditional business operations. We therefore find in it a combination of the old and familiar laws of classic commerce with entirely new features which the current capacities of information and communications technologies have brought to business. By combining the features of these two highly dissimilar environments, we obtain a very special cocktail of rules. On the one hand there are rules which have been tried and tested in traditional business, on the other hand certain new specific features have been added, which have entirely overturned some of those rules. Therein lies the catch, and the charm, of business in the new age.
This book does not aim to answer all the questions being asked today, but it does want at least to open up certain fundamental questions. There is no single correct answer to the questions which will be raised here, but reflecting on them is highly worthwhile. It can give readers new incentives to improve their own business plans, which is precisely the aim of this book.
Jiøí Donát
The categories of the "world of atoms" and the "world of bytes", as distinguished by modern economists, divide our world into the tangible world and the intangible world. The world of atoms is the material world around us, the world of buildings and machinery. The world of bytes is the world of all the information in the world: specifications, plans and ideas in all their different forms. These two categories are expanding at different speeds. The expansion of the tangible world is slowing down, while the world of ideas is expanding at an ever-greater speed.
The world of atoms and the world of bytes
We can compare the development of civilisation to the development
of a human being, in whom the slow-down in physical development
can be seen very clearly. At the start of his life, a human being
grows and develops physically; his basic mental potential, essential
for later intellectual (in our terminology, intangible) development,
is also developing. In later phases of life, mental development
predominates. Physically, the individual does not change too much,
but there is nevertheless a marked qualitative change3.
Let's now return to the present. We shall look at what its uniqueness is from this point of view, and on the basis of what developments the phenomenon called the New Economy has emerged.
Pompeii
In our life there are moments we never forget. For me, a visit
to Pompeii was such an experience. In 79 AD that city was buried
under ash from the nearby volcano Vesuvius. Thanks to that, it
has remained almost perfectly preserved to the present day. As
if time has stopped. We walk along wide paved streets, we pass
three public baths, two theatres, a stadium and several restaurants.
And suddenly a heretic thought crosses our minds. All this was
here two thousand years ago. How would a modern city, stricken
by a similar fate, appear to future archaeologists? Would we be
any different?
I fear we would not. The differences in the excavations would be minimal. Similar streets, similar houses - maybe some of the transport infrastructure would be preserved; instead of an aqueduct, we would find the remains of bridges, perhaps metro tunnels would be preserved underground. Those are still very few differences for two thousand years of development.
Let's imagine that we are lucky and archaeologists also find a steam locomotive, preserved in the ruins of the Technical Museum. This would paradoxically move us up quite a few notches in their eyes. If however they found a computer, that would probably be unnoticed and not understood. Most information in a computer is stored intangibly (and often remotely, on a network). It is precisely that information (software) which describes the computer's work and purpose. A computer's function is not part of the computer itself: more exactly, it is not part of the physical equipment that archaeologists would find.
Why wouldn't a computer be appreciated? Archaeologists can only observe and reconstruct our tangible world. A steam engine allows us to understand its function on the basis of its appearance. Likewise, the ideas behind a petrol engine and gearbox are also embodied in matter. That is not true of computers. The function of computers is hidden in their software, which does not exist in the material world of atoms. And as computers (and software) are used in an increasing number of appliances, more and more areas of modern life are gradually losing their visible function: domestic appliances, vehicle driving systems, and of course corporate information systems.
The "world of atoms" and the "world of bytes" have of course always existed. In Pompeii's heyday the city was part of an empire, which has not of course been preserved. We can only deduce its size and organisation from a number of tangible remains, i.e. texts from the time. Perhaps someone in Pompeii owned not one, but three shops in three different streets. Perhaps the city also had some important companies. We cannot ascertain any of that. A city without a specification, without its "category of bytes", is for us a dead city. From the text records which have been preserved, we can only reconstruct a very small part of the specification. The greater part of the specification has gone for good, and only the tangible remnants of that time have been preserved to the present day.
The "world of bytes" has always had the upper hand over matter4 and has given matter dynamism. Without knowing the intangible contexts, we cannot ascertain the dynamics of an ancient empire; equally, our time would lose its dynamism without the "world of bytes". In both cases archaeologists would find more or less the same.
Development viewed from the "world of atoms" and the
"world of bytes"
Viewed from the "world of atoms", our development is
far from revolutionary. If we compared the tangible excavations
of ancient and modern cities, we could feel disappointed. Of course,
the "world of atoms" is only one part of our world,
the static part. The truly revolutionary developments have taken
place where they are not so obvious at first glance. The intangible
part of society has made great progress5 during the last two
thousand years, and has passed a number of milestones which have
further accelerated its development.
The invention of writing, printing and the universal computer
The first milestone was the invention of writing. The oldest written
language dates from 3100 BC. Writing represented a medium whose
duration went beyond one human life. A basis for storing intangible
information came into being, and since then it has not been necessary
to transfer all knowledge orally. A further milestone which significantly
speeded up development was the invention of printing in around
14306. Printing speeded up the dissemination of information.
It enabled people to use the knowledge contained in recorded information
for their work. The real breakthrough was however in 1945, when
von Neumann formulated the concept of the universal computer7.
Until then ideas had remained motionless on paper; with the universal
computer, human creations truly began to live. For the first time
in history, no craftsman's skills were needed to bring human ideas
to life - the ideas themselves could live, incarnated in the language
of a computer programme.
The Analytical Engine
Let's pause here for a moment. The invention of the universal
computer represented a massive advance from the pinnacle of the
machine age, when Pascal invented his mechanical calculator (1642)
and Jacquard his punch-card loom (1801). Those inventors' ideas
required perfect mechanical work. The godfather of modern computers,
Charles Babbage, had to devise his own recording method in order
to produce drawings of the moving parts of his machines, resulting
in the precursor of today's programming languages. The difference
lay in the fact that in order to bring a machine on paper to life,
it was first necessary to make it. The inventor's greatest creation
paid heavily for that truth, self-evident at the time. That creation
was the Analytical Engine (1834-1849), the precursor of programmable
computers. For fifteen years, Babbage tried to turn his dream
into reality. In the end he had to abandon his plans for the Analytical
Engine he had drawn. His concept was too difficult and expensive
to realise in the mechanical world of the time, and Babbage ran
out of funds8.
Pascal, Jacquard and Babbage had to put their original dynamic drawings, which we can understand as the precursors of today's programming language, into mechanical form. Today, thanks to von Neumann's concept of the universal computer, that is no longer necessary. This new infrastructure has facilitated a massive acceleration in developing and testing ideas - development in the "world of bytes".
The periodicity of inventions
After the invention of writing, printing and the universal computer,
comes the fourth and - for the time being - the last milestone:
linking up universal computers in a network. Note a certain periodicity
in these inventions. The inventing of writing allowed information
to be stored, the invention of printing facilitated its dissemination.
The universal computer again concentrated on storing information,
but at a qualitatively higher level, allowing information to be
stored in a new and dynamic way. For the first time in history,
ideas could be brought to life without putting them in material
form. That is also the case with the advent of the universal network:
in consequence of the development of the internet, as with printing,
the dissemination and exchange of information has been so simplified
that, for the first time in history, information has lost its
physical location.
This acceleration, the last for the time being, is exponential: as the size of the network increases, so does the value of each new node added9.
Today we still live in houses which have not changed greatly over time, but our intangible world, primarily represented today by the phenomenon of the internet, is changing and developing day by day, hour by hour.
A parallel presents itself: a human being comes into existence on the basis of the instructions included in his DNA. DNA is a set of information which is very similar in form to human writing. As the human species develops, so its DNA is gradually modified and supplemented. We can understand intangible information, shaped by human civilisation, as a certain kind of genetic code. It is only under this code that there exist corporations, states, companies and all scientific knowledge. As in Pompeii, it is this intangible world which sets out the rules for our real world and breathes life into it. Without a knowledge of the "code" of our civilisation, future archaeologists would only find deserted buildings and maybe pieces of twisted plastic with small plastic squares, which no-one would recognise as keyboards.
DNA
In our lives, we do not of course realise all of our ideas, just
as no entrepreneur puts all of his plans into effect. Likewise,
in nature DNA is only tangibly realised in part: if archaeologists
find a dead creature, no-one can ascertain what its behaviour
and character were like. The more complex an animal, the less
it is possible to deduce its behaviour and character from its
physical aspects. The same is true of civilisation: the more complex
a civilisation, the less its "world of bytes" is realised
in its tangible products. All human knowledge today is in intangible
form, but people only convert a very small part of that knowledge
into matter. Those are the houses which will be preserved for
future generations.
The intangible and tangible worlds are inseparably connected. All human activity and all economic events are part of the intangible world. With the advent of the internet, our civilisation's intangible world has gained entirely new possibilities for acceleration. The world we live in today is therefore markedly different from the world of our predecessors. The rate of change today is so high that the present time and the present business environment have earned a new name: the New Economy.
The acceleration of the intangible world
The intangible world is not only part of our civilisation, but
also of individual people, who have their thoughts, ideas and
plans. If someone were able to discover our private plans, he
would also be able to a considerable degree to predict how we
would try to influence the tangible world around us. The intangible
world is ahead of the tangible world. Understanding events in
the intangible world enables us to predict future developments
in the "world of atoms".
It is equally beneficial to understand events in the intangible world in our civilisation. We gain a forecast for future developments in our tangible world, and for fundamental changes in the business environment.
The intangible world in the New Economy
A new element in the New Economy is a marked acceleration in the
development of the intangible world. We see however that that
marks vast changes underway in the world, which affect every one
of us. That is the reason why the New Economy cannot be regarded
merely as an alternative to the existing way of doing business.
In the following chapters we will look at how changes in the intangible part of our world are projected into changes in the workings of the traditional business environment, and how an entirely new entity, which we shall call the virtual corporation10, has come into being.
The significance of inventions
People have a tendency to overestimate the significance of inventions.
As the internet and its applications become more and more popular,
there is a tendency to attribute almost miraculous properties
to it, together with vast power. But not even the internet can
erase at the wave of a magic wand the geographical, language and
trade barriers which have been built up over thousands of years,
and it will not transform our civilisation into an integrated
global society. Nor have any other discoveries had the power to
change the world at a stroke. Thanks to certain unique properties,
the internet does however have the opportunity to affect the lives
of the majority of the planet's population. It can significantly
redefine the way in which people work and do business. At the
start of this book, let us consider which of the internet's features
are crucial for its current commercial applications, and where
internet applications may be heading in future years. We will
gain an understanding of the changes in our life and in business
which the internet can indeed initiate, and the changes which
will continue to remain in the realm of fantasy.
The nature of the internet
Let's begin by refining our intuitive understanding of the internet.
Today, by "internet" we primarily understand its most
widespread application, the World Wide Web, a name which is used
interchangeably with the internet in everyday situations. However,
only a decade ago the WWW service did not exist. For similar reasons,
it can hardly be expected that in several years' time the internet
will be dominated by services in their present form. Let us however
disregard this dynamic and try to render the internet and its
basic features in their current form. We will return to the changes
we can expect at the end of this chapter.
What basic features then distinguish the internet from other means of communication? The internet in the form in which we know it (which we frequently confuse with the WWW service) is a global medium. The WWW service has been a global service since its inception in 1993, as at that time it could already build on the established internet infrastructure, which was in place on all continents and in all important countries. The globality of the medium is then one of the main advantages of the internet and at the same time an advantage which the most popular WWW service was able to benefit from right from the start, which was also - by no accident - the start of the commercial use of the internet.
A global medium
The internet is by no means the first global medium: long before
it came into being, there were global newspapers (Financial Times,
International Herald Tribune), global television and radio stations
(CNN, BBC, VOA). But one feature distinguishes the internet from
other global media: previously, the globality of the traditional
global media was expensive. Television and radio stations had
to rent satellite connections to distribute their signals, newspaper
publishers had to ensure simultaneous publication on several continents
and deal with global distribution in diverse and highly specific
countries. In contrast, the internet is a medium which offers
its globality free of charge, as part of the basic service. Anything
we put on it is available throughout the entire internet. Putting
a global application on it costs no more than a local application.
The internet is therefore a global medium in the truest sense
of the word.
The internet as a network
We can therefore compare the internet to a network of roads going
round the whole world - with the difference that travel on internet
roads is free and very fast - we can get to anywhere on the planet
in a split-second. The network has a very interesting property:
if we look from any place in the network at all the places we
can get to, what we see is always in essence the same - we see
all those places at once. What we see is independent of where
we are looking from. I see the same internet from a computer in
Prague and one in New Zealand! That is the second feature of the
global nature of the internet communications environment.
In addition to globality, the internet has two more exceptional features. If we go back to our model of a network of roads, we find that not only is viewing on this network free of charge, but it also gives us instant results - travel on the "roads" of the internet takes place at the speed of light. So another feature of the internet is its immediacy: the internet is an electronic medium which works in real time. Imagine that in some town they repaint the facade of a house, or put a billboard on it. From that moment the change is apparent to everyone who looks at that town. Likewise, any change in the content of our web page is immediately visible on the internet.
The third pillar of the internet is its ability to make things automatic. The internet itself is a vast computer network, and computers have the ability to process information and automate routine tasks. At the moment we only use the internet as an environment which gives us a "view" of our network of roads, so that option remains unused. Computers which are hidden in the net can be used to automate the majority of communication activities which are carried out today by hand. Current applications in which without exception a living user is sitting behind the browser can be compared to using the internet and all of its computers only as electronic paper - looking at somewhere in the world and displaying the information gained on our screens. That can only be called a missed opportunity. It recalls the use of computers as only slightly more intelligent typewriters, to which electronic mail has been added in recent years (making the computer something of a combination of typewriter and fax).
If however we were able to use the computers already in place on the net to a greater extent than we have done so far, we would acquire an instrument which has never existed before. Instead of today's internet applications, so strongly reminiscent of existing paper and electronic media, there would be a qualitatively higher-grade product. We can designate this new product as using the internet for business.
The automation of internet applications
This is however only a working name. The automation of internet
applications means that instead of having to look at the information
placed on the internet ourselves, we can delegate that work to
another computer - whether at home, in our pocket, or in our company.
In any case there will not be only classic computers, but also
new, dedicated network instruments, from wristwatches to pocket-sized
personal digital assistants, from our kitchen fridge to a robot
on a production line.
Let's put dynamics back into our account and see how the three features of the internet have changed over time. The internet is a medium which is developing very dynamically. The main aspects in its development are at two main levels: in expanding the user base, thanks to which the internet has become a mass-medium, and in improvements in the technology used, which have resulted in increasing automation.
Aspects of the development of the internet
Let's start with the first. Throughout its existence, the internet
has witnessed an exponential rise in the number of users. In our
model, we started monitoring it since the advent of the first
important commercial service - the WWW, i.e. since the 1990s.
But internet technology has been developing since the cold war,
i.e. since the 1950s. And from that time to the present the number
of internet users has been increasing exponentially. At present
the internet has 200 million users, and that number is doubling
every one or two years.
The speed of the development of the internet
The internet is not expanding at the same rate in every country.
It has been most widely adopted in the United States, where over
60% of the population have internet access. At the bottom of the
ladder is China, with just ten million users. Significant barriers
to the mass adoption of the internet are not only user inertia,
but also economic and political hurdles. In forecasts for future
developments, experts agree that this exponential growth will
continue for some time, as saturation in technologically advanced
countries is replaced by the massive popularity of the internet
in less developed countries.
Electronic communications and distance
The first pages on the internet were static, corresponding to
the situation we described above with the billboard on the house.
The billboard remains the same, only changing when we paste a
new poster onto it. But technology is advancing: imagine that
one day we take down the wooden billboard and replace it with
a large television screen. In essence nothing in our scenario
has changed, but virtual visitors looking at our town will see
a live broadcast on our screen, instead of a static poster. That
is in fact a dramatic change - by putting a live broadcast there,
we have made use of the internet's ability to transmit information
in real time. Let's now look at the main consequence of increasing
the internet's user base.
The origins of electronic mail
When electronic mail first began to be used, each university or
scientific institution had just one user account, which was naturally
used mainly when it was necessary to communicate with another
country. For local communications, there was the mail, the telephone
and the fax. That also held later, when the internet began expanding
into corporations. If we needed to communicate with a supplier
in the Far East, the internet was the optimal tool for that communication,
with considerable cost savings. If we needed to arrange something
with a supplier in Prague, there was the telephone or, for written
communications, a letter or fax. That is why not many companies
in Prague had e-mail. While some of them had their own electronic
mail systems, they were not connected to our system11.
The transformation of the use of electronic mail
Today however we primarily use e-mail to communicate with our
immediate surroundings - sometimes even colleagues sitting in
the same office.
This situation has its parallel in all communication instruments in human history. It can probably be best illustrated by developments in the classic mail service12. Not too long ago, it would never occur to anyone to write a letter to someone in the same town - when people used the post, they wrote to other towns or countries. Today, the situation is the reverse. If I analyse the contents of my own letter box at home, I find that most correspondence is from Prague (and most of it is unsolicited - another aspect in which the mail is similar to electronic mail). We can see similar parallels in the use of the telephone and fax. In all of those cases, with the increasing adoption of the technology, as its users become more "dense" in a given locality, its local significance also increases.
The telephone
Telephones were initially only located at post offices; as time
went on they began to spread into offices and apartments. Naturally,
first in line were those professions which could truly benefit
from the new technology - doctors, vets, lawyers and so on. With
the mass adoption of the telephone, the typical user came to be
the typical urban dweller - the technology became cheaper and
people began to use the phone in situations where it was not such
a boon. Telephoning is a more natural (and therefore more comfortable)
way of communicating than writing letters, and people therefore
prefer it even in situations where there is no need to convey
a message instantly.
The internet
The same is true of the internet - as it has become massively
widespread, the user base is starting to correspond to the ordinary
population. The ordinary user does not feel the need to make full
use of all of its unique properties - in our terminology, all
of its axes.
In time, only one axis will remain from our 3-D model. The automation axis, which saves people work. It is more comfortable to use an automatic machine than a hand-operated one.
People have a tendency to exaggerate the importance of inventions. Just as other inventions did not change the world overnight, nor will the internet transform the inhabitants of this planet into educated people speaking several languages. During the centuries over which human civilisation has developed, barriers have formed - initially continental boundaries, then national borders, and alongside them language barriers. We cannot therefore assume that the internet will be a magic wand to remove all those barriers. It can hardly be expected that as the internet becomes ever more widespread, everybody will start talking e.g. English, and the language barrier will completely disappear. It is of course true that automatic translation functions have appeared and will continue to appear in new and improved forms. In the localisation of content however, language is far from being the only issue. The idea that by placing information (or a commercial project) on the internet, it will be possible to address everyone on the plant, will clearly not come true. After all, global media - global newspapers and magazines, global radio and television channels - have been around for some years and still have not managed to unify the world linguistically. During that time, those media have of course established their own communities of readers, listeners and viewers. Regardless of whether a community consists of scientists specialising in a particular area (readers of Nature magazine), top business managers (who for example read the Financial Times, listen to the BBC or follow CNN), or people united by their interest in a particular field (highly specialised internet portals such as Calresco.org), at least within that community the geographical borders have been eliminated. However, as we have shown, those communities were in place long before the advent of the internet.
Global media
While the importance of a radio station such as the BBC or a television
station like CNN is considerable and global, in geographical terms
they only affect a very narrow group of people in any country.
In media surveys in any country, global media come at the bottom
of the ladder. That is why as the internet becomes massively widespread,
it is becoming a local medium, a situation similar to that for
classic media. The majority of radio and television stations,
and magazines, are local affairs, within a given geography. That
is not altered by the fact that there are also global media in
each of the groups mentioned. The dominant, target consumer is
in every instance a consumer of local content.
The internet's potential
The use of the internet today is at the very beginning of its
true potential. Today's applications lack automation - using the
great majority of them requires the presence of a human being,
sitting behind the browser of a computer connected to the information
technology. The majority of existing applications only use the
internet as a giant blackboard, which can be accessed by people
from the entire world so that they can read from it and write
on it. It is only a slight exaggeration to say that we only use
the displays of computers connected to the internet. That is very
little: after all, computers are able to arrange many things with
no need for human intervention. The goal which developments in
internet technology are leading to is the conversion of that blackboard,
manually serviced, into a communications medium which computers
will use automatically. People will no longer see the blackboard.
The automation of routine tasks
Therein lies the true value of using the internet. The internet
will not remove at the wave of a wand the geographical, language
and trade barriers which our civilisation has built up over thousands
of years, not will it transform our civilisation into an integrated
global society. It does however have the power to simplify and
reduce the price of very many everyday tasks in the local world
in which every one of us lives, regardless of whether this involves
our working lives or our private lives. It can automate routine
chores in our private life, from planning meetings to automatically
ordering food, which saves us time. It can also automate relations
between companies which work together and enable the founding
of virtual companies with much greater efficiency than existing
companies. New internet applications will appear which will become
so popular that they will put the WWW service in the shade. Here
I primarily have in mind distributed applications, which first
appeared for distributing music. We will of course indicate possible
future developments on the automation axis, especially in consequence
of the model of electronic commerce in the chapter entitled "A
model of electronic commerce".
In the preceding chapter we described the basic features of the internet which can be deployed for commercial uses. We shall now look at the present state of commercial internet applications. We should note that we are now in a transitional stage and will indicate what the greatest weaknesses of current internet companies are. From weaknesses, it is only a short step to identifying their opportunities, which we will return to in the rest of the book.
When a new technology is invented, people run into the problem of how to use it. As no-one has had any experience with the new technology, the initial applications merely copy the standard uses for inventions which have long been in existence. That is true of every invention, not just the internet. Perplexity over new technology is sometimes called the talking pictures phenomenon, an expression which comes from the time when the first television programmes appeared.
The first television broadcasts
What could we see on television at that time? Reporters commenting
in detail on sports events, announcers reading the news from pieces
of paper, people talking around a table with microphones. The
first television programmes were very similar to radio programmes,
and came to be known by the somewhat derisive expression "talking
pictures". The picture was just something extra. Everyone
suspected that the new dimension was powerful and important, but
nobody knew how to take advantage of the new feature, what to
use it for. So they experimented with the only broadcasting professionals
available at the time, radio broadcasters. It took many years
before television broadcasting began to take the form in which
we know it today.
The invention of the steam engine
Another example of perplexity over what to do with new technology
comes from an earlier time, the start of the industrial revolution.
James Watt patented his steam engine with an separate condenser
in 1769. The first applications to use the steam engine were those
which used it as a replacement for water power in the textile
factories and mills of the time. It took three decades before
a radically new application was found, an application which would
not have been possible with the previous technology. It was not
until 1804 that the steam engine was put on a chassis to make
the first steam locomotive. This new use had not incurred to the
inventor of the steam engine; on the contrary, the success of
Watt's patents in developing and improving low-pressure steam
engines paradoxically held back the development of the high-pressure
engines essential for locomotives.
At the time a new technology is devised, there are not automatically instructions on how to use the technology and make use of its new features. The forming of experience usually takes a substantially longer time than the actual development of the invention.
The talking pictures phenomenon
The present use of the internet and our account of the opportunities
for its commercial application also suffer from the "talking
pictures" phenomenon. The current problems with the Nasdaq
technological stock exchange only illustrate that. That raises
the question of whether we are not making a mistake in our present
use of the internet.
The reasons for the present perplexity concerning the use of the internet are clear. The internet is an instrument which combines the previously incompatible properties described in the previous chapter: a global scope with a high density of local users, and the immediacy of a mass electronic medium with very cheap access to "broadcasting". There is also an entirely new property: the extensive options for automating all operations13. There has never before been such a technology. It is no wonder that existing internet applications do not know how to deal with this atypical combination of properties. The path has not yet been trod.
In its initial commercial applications, the internet was used in the same way as the previous technologies. The initial focus was on the distribution of its content. The internet began to copy the role of the press, radio and, as its transmission capacity increased, television. It also took over the business model for those media. For distributing content, revenues on the internet come primarily from selling advertising (e.g. advertising banners) and to a lesser extent from subscriptions (in the case of the internet, they are paid services for access to information).
Trends in the commercial use of the internet
Application creators soon realised that this form of commercial
use of the internet does not use even a fraction of the internet's
true capabilities. They began to think about other commercial
applications. It is no wonder that among the first candidates
was another model which is usual in the previous technologies
- shops. After all, shops are a traditional instrument for earning
money, so why couldn't the same model be suitable for the internet?
This was then the inception of electronic retailing to the end customer. It soon came to be known as Business to Consumer (B2C). So that the new phenomenon could be measured, figures begin to be produced for the turnover from individual shops and from electronic retail as a whole.
Of course, not everything in electronic commerce fits into the category of retail to the end user. As we indicated in the introduction, not every use of the internet needs to resemble the applications we already know. An overly narrow definition of electronic trading with the end customer will soon cease to be appropriate, as it will no longer be applicable to the other commercial uses which are now beginning to emerge.
Business to Business
In addition to the Business to Consumer category, there is then
another category, into which goes basically everything which doesn't
fit into the first. This group is known as Business to Business,
not however the most fortunate choice of names. There are certain
misunderstandings in this category, the biggest of which derives
from the use of the word "business" in the title. Perhaps
that is why "turnover" is now starting to be measured
for this category. There is however a catch with "turnover"
here: while in classic business, turnover is a logical and useful
indicator, for example because together with gross margin it can
be used to establish gross profit, "turnover" for B2B
can be neither established nor meaningfully interpreted. Nevertheless,
companies still try to do so: for example, according to IDC the
world-wide "turnover" from B2B in 1999 was 80 billion
dollars, while according to the Gartner Group it was 145 billion;
Forrester Research for a change set the figure at 109 billion
for the United States alone. Different companies understand B2B
to mean very different things, and give us very different figures
under the label "turnover". But even if we only had
one figure, one hundred percent reliable, we would still be unable
to interpret it or use it meaningfully.
This does not only involve the ambiguous definition of the B2B category. The problem is more fundamental: the new uses for the internet go much further than just automating retail. Shops are therefore ceasing to be an adequate conception of how to use the new internet technology.
In this chapter we will look in more detail at the first phase of commercial applications for the internet - electronic shops. We shall split them into two basic groups, local shops and global shops. Global shops concentrate on commodities which can be delivered around the world; they use the existing global logistics infrastructure for physical delivery. Focusing on the world-wide market allows an unusually high level of specialisation. It paves the way for shops in sectors which would not find sufficient customers on any local market, and would therefore be economically unviable. In contrast, local shops look for a competitive edge in the quality of delivering goods in a particular locality. Each shop must therefore ask itself what makes it different from the competitors in the highly competitive environment of the internet. We can seek this difference in the world of bytes (differences in the product range, offering high specialisation), and in the world of atoms (differences in local customer services, when a shop handles the distribution of goods in a given physical locality better than the competition).
In order better to understand the development of current commercial internet applications, let us take a brief look at history. The history of this area is in fact so short that it is sufficient to go back just six years. At that time one of the main ways of making money on the internet was the intranet. In essence, the issue was how to introduce internet hardware and software technology related to the TCP/IP protocol into internal corporate information systems. This was then a way of making money "around the internet", for the time being as earnings from the installation of those technologies, not as earnings from their operation.
Information systems
We mainly mention the intranet because it is closely related to
the extranet applications which emerged in no time afterwards.
The aim of the extranet was to link up information systems between
individual companies working together, in order to create an automatically
functioning whole14. Due to the fact that at the time, computers
and information systems were already in place in the majority
of companies, there was a need to link up the individual systems.
A typical business transaction still required a basically unnecessary
human intervention: at the supplier's, the information system
printed an order, which was sent by fax to the other party, where
a member of staff had to transcribe it by hand into the second
information system. That was understandably impractical, complicated
and expensive. While this way of "linking up" works
universally, it can best be compared to a situation in which two
people need an interpreter to talk to one another. Including such
pitfalls as inaccurate translation. The interpreter makes mistakes,
the process is slowed down, and only a particular kind of communication
is possible.
Exchanging structured documents
The extranet was not the first attempt to automate relations between
business partners - during the cold war a plan was formulated
for the automatic exchange of structured documents under the name
EDI (Electronic Data Interchange). Work on it started during the
Berlin crisis, when there was a need for automatic solutions to
logistics problems concerning supplying Berlin by air bridge.
In the eighties this idea was brought to completion and complete
standards were produced for exchanging data in general business,
and for individual specialised industrial sectors. EDI systems
were of course only installed in companies with a high volume
of business transactions (e.g. large retail chains and car makers),
where the savings justified high acquisition and running costs.
The market for small and medium companies was untouched, and to
this day remains a challenge for electronic commerce applications.
General extranet applications never achieved the same level of
functionality as EDI systems. EDI systems are still around today
and experience with them has served as a way into systems based
on the XML standard.
The first electronic shops
This almost brings us up to the present. At the same time as plans
for the extranet were first devised, the first electronic shops
appeared. As we said in chapter 3, the electronic shop is the
classic way of using the massive expansion of internet technologies
for commercial applications, and we can therefore regard it as
the first phase in electronic commerce.
Electronic commerce differs from classic commerce in that it uses the medium of the internet, and it is precisely that medium which gives electronic shops their basic competitive edge over classic shops. One of the basic features of the internet today, as we mentioned in chapter 2, is its globality.
The global nature of the internet
Thanks to the globality of the internet, whatever information
I put on it is available throughout the entire medium, regardless
of national and continental borders. Although the internet is
not the first global medium to emerge, it is the first medium
in which globality is part of the basic service. In other words,
to advertise my products on the American market, I do not pay
a penny more than for my internet presentation for the Prague
or Beroun markets.
As we shall show in a moment, I can make very good use of this property. In the model of the electronic shop, globality is quite ideal for the application of the statistical laws of the mass market. There is after all a difference in multiplying the same estimate for the share of a particular specialised market by one hundred thousand potential customers, or one hundred million. The globality of the internet therefore gives electronic shops two important competitive advantages.
The first of the two advantages enjoyed by global electronic shops lies in the product range. In a global medium I can have a wider product range than in the largest physical supermarket. Even the most narrowly specialised items in my product range will find potential customers in the global internet community. The larger my product range, the better the service I can offer my customers, thereby standing out from the competition from internet and classic shops (which have the advantage of being where the customer lives).
Amazon.com
One of the successes of the largest world-wide shop, Amazon.com,
was that right from the start it set itself an ambitious target:
to be the largest bookshop in the world in terms of the number
of books stocked. It wanted to offer every book ever printed.
The magic of retail, tried and tested over the centuries, consists in an attempt to awake in customers a desire for something which they did not originally need, and allow them to buy that product immediately. Here too the product range plays an important role: the wider it is, the better the chances of success.
This is the reason behind the psychological scenarios in shops in the real world, for example supermarkets, where those goods purchased most often (such as bread and milk) are located right at the back of the shop. The shortest route to them takes us through the entire supermarket, if possible round all the rest of the product range. The perfection of this principle is enhanced by the "check-out zone", where use is made of the fact that customers have to wait there to place products there which customers would probably not buy anywhere else.
The psychological scenario on the internet
The same principle, translated into the language of the internet,
has led to the "substitutes list", where electronic
shops automatically offer readers of a particular author (which
is what we go to buy there) "similar" authors, the fans
of a certain singer are offered a "similar" singer,
or "similar" style, etc. The larger the product range,
the better this mechanism works.
In addition to the breadth of the product range, electronic shops have another advantage over supermarkets: a well-developed information system which can monitor each customer's purchases in detail15. By combining those two advantages, it is always possible to add new requirements to a customer's existing ones and present him with new offers which are attractive for him.
The second strength of electronic shops is closely related to the first, the option for narrow specialisation. For example, only very few people in the Czech Republic are interested in theories of artificial life (Alife16). In the whole world, there are of course thousands of such people, and it would be worthwhile elaborating a special product range for that group of people, perhaps running a specialised bookshop. That holds for all human activity, not just science, but also certain specialised and less traditional interests (such as collecting stamps or labels solely from a particular period or relating to a particular event).
To complete a selected specialisation, it is necessary to assemble a virtual community of people around the project. To bring into our shop precisely the kind of people it is aimed at. This path has now been trod and is today one of the cornerstones of the success of an internet project. The internet community is an ideal tool for gaining regular visitors. At the same time, it is a way of strengthening a specialisation and building up a brand for our target group.
Let's take a look at an interesting consequence of the global nature of the internet. What are the opportunities for opening successful Czech electronic shops, shops concentrating on Czech customers which sell global sales commodities? Can such shops make use of both the advantages mentioned?
Product range
Let's start on an optimistic note: there won't be any problems
with the product range. Today it is no problem for any electronic
shop - let's say a bookshop - to link up to a global book distribution
network. There is therefore no theoretical reason for any Czech
bookshop not to boast the same product range as Amazon.com.
Specialisation
What about specialisation? We have to realise that we are not
the largest nation in the world. A Czech bookshop focusing on
artificial life will only have a few customers - too few to survive.
In contrast, American shops have been operating globally from the start: before Amazon opened its first foreign branches, it was already selling a large part of its production abroad. But who will buy Czech-language goods from a Czech shop? Obviously, someone who speaks Czech. There are however only around one million such people on the internet, a fraction of the 200 million users. A Czech customer would rather compare the price of a book from a Czech bookshop with the price of the same book in American shops, most probably in those cases where a Czech shop boasts thousands of foreign titles.
The one-way language barrier
That is the one-way language barrier. A typical American customer
cannot go into a purely Czech internet shop, because he doesn't
understand Czech. How does it work the other way round? In the
demographic structure of today's Czech internet community, a significant
number of users (around two-thirds) speak English - a much higher
figure than the number of Czechs and Czech-speaking Americans
(around half of one percent). This difference will always exist,
as Czech and English are of different global importance. English
is one of the world languages used in international communication
and is therefore used by a large number of people as their first
or second language. That is not true of Czech, nor will it ever
be. While global shops run in English can compete with internet
shops run only in Czech, the reverse is impossible. This results
in one-sided competition which will sooner or later destroy the
Czech shop.
So, if a visitor to Amazon.com sitting in San Francisco doesn't compare the price there with that offered by Vltava.cz, but a Vltava visitor sitting in Prague compares the price of each book with the Amazon prize, in the medium term only one of those two electronic shops will survive. That is the reality of competition in a global medium.
The limitations of Czech internet shops
This leads us to the conclusion that Czech electronic shops concentrating
solely on the Czech-speaking community (only offering goods in
Czech) cannot afford to specialise. The Czech internet community
is too small for the time being, and in some areas of possible
specialisation will always be small, even after the internet has
become more widespread in this country. By restricting themselves
to the Czech language, Czech electronic shops renounce one of
the basic advantages of electronic shops - the opportunity of
standing out thanks to specialisation.
Global sales commodities
For global sales commodities, it is therefore highly problematic
and dangerous to set up - perhaps unwittingly - a one-way language
barrier. An English language version, the use of internationally
accepted payment instruments and global logistics should be the
bare necessities for any shop facing direct global competition.
There is no sense in offering some goods globally. There are commodities whose transport is too demanding or expensive (in relation to their price - e.g. sand), or which it does not make sense to offer globally (e.g. fresh bread, vegetables at the Prague Holešovice market or tickets for a film at a Prague cinema tomorrow). It is here, in the range of goods on offer, that the limitations of the world of atoms intrude on the world of bytes17. For the aforementioned local commodities, local electronic shops do not face any competition from global companies. What is more, as the internet becomes more "dense" in a given geographical area, this area will become much more significant. It will also benefit most from alternative internet access technologies, the field known as m-commerce18.
Local commodities
We can therefore get rid of the global competition by focusing
on local commodities. That is also possible however for the global
commodities we discussed earlier. We can achieve that if we can
handle the after-sale service better than the global competition,
i.e. after delivering the goods to a customer in our locality.
The most common example of such an approach is the combined model
for electronic shops: combining an electronic shop with a classic
one19. In this model, the electronic shop offers the customer
a wide product range and an easy way to find the product required,
and the customer then collects the goods from a selected brick
and mortar shop, which gives him the logistics services offered
by classic shops. Our partner for delivering goods need not be
a shop; to improve the quality of our supply, we can work with
a local courier service or in fact with any business located near
the customer, even if it appears to have nothing to do with our
business.
Combining electronic and classic shops
Similar systems have been in operation in the United States for
several years. The customer can collect his purchases in a shop
(perhaps on the way home from work) and therefore saves time,
as he does not have to look for individual products in vast halls.
This system is also linked to electronic news on current reductions
in "our" hypermarket; unlike leaflets, customers can
reserve reduced goods immediately and pick them up the next time
they go to the shop. Food can be sold this way in Europe, for
example in the Belgian shop www.ready.be. The customer orders
the goods at work and picks up his purchases at a petrol station
on the way home.
All of these activities have one thing in common: they combine the internet with a local content (e.g. the nearest hypermarket, the option of picking up shopping at petrol stations in our town or district). This distinction eliminates the generally targeted global competition.
Just as there are regional newspapers, national newspapers and global newspapers such as the Financial Times or International Herald Tribune, there are and always will be exclusively local and entirely global electronic shops. We have already stated the internet's main advantage over earlier global media: while for the newspapers we have mentioned, world-wide distribution is a very expensive affair, for the internet the world-wide presence of whatever is on offer is part of the basic product. What a company offers is available to the whole world from the moment it is first publicised, without costing the company a penny more. This property is an advantage, but also a threat - every internet company faces massive competition. In order for my services to stand out in the eyes of the end customer, I either have to be highly specialised (the customer will not buy a book on artificial life anywhere else, so it doesn't matter to him that delivery takes a week), or arrange local delivery (I am the only one in town to guarantee home delivery within two hours).
The electronic shop is only the first stage in electronic commerce. There are also other ways of using the new internet technology. In this chapter we will forget our set ideas about restricting electronic commerce solely to electronic shops. Let's look at one possible alternative way of looking at and quantifying electronic commerce. This will also touch on the question of wherein actually lie the financial benefits of electronic commerce and how this potential can be converted into real money for our company - whether it is a New Economy company or a classic one.
We can break all human activity down into processes. Examples of processes are making a shirt, producing a car, building a house, and also arranging a meeting or ordering a service. These processes can be divided into two groups: processes which take place within a single company - internal processes - and process which go beyond the boundaries of the company - external processes. Each process which goes beyond the boundaries of a company therefore becomes an external process.
The division of processes
This division can be illustrated using the example of the process
of making a shirt. If we look at it within a single company, we
get an internal process. If we want to describe the entire process,
starting with buying materials from suppliers and ending with
selling the shirt to the end customer, we would get a typical
example of an external process. Each purchase and sale is in fact
a typical (and, as we shall soon see, a very important) example
of an external process.
What is the difference between internal and external processes? The basic difference is whether anyone is concerned with their efficiency. If someone is interested in ensuring that a process is as efficient as possible, we say that the process has an owner. It is now apparent that while internal processes have an owner, external processes have none.
The efficiency of processes
Each company does of course have an interest in ensuring that
its own processes operate as efficiently as possible. The efficiency
of internal processes affects costs, and costs significantly affect
profit. Reducing costs by just a few percentage points can mean
increasing profit by dozens of percentage points, while a minor
increase in costs can result in a loss for the company. A company
which does not take care of the efficiency of its internal processes
may not succeed in competition with other companies in the sector.
That is why corporate management and all restructuring and reengineering
projects are aimed at internal processes.
In short, every company has a vital interest in taking care of its processes, just as an owner takes care of his property.
However, who takes care of a process which goes beyond a company? Let's look at a typical example of an external process, the logistics chain. There is a widespread myth that most of the world's wealth is created along the chain of buying and selling by companies working together. In fact it is just that which massively erodes value. Just think of the costs of holding a tender, the costs incurred by individual participants (including the unsuccessful ones) when producing their bids, and the hidden costs for the "opacity" of the entire process.
Competition between petrol stations
Another example of the erosion of value are chains of competing
petrol stations which line our roads. For the most part, these
petrol stations are empty and waiting for customers. A much smaller
number of petrol stations would of course suffice to service all
motorists, and the entire fuel distribution process would become
dramatically cheaper. The customer can however choose whether
to fill up at the blue station, or the red station one hundred
metres further on. Paradoxically however, he has no choice in
that regardless of which station he chooses, the price of petrol
will reflect that uneconomic luxury. Whichever petrol station
he decides on, the customer has to pay a premium for having a
choice.
That is very typical situation for external processes. While the customer - whether a company or the end user - can press the supplier to lower prices (the customer can go to a pump where petrol is slightly cheaper, a corporate customer can put a contract out to tender and choose the cheapest bid), he cannot do anything about the inefficiency of the entire process, which in the end he has to pay for as part of the price of the goods purchased. If the distribution of petrol was optimised for the end user and if it was not necessary to operate petrol stations which remain most of the time unused, petrol could cost just half the current price. If a company producing computers did not have such high selling costs (including the costs of entering tenders), the prices of its computers could fall to a fraction of the current price. At present such thinking is idealistic - no existing company can afford to cut selling costs, because it would not succeed in the competition on the market. If a company shut down most of its petrol stations, customers would not move to its remaining petrol stations, but to those of its competitors. Selling costs are therefore an essential tool for survival in competition today.
Neglecting the efficiency of external processes.
So, we can sum up the situation by stating that there is no-one
to take care of the efficiency of external processes. In fact,
in some cases the inefficiency of mutual relations is beneficial
for individual companies - thanks to it, entry costs are high,
which prevents potential competitors from joining the sector.
We should note another interesting detail: at the boundaries between companies, where one company communicates with another, human work is required without exception today. Each external process involves a whole range of people from both sides of the inter-company boundary. People who communicate and negotiate are not the cheapest (nor the most reliable) way for companies to work together. Those people's role is "only" to ensure communication across the administrative boundary. Whether it is the relationship between customer and sales assistant, the relationship between buyer and seller, or the customer's agreement with a manufacturer, a large proportion of human work is always involved.
In technological terms, the typical relation between two companies today can be described as follows: the first company's information system ends at the terminal of a member of staff, who then uses the telephone (or e-mail) and reaches an agreement with an employee at the second company, sitting at a terminal connected to that company's information system. We can compare this situation to two railway lines with different gauges, between which there is a manual reloading point. Or to communication between two people through an interpreter.
Optimising external processes
On the other hand, a great opportunity has opened up here: as
external processes do not have an owner, optimising this area
is untrodden ground. Making external processes more efficient
can bring massive value.
So, companies usually only focus on that part of the process which they own. If however we could somehow combine companies in a single larger unit, at least for the duration of their cooperation, there could a massive change: processes which did not previously have an owner (so no-one cared about their efficiency) would suddenly have one. Let's call this larger unit a virtual company. During cooperation between the individual companies, such a virtual company would bridge the corporate boundaries between the individual participants in the process in question, and would give the external process an owner. In this way an external process between physical companies would be transformed into an internal process within a virtual company.
But how can we set up such a virtual company? And who would its owner be?
Let's start with the second question. We know that the positions and roles of the individual companies in an external process are not equal. Let's look at the external process in terms of cash flow.
Cash flow
Just one entity in the entire process covers the customer end
of that process. That is the company which owns the customer,
and therefore the brand. The customer pays that company (even
if e.g. by means of an indirect sales channel); that company subsequently
in its virtual company (in the process of cooperation with other
companies) pays all the other participants (the other companies)
for their participation. That company then leases the rest of
the virtual company and decides on cash flow in the entire company.
In the logistics chain, the owner of the external process (i.e.
the payer) is always the customer; in general the owner of a virtual
company is the owner of the brand - under that brand the service
is delivered to the customer and the customer pays that brand.
The brand and the virtual company
In a virtual company then, all the participating companies work
under a single roof, under a single brand. Only one company has
the costs of establishing the brand.
That is one part of the savings. All savings, including that part, come from the fact that the owner of a virtual company has a very good reason to take care of the efficiency of all the processes in his company, including the external ones. That is simply because his company (i.e. his brand) is competing for the customer's favour with other suppliers of the product or service in question, whether those are classic or virtual companies. The owner of the external process - like a classic company - appears to the customer in the role of supplier. The role of virtual companies mergers with role of classic companies. Both have an owner who takes care of the entire company.
What role has technology played in the emergence of virtual companies? As we said in chapter 3, the use of the internet today is at the very start of its true capabilities. The majority of applications use the internet merely as a massive blackboard, accessible to people from the whole world, which they can read from and write on. The target at which the development of internet technologies is aiming is to convert that blackboard into a communications medium, which will be used automatically by machines, not people. For them, the blackboard will be hidden.
The internet has now been adopted en masse, and is becoming a universally accepted medium which simplifies communication between companies and people. Logically, the next step will be a greater degree of automation for its applications. Communication will become automatic. That is a new use for the new technology, which was not possible with the previous technology. Today a whole range of services and technologies is emerging to automate inter-corporate cooperation. Whether this involves electronic markets (Electronic Exchanges or eMarketplaces) or technologies for the automatic exchange of structured business documents (like the XML family of standards), these are instruments which are intended to simplify inter-corporate cooperation and which will lead to the formation of virtual companies.
The automation of inter-corporate cooperation
As we stated in the previous chapter, we don't have to look for
anything revolutionary or entirely new here - this development
is only a continuation of a process which has already been underway
for a long time. People have tried to automate inter-corporate
communications since the fifties. The basic idea is not therefore
revolutionary. What is new is the mass expansion of the internet
and therefore the presence of a general medium which is suitable
for automating business relations. Thanks to the mass adoption
of computers and the internet communications medium, new automated
software technologies are spreading on a massive scale, and they
are becoming cheaper. After this "software part of the internet"
has been fully developed and a certain degree of standardisation
has been achieved, the removal of barriers in external processes
will be far simpler and cheaper than ever before.
The use of a sophisticated information system will then cease to be a competitive advantage (as was traditionally the case for corporate information systems and as is today the case for the first virtual companies' systems) and will become a commodity (like today's office applications). The basic catalyst to accelerate this process is the mass expansion of the internet.
At the moment the barrier between companies is removed, the external process gains its owner. Companies cease to operate under several headings and begin to present themselves to the customer under a single heading. At that moment a virtual company comes into being. Thanks to automated technologies, the new owner can run that company with no regard for company boundaries.
Let's imagine that at least some petrol stations lose their various brand names and begin operating under a single name (after all, they all sell the same products anyway). At that moment we have got rid of the costs of making ourselves different from the rest - and that is before we have started optimising the sales network.
That brings us to a process definition of electronic commerce:
Electronic commerce means using information and communications technologies to improve the efficiency of relations between companies and between individual users.
The way to achieve those savings is to attach owners to external processes and create virtual companies.
As internet technology becomes cheaper and the options for its automatic application improve, the shift of business into virtual companies is becoming faster and more marked. Not only the internet communications medium, but also technology which enables it to be used automatically, are becoming commodities. At the same time the role of ownership in the customer service process is diminishing - in fact, ownership is now sometimes a burden, as classic companies are less dynamic than virtual companies.
The examples of virtual companies we will present here have some interesting features in common: with today's virtual companies, it is not necessary for the owners to handle the goods they send to their customers. Nor is it necessary for any employee in the owner's company to touch an order. The owners may only have a very small role in the whole production and sales process. They do of course need the customer, and a brand. The owner of a virtual company must be the one who takes money from the customer by virtue of the fact that his brand appears on the goods supplied. Today, he moreover needs to own a sophisticated information system, which allows close cooperation between the individual companies involved.
Let's illustrate what we have learnt so far using the two following virtual companies. These are not unknown companies, and perhaps precisely because of that it will not hurt to look at them in a less usual context.
From a traditional viewpoint (provided we can talk of such in the context of internet companies), Amazon is an electronic shop, literally a prototype of a certain model of internet retailing to end customers. We will not be concerned here with its web pages, which it uses to make its sales. On the contrary, we shall look at its "internal"20 information system and see how Amazon processes a customer order.
The electronic bookshop
Let's say that a customer orders a typical product - a book -
and chooses the most typical means of payment, by credit card.
At that moment Amazon asks the credit-card company to verify the
card and cover the payment. As soon as payment has been settled,
the order goes to the supplier of the title in question. All companies
try to minimise goods in stock; if as part of the order goods
are requested from just one supplier, companies will try to complete
the supply at that supplier's. After the supplier has sent Amazon
a confirmation that the book is ready, Amazon contacts a logistics
company, in this case FedEx. FedEx delivers the book to the customer.
The whole process is interesting for two reasons. Four companies
are involved in the whole process - Amazon, the credit-card company,
the book supplier and FedEx, which covers logistics. No Amazon
employee touches the order21. Of course, the customer buys from
Amazon, he sees the Amazon logo on the parcel he receives, and
what is most important, he pays Amazon. In this transaction, the
customer is a customer of Amazon, not the book supplier, logistics
company or credit-card company. Amazon also decides on the flow
of all cash in its virtual company.
Cisco is one of the most successful technology companies. It won its spurs by making active communication elements. Today, the company's annual turnover is in the order of 12 billion dollars, and its capitalisation is 480 billion. However, we are interested in it for another reason. The company owns only two of the six main factories where its products are made. This is an interesting situation: the majority of goods the company makes are not touched by any of its employees. Goods are sold and ordered by the company's business partner, production begins in one of the partner factories, transport is covered by an independent company and installation is also carried out by a business partner.
Four of the six factories where Cisco products are made do not actually belong to the company. What does belong to it is complete product development, a sales division, an information system which covers the close cooperation between the mutually independent companies, and of course the Cisco brand. So the customers belong to Cisco. This is where the real money is in electronic commerce. The company itself estimates that this system gives it annual savings of 356 million dollars, but that is only the smaller part of its savings. It is hard to estimate the financial benefits which the company enjoys thanks to its flexibility and ability to react to customers' requirements. This no longer concerns savings, but real opportunities. If we can better serve a customer on this very dynamic market, we can win a greater slice of that market.
Computer manufacture
Other technological companies22 work in similar ways: it is for
example no secret that the majority of computers are made in the
Far East. Those computers are then sold under various brands.
Some companies are truly masterful in the way they work with sub-contractors.
For example, Dell has cut the cycle from ordering to manufacturing
and delivery to a maximum of five days. That reveals another important
feature of virtual companies. The capital turnaround period is
in negative figures: thanks to the flexibility of the entire process,
the company receives payment for its goods before it has to pay
its sub-contractors.
The companies we have presented display two properties: the owner of a virtual company must be the one who owns the brand, takes money from the customer (even if via another company), and decides how to split it between his partners in the customer service process. The owner of a virtual company therefore has the same financial decision-making powers as the owner of a classic company.
Today, he must moreover have a sophisticated information system which allows such close cooperation between the individual companies.
Preconditions for success in the future
We can ask what will happen to those essential preconditions in
the future. It is quite clear that ownership of the customer and
related ownership of the brand will remain essential preconditions
for virtual companies. We shall discuss these issues in the next
chapter. However, the need to own a sophisticated information
system, capable of linking up the individual companies working
in the external process, will in time cease to be a key competitive
advantage. As the development and adoption of technologies progress,
such systems will become a cheap and easily available commodity,
just as thanks to the internet they have now become a commodity
from the communications environment. So in the future the complicated
purchase and installation of a system for companies working together
on external processes will not be necessary - it will for example
be possible just to register and use such a system on an hourly
basis. Lowering the threshold for companies to start virtual cooperation
will greatly simplify the process of setting up virtual companies,
which will become the key element in the New Economy.
eMarketplaces
Electronic markets (eMarketplaces) will clearly play a role here.
They benefit from the internet as a communications commodity and
allow individual companies very easy access to mutual cooperation,
whether their specialisation is vertical (e.g. the automobile
industry or metallurgy) or geographical (e.g. Central and Eastern
Europe). Electronic markets can therefore become a catalyst for
the emergence of the virtual companies of the future, just as
the internet became the catalyst for the mass adoption of electronic
mail and subsequently electronic markets. The main benefit of
the future mass availability of technologies will be a much higher
level of automation, which can only be achieved today within individual
corporate systems.
We should note one important consequence of our findings. In the traditional "old" economy, the phenomenon of economies of scale is well known. Large companies can buy at substantially cheaper prices (centralising procurement) and thanks to their size can amass substantially higher funds to invest into vital functions, especially research and development and marketing. Thanks to that, large companies can make more advanced products and be more visible on the market. Traditional companies therefore try to expand - every week we are witnesses to new mergers and acquisitions.
The principle of association
The New Economy allows large units to be formed without the need
for real companies (in the sense of ownership). Companies owned
by various entities can bring together their purchasing power
on virtual marketplaces and achieve savings for procurement similar
to those enjoyed by giant corporations. The owner of a virtual
company can achieve a high turnover with a minimal number of staff
and make decisions on finances as high as those of a traditional
company. This turnover is the aggregate value created in the series
of cooperating companies. Although the company is virtual, its
turnover is real, and is at the owner's disposal. He can invest
absolute sums into research and development and brand enhancement
which are just as large as those invested by a traditional large
company. So the virtual companies of the New Economy enjoy the
same benefits of economies of scale as traditional multinationals,
and they moreover have an important advantage. Virtual companies
can allocate production resources and respond to an increase in
demand very flexibly.
Thanks to that, they can expand more rapidly than traditional companies could in the past. Commerce as a whole is therefore becoming considerably more dynamic. Thanks to the new information infrastructure and the companies connected to it, ideas can change into prosperous global companies faster then ever before. The New Economy offers new opportunities for good ideas, regardless of the size of the company that wants to implement them. That also opens opportunities for Czech entrepreneurs. One of the barriers which technology has removed is the geographical barrier.
The removal of the geographical barrier
The owner of a virtual company owns the brand. In a situation
in which the role of ownership is declining, it is the brand which
distinguishes a virtual company from the competition. In the next
chapter we shall therefore look at how an effective brand can
be developed in the New Economy and, when establishing a company,
how to avoid mistakes which would harm our brand.
Brands have an irreplaceable role in any kind of business. In this chapter we arrive at a general trend for the New Economy concerning increasing the competitiveness of the business environment, which has resulted in a greater role for brands.
The significance of brands increases with the level of competition in an environment: in monopolistic conditions we do not need a brand, but brands are irreplaceable in the highly competitive environment of internet business and virtual companies. In a virtual company the brand is basically the owner's greatest asset. We shall also look at measuring the value of a brand. We shall show that the value of a brand consists of internal and external elements. The internal value of a brand increases with our ability to attach attributes to it which can positively and significantly distinguish our product from the competition. The external value increases with the aforementioned level of competition in the external environment in which we operate, and with the level of awareness of our brand in the target community of potential customers, i.e. the popularity of the brand. These two elements combined have an effect on the benefits a good brand is able to provide, to distinguish our product or service from the competition in the individual customer's decision-making process. A quality brand means a greater chance that our product will be bought. We finally reach the conclusion that the present features a decline in natural monopolies and a natural increase in the level of competition in the business environment. This trend has made brands more important in business, not just in technology companies, but in the New Economy as a whole.
We live in a world of brands. Let's look at an ordinary television advertisement. We usually see a brief description of the positive features of the product being advertised, followed by an emphatic promotion of the brand. The brand is not there by accident: we are supposed to remember it and connect it with the positive features just announced. Every advertisement has a similar structure, whether it appears in newspapers, on billboards, on radio or on the internet. There are no advertisements which do not feature brands.
Brands in advertisements
And that is not just true of advertising. Brands play a role in
retail, not just to the end customer, but throughout the entire
value chain of sub-supplies and relations between companies. There
is no business without brands.
In fact even in our personal lives we each have our brand. Our personal brand is our name. As in the process of developing a commercial brand, in the course of our lives we try to connect our name to positive attributes ("I'm not going to sign this"). So brands are part of our entire lives.
We shall now refine our intuitive understanding of brands. The world is in essence a world of symbols, of brands. Brands serve to simplify the world for us, to make orientation in it easier for us. Without brands our lives would be much more difficult and we would hardly know what to do. That is true of all brands, whether they are words designating objects or people's names. Commercial brands only differ from other designations in that they are artificially created symbols, which make use of people's need to designate objects around them with concise verbal labels.
Life without brands
Let's try to imagine life without brands. My wife would instruct
me to go and buy the washing powder in the blue box, with the
drawing of soap foam on the back, in the third row at the rear
of the local shop - and be careful, because right next to it are
boxes with pink foam, and we don't want those.
Orientation with the help of brands
Brands simplify orientation in a complicated world. They simplify
our world into a number of easily grasped symbols in each category.
We depend on that simplification - we are only able to remember
a limited number of simple symbols in whichever area we are interested
in.
The business world makes use of that timeless truth, as is apparent in the process of building up commercial brands.
A brand comes out of the same principles from which words arise in a language. In ordinary life we are used to naming the objects we see around us. A word symbolises an object which we encounter on a regular basis. The more often we encounter that object, the greater our need for a concise and unambiguous name. The reverse also holds: if we do not encounter that object, after a time we forget its name.
A brand comes out of similar principles, with the difference that naming is artificially managed by someone. From the start, the creation of a brand is motivated by certain objectives. With a little exaggeration, the method for creating a brand can be described as follows: first we have to choose a word which we are sure does not exist and is not used. Only with such a word are we free to invent its content. In the second stage we have to make every effort for our word to become a generally known expression and for people to link it with the attributes we assign to it. The external strength of the brand depends on our success in these two tasks. Thanks to the existence of mass media, this process need not take too long.
An entrepreneur aims to establish a strong brand. In the traditional world, a brand plays the role of navigator - a symbol which distinguishes our goods and services from the competition.
Brands in the world of virtual companies
The role of a brand is significantly greater in the world of virtual
companies - the brand is one of the few things I actually own.
My suppliers can be - and in the New Economy increasingly are
- independent companies. Nor do I own a retail chain leading to
my customer (for electronic shops, that chain is just the shared
internet). I do not own any logistics services, nor in the majority
of cases any financial services. People can't come into my shop,
as I don't have one. So in my business, I can only use what I
offer to distinguish myself. In order to make what I am offering
sufficiently well-known on my target market, I have to name it.
I therefore have to devise a symbol for my business. Something
which is easily communicable, something which people will remember
and associate with positive feelings. In other words, I have to
devise an easily-understood abbreviation for my business, and
that abbreviation is my brand.
For specific examples of successful brands, we can look at large companies in the classic world. For example, Volvo is a synonym for a safe car. The carmaker would be making a mistake if he also tried to present Volvos as fast cars. He would lose the brand's basic value, which is the generally known linking of the brand to a certain positively perceived property. Not only the brand (the actual symbol) has to be straightforward; its description must also be simple and unambiguous. Customers can't be confused by contrary attributes.
Another example is Coca-Cola, where the brand is the company's greatest value. Its value does not lie in the original and closely-guarded recipe, as we might at first think; after all, the company has in the course of its history changed that recipe, and added new ones. A recipe (or know-how in general, for example a specific model of car, a specific drink or a specific internet application) is only important during the phase of establishing a brand. Once that has been done, we can reap the benefits. The brand then lives a life of its own, independent of the changing content of our products. That is when it yields its value.
The value of a brand
We realise the value of a brand by using it to sell our goods:
goods with a quality brand sell better than ones without a brand.
The better our brand works for selling, i.e. the more people who
know it, the more valuable our brand is. At the same time, that
makes it harder and more dangerous to alter its content. That
results in a concrete recommendation for start-up internet companies:
at the time of setting up the company, we should bear in mind
the target content of our brand. We can only refine that content
one step at a time. We cannot radically alter the content of the
brand, but only refine it. We should therefore think several moves
ahead. In addition to a tactical plan for each step, we also need
a vision of our company, in which a crucial element is our brand's
target position.
The general aim of a brand is to enhance sales. Those do not have to be sales to the end customer; brands are used generally in each sale, including sales as part of cooperation between companies. In all cases the aim of the brand is to distinguish our goods positively from the competition. That is the fundamental objective which we start from when establishing the quality, the strength of a brand. The more people in our target group who know our brand, the greater that brand's value. That is the first part of the significance of a brand. The second and essential part of a brand's value is its association with positive values. It is not enough for our brand to distinguish our goods from the competition. That distinction has to be positive. Cases are known in which a brand's value starts to be negative, and the brand as such becomes a burden. In such cases companies may even decide to change their brands. In the recent past SPT Telecom has changed its brand to Èeský telecom and the Mana supermarket chain has changed its brand to Albert.
The value of a brand lies in its ability to improve sales. The better our brand can distinguish our goods from the competition, the greater its role. The role of the brand is also greater the more competitive the environment in which we are operating. In a monopoly we do not need a brand (as we do not need to distinguish ourselves from the competition, which is of course non-existent), while on a highly competitive market a brand is essential if we are to survive. A specific feature of internet business is the unusually high level of competition. Here every step by an entrepreneur needs to be governed the need to establish the brand.
As we have already said, the importance of a brand, consisting in its ability to distinguish our product or service from the competition, increases with the competitiveness of the environment. In these terms, internet business stands at the top of the pyramid. Competition is inherent in internet business - the customer is (at least when seen from the world of bytes) only a mouse click away from the competition. Brand quality is a highly significant part of the success of every electronic business.
Virtual companies have made the most progress here. As we said in the previous chapter, a virtual company consists of companies owned by various entities, which work together to service specific orders. In other words, a virtual company is the mere process of serving the customer. In classic business each company has its owner, but a virtual company as a whole is not owned by anyone. The imaginary owner of a virtual company, that is, the company which manages the entire process, does not in fact own anything other than its brand.
A change in the importance of ownership
This significantly changes the importance of the role of ownership.
Today it is not necessary to own an entire range of companies,
leading all the way to the customer, in order to deliver goods
to him at a certain level of quality; on the contrary, the very
fact of ownership could sap the dynamism, so necessary in a competitive
environment, from our business. It would also add to our fixed
costs.
Assets as a burden
So, thanks to the greater dynamism of the New Economy, assets
can change from an advantage to a burden. This change in the way
we look at ownership is due to the fact that for delivery itself,
an infrastructure has emerged which we do not have to own but
which guarantees us the same quality of service. The new means
of communication moreover allow us to monitor in detail the quality
of work by external companies. This of course eliminates the classic
ways of distinguishing ourselves from the competition, with one
of the primary ways ownership of the distribution chain. Alternative
methods of making ourselves stand out are therefore more important,
with brand in first place.
The changes taking place today can best be illustrated in the following example. If I am a small businessman, with my own food shop in a particular street, right from the start I am the nearest shop for the commodity in question for people living in my street. I gain a similar advantage if I am a craftsman and open a workshop which is the only one in the street. In both those cases, the delivery of my goods is strongly tied to the tangible world. If my services meet at least the basic quality requirements, I have from the start a stable clientele, to whom I can offer higher value than my competitors. That added value is proximity, and is completely independent of the nature of my business. The role of the brand is also limited in my business, and the conditions for my business come close to a monopolistic environment. In my street I have a monopoly for my goods or services. Even if I do not actively profile my brand (and just call my shop something like General Stores), that completely satisfies my promotion needs. If we take this example to the extreme, we get the situation of a local monopoly.
Local monopolies
A local monopoly arises at the moment I open the only shop at
a campsite, or the only refreshment stand at a swimming pool.
That is a textbook situation: if customers want the kind of goods
I sell, they have to come to me. Otherwise their tickets for the
swimming pool would become void or they would have to go to a
village several kilometres away. They would of course have to
add the price of a ticket or the journey to the price of the goods
they buy elsewhere. In such a situation we can even talk of building
a brand with a negative value (the fact that a shop at a campsite
sells milk at a higher price would not add any positive attributes
to its brand, so important in the situation of classic competition).
We only need a brand to compete; in a monopoly situation it is
unimportant. The brand which is nevertheless established (quite
automatically, as a designation which people begin to use for
our service) acquires a negative value (do you want a connection
from Telecom or from New Connector?). In a monopolistic situation,
that doesn't bother us; but if our monopoly ends, we have good
reason to dispose of the existing brand and start from scratch
with a new one.
We live in a time which does not favour natural geographical monopolies. An infrastructure is developing which is significantly reducing the role of geographical borders in our lives. As we stated in the foreword to this book, this does not only mean the technological infrastructure. Technology is changing the entire business environment. If we run a local shop in our street, we run up against the increasing popularity of shopping in large supermarkets and hypermarkets. If I run a local grocer's, I find that more and more people living in my street are doing their shopping once a week in an out-of-town hypermarket. This of course eliminates their need to buy in my shop and I start to lose my natural market. This process is moreover supported by new types of products on the market. Even ordinary milk now lasts five days. For that reason, people living in my street are losing the reason to shop every day. My geographical advantage disappears (no-one would go to the distant hypermarket every day, that would be more expensive than paying my somewhat higher prices, but people are happy to go to the hypermarket once a week). Large retail outlets have changed the rules of the game, to my disadvantage.
Brands in the New Economy
The role of distance is diminishing today, as in consequence is
the natural way of establishing relations with customers. The
market is becoming increasingly competitive. That is why brands
have an irreplaceable role in the New Economy.
This year several start-up internet companies have folded. Even some very well-known names, such as Boo.com, have not been able to avoid problems. The difficulties many of them are facing have a common denominator: the projects have not been able to control their companies on the highly dynamic internet market.
Today's internet user market is in a situation where the number of participants is rising enormously, and we call such a situation a tornado. The difficulties facing certain internet companies can be attributed to the fact that when the market is expanding so rapidly, which is naturally accompanied by a great number of other changes, classic project management methods fail. It would however be mistaken to conclude that we should rather give rapidly expanding markets a wide berth. We can operate on the internet market, but we need to take its special features into account. In this chapter we therefore look at the those special features, and how we can operate on such a market safely (if possible) and build up a quality brand.
We can compare any market to an ecosystem which is not centrally managed and which evolves in a process highly reminiscent of natural selection. With the difference that a classic market is by and large a stable set of people and companies, which is not expanding dramatically. In contrast, the internet represents a city whose population as much as doubles each year. Such a market is not of course particularly stable, and has principles different from those which apply on classic markets.
The exceptional nature of the internet market
A similar example of an expanding (but now saturated) market is
the market for IBM PC compatible software. What of course makes
the internet market exceptional and barely comparable with any
other market is the long-term nature of its growth (the number
of users has been rising since the cold war - for over 40 years)
and the absolute figures for its growth today (from the start
this growth has been geometrical, but today it is in the region
of hundreds of millions of new users each year). It is precisely
that factor which is a new feature of the external environment,
which companies have not yet had any experience with, but which
electronic commerce must come to terms with.
While the internet market is very new, it is not uncontrollable. There is however one condition: regardless of the rapid changes in the environment, we always have to keep the situation under control. We can put this another way: if we have a plan, we may not succeed; but if we do not have a plan, or do not control its implementation, there is no way we can succeed.
Why then do start-up companies fail? The answer is simple: we can hardly run a (successful) business which gets out of hand right at the start. The basic parameter, which we should keep in mind from the start, is the break-even point, i.e. the moment at which we start to make a return on our investments. The entire business plan rests on this parameter, including the question of whether our idea is at all viable. If we do not have such a plan (or if our break-even point starts to disappear into the far horizon), it is highly unlikely that we will find our way to that longed-for moment. The fundamental problem for internet companies is the impossibility of setting out a long-term strategy for a precisely defined target segment of users, because in a matter of months that segment will have changed out of all recognition. What can we do in such a situation? Fortunately, there are two methods which enable us to change the "crazy" internet market into a much more conservative and traditional market. The first is called the space restriction method, the second the time restriction method.
At the beginning of each business plan is (or should be) a definition of our strategy, with answers to the questions of why and in what we will be better than the others, and whom we want to offer our products to. The second question - to whom - defines our potential customers (while the first specifies the content of our internet brand). In other words: before we start doing business, we have to define our target customers. When defining our target, there is of course nothing to prevent us from taking the special features of the internet into account, so that we choose an area which is by and large quiet and not expanding. Examples of tranquil waters on the internet can particularly be found in segments which have already achieved high adoption, such as flight ticket sales (the majority of people who fly have already been internet users for some time), or the distribution of specialised literature for internet specialists (where the coincidence is 100%). Examples of the reverse are for example plug-in modules for browsers, games and of course internet shops with a general focus.
If we decide for example to operate an electronic shop or any kind of electronic service, we have a whole range of options to choose a market which can be controlled using classic management methods.
The second method can best be described by means of a parallel from classic photography. If we photograph very rapid motion in a sufficiently brief interval of time, the motion disappears and we have the illusion of a static picture. A similar approach can be used to "tame" the internet market. If the annual growth of a classic market which if manageable for us is for example 10%, we can devise a plan for a period of time in which the internet market does not grow by a greater factor. So, if we plan internet projects for a period not longer than e.g. five weeks, we can operate on the internet market in a way very similar to how we operate on the classic market we are used to. Within that time-frame, our customer base will not change dramatically.
That does not of course mean that we have to achieve in a matter of weeks what would otherwise take months or years. But it does mean that we have to plan our objectives gradually and in a much shorter time-frame. The more dynamic our target market, the shorter, simpler and more modest our objectives must be. There is no point in making longer-term plans: during implementation, the external conditions would change so much that the completion of our plan would no longer make sense23. After the implementation of one plan, there can of course be another plan, which builds on the first. So on the internet there can be projects of the same scope and duration as in classic business. The difference however lies in the planning, which has to adapt to the current situation much more frequently. This project management model can be imagined as a gradually sliding window. The length of the window can be established by applying the two rules specified above.
In the "worst-case" scenario, where I aim my company at the whole (exponentially expanding) internet market, I have roughly a tenth of the time for one window in my project than is the case in classic business. But there is nothing to stop me from combining time and space restrictions. As soon as I restrict my target group of customers, I gain more time for my project. The reverse also holds: as soon as I extend my target group to a market which is expanding with great rapidity, I have to be faster and more modest. That affects the length of my project's sliding window.
Business plans
It can therefore be said that at the start of preparing business
plans today, we should not overlook a new step: an appraisal of
the level of growth of the target segment24. The more rapidly
our target segment is expanding, the shorter the individual stages
of our business plan must be. The average time for an internet
project from idea to implementation is between 60 and 90 days,
which corresponds well to our conclusions.
And now let's link what has just been said to what we know about building a brand. A brand is each virtual company's must important value. The brand will also have an irreplaceable role in devising our internet project.
The start of internet business
Let's enter the role of a new internet entrepreneur. At this stage
all I have is an idea; to succeed in electronic commerce, I need
to convert that idea into a solution and build my brand. I am
to have the kind of brand which will distinguish me from the competition
- otherwise customers would not come to me. I therefore have to
identify an area for goods and services which is still vacant
and try to place what I am offering there. I have to be very careful:
my initial offer must be capable of being realised within a sensible
time-frame. In other words, in my first sliding window (and then
of course in each subsequent one), I can only define the kind
of brand which I can technically realise within the duration of
the window. The picture below illustrates this situation.
Every project takes a certain time, and if I set my sights too high, I will not control the project. For example, the unwritten rule of system integration is that no implementation project should last longer than one year. The same holds for internet business, where moreover what is considered a sensible time-frame also depends on the rate of growth of the target group of users. We have to set the length of our window in line with that.
That brings us to the fundamental dilemma facing internet entrepreneurs. On the one hand there is our attempt to offer right from the start a service which distinguishes us from the competition (we build our brand on that basis), on the other hand is the problem of implementing that step within the time-frame allocated once time and space restrictions have been applied. If we are too ambitious, we will not control the situation and will fall into the trap at the top right of the picture.
Good services versus their realisation
It would be just as much a fatal mistake not to give our brand
a chance: not to give it a function which could distinguish it
from the other brands already in existence. We would stay in our
competitors' territory. If for example we opened a server offering
graphs of selected share prices, we would only be joining a multitude
of services which have been available for a considerable period
of time. We would be doing our brand a disservice, because we
would be linking it with the average - and that's something we
can't afford to do when we building our brand.
Overly-ambitious targets
The most treacherous area is however the top left corner of our
graph: at first sight it sounds attractive to present our brand
as "the best portal" or, more narrowly, "the portal
for everything you need to know about handling your finances".
Such a strategy is mistaken, because in the first place it does
not allow me to build a brand which differs sufficiently from
existing services: it opens itself to comparison with too many
competitors at once. And secondly, my overly-ambitious target
will inevitably lead me into problems at the implementation stage.
In practice it goes like this: first I prompt massive expectations,
which I cannot then fulfil. People would for example complain
that they cannot find the services on my server which they would
expect from a general financial portal. The result is inevitable
and irreversible harm to our brand.
In each step of our internet strategy we therefore have to add something new to our brand, something which supplements it and distinguishes it from the competition. We also have to choose only those steps which we can cope with in the given time-frame. We have to be very careful that our gradual steps do not change the brand's content - we are only allowed to build and refine it.
Yahoo.com
An example of a successful strategy on the internet is the Yahoo.com
portal. Each new improvement to the service only supplements the
brand already established and enhances its perception as the most-visited
portal in the world. An example of poor brand management is Amazon.com,
which has used massive acquisitions to diversify its original
operation (selling books), which it was good at, and where it
developed a valuable brand.
So even in internet business, a truth which applied long before the advent of the internet still holds: in business we must proceed by steps, and each additional step must build on something already established, something which already exists. The sliding window method is the application of that principle to the tornado of the internet market.
Let's now look at a model of electronic commerce in which we will try to summarise our existing knowledge. This model can be used to categorise today's commercial internet applications, and we can use it to illustrate the influence of technology on changes in the world. Throughout this book there is a symbolic division of the world in the tangible world and the intangible world. We will now project this division into our model, specifically into its two axes.
The horizontal axis is the axis for the intangible part of our world - the world of bytes axis. It displays the dispersion of the market in the sector we operate in. In the left part of the model are sectors with low market dispersal, i.e. areas where the market has already been cut up between several large players. In such sectors electronic commerce can only bring very limited value. If there are only several key players on the market in a given sector, technology can at most automate the existing business channel and support it in the form of electronic commerce.
As the dispersion of the sector and competition between manufacturers increase, so does the value of electronic commerce. It gives suppliers an opportunity to increase their market shares, while giving customers instant information on other suppliers, which pushes prices down. As we shall show in a moment, that situation develops over time. In general, internet technology increases the competitiveness of the environment, thanks to which there will over time be fewer consolidated sectors on the left side of our graph. The mainstream will shift to disintegrated sectors, where electronic commerce can yield the greatest value.
The vertical axis is our tangible world. This brings into the almost ideal intangible world information on the limitations of our real, physical world. These are primarily transport barriers, but there are also various customs and political obstacles. We have put transport barriers on the axis as an example. It is clear that internet business can yield the highest value when there are low barriers in the physical world. This is nothing new - internet business has always served us best for services. Internet media, flight ticket sales, and travel services are just three examples of successful electronic commerce today. Our graph's vertical axis will also evolve over time. As we shall see below, in the physical world an infrastructure will be established to enable us to make use of the advantages of electronic commerce in areas which are unsuitable today.
The world of bytes has supremacy over our real world. Thanks to the massive popularity of electronic commerce and the influence of technologies on our world25, our two axes are gradually evolving. We have indicated this development with arrows on the edges of our graph. On the bytes axis, traditional large companies are breaking up and virtual companies are emerging, consisting of smaller dynamic units. Companies in individual sectors are disintegrating and increasingly adapting to the needs of electronic commerce. This is a consequence of the general increase in competition in our world.
Surprisingly, there are similar developments on the world of atoms axis. Our real world is becoming more and more a world without borders or physical restrictions. In fact, certain physical commodities are gradually becoming virtual, as though it were possible to use intangible media to transport tangible objects. This is not of course possible, but internet entrepreneurs now use the newly emerging infrastructure as though it were - we shall explain shortly. So, while electronic commerce was originally particularly suited to supplying services, its options are increasingly extending to other areas, in this case tangible ones. In consequence, the situation on both axes is changing in favour of a rise in the value of electronic commerce.
The disintegration of companies and the virtualisation of tangible
transport
Let us now try to say more on these two phenomena - the disintegration
of companies into virtual companies and the virtualisation of
tangible transport. We shall start with the second phenomenon,
the virtualisation of matter. This is nothing other than the growth
of the infrastructure of the world of atoms in an effort to support
business opportunities in the intangible world of bytes; an inevitable
consequence of using this infrastructure is the disintegration
of companies as business is broken down into virtual units, as
we discussed in chapter 5.
As we noted at the start of this book, if we look at the relation between the world of bytes and the world of atoms, we find that the world of bytes rules the tangible world. The world of bytes contains within itself plans for e.g. how to run a company or build a factory. The tangible world contains the mechanisms to implement those plans (e.g. using workers, staff, information systems, etc.). In this respect our civilisation is like a living being. An animal's intangible world is its mental processes, which influence all of its behaviour. And just as an individual creates tools to implement its thoughts (hammer, pen, computer), our civilisation creates automatic tools to implement the needs of the world of bytes (e.g. the needs of electronic commerce). An infrastructure is therefore emerging to convert plans and concepts into matter automatically. This process will gradually lead to the virtualisation of matter, separating the form, function and specification of products from their physical matter, e.g. wood or metal. This has been precisely the case with information, which no longer requires paper to be conveyed. Thanks to this separation of specification and matter, it will be possible to transport products (i.e. their specification) in a manner similar to that in which intangible information is transported. The product will therefore become virtual, it can travel on communications networks and become tangible (be manufactured) at the moment it is required (when there is a customer for it), wherever we want (wherever the customer requires). That will lead to classic companies breaking up into companies specialising in individual elements of the customer service process, and will in consequence increase competition along the value chain. That will be the next industrial revolution.
An infrastructure is now emerging in the tangible world which can emulate certain functions of the tangible world in the world of bytes, especially transport. The internet can emulate transport for services - which is why certain services can now be offered globally, why there are global companies such as Amazon.com, and why the popularity of their brands is increasing rapidly. The next step in these developments will be the emulation of transport for certain tangible categories.
Science fiction writers have dreamt of creating a machine which could transport not just information, but also matter. According to those authors, we would step into such a machine, which would then analyse us, destroy us, and build an exact copy of us somewhere else26.
Transmitting information
In the world of inanimate matter, the idea of separating matter
from information is not so drastic. We are already in a situation
where physical distances for transmitting information have entirely
disappeared, i.e. in the world of bytes. We no longer need reams
of paper to transport information, we don't have to send a celluloid
strip by train to transport a film, we don't need to send a magnetic
cassette by plane to transport a television programme. Let's now
imagine that an infrastructure is created in our world of atoms
which would allow us to eliminate distances (and therefore transport,
loading and storage costs, and the time required for transport)
for a certain traditional area (commodity) in the world of atoms.
Simulating the disappearance of distance
This idea is by no means unrealistic. There are already areas
in the tangible world where the infrastructure simulates the disappearance
of distances. Perhaps you recall Fleurop, a world-wide network
of florists, where I can e.g. request in Prague that flowers are
delivered to an address in New York the same day. Faxes were sufficient
for this application. There was no need for more sophisticated
means of communication because the flowers are not of course produced
on location - I do not therefore need to send a detailed specification
of them. But I have to trust the company to make the delivery
as ordered. Fleurop therefore uses its brand to guarantee quality.
As we shall see shortly, it is again similar to virtual companies
in this respect.
The possibilities of the internet
Unlike faxes, the internet can extend the option of wireless transport
to categories where a detailed specification has to be transported.
The internet can therefore transport unique goods, made to measure
for individual customers.
There are now machines on the market for small print runs, which can print an entire book, including the binding, while you wait. There is no need to print more than one book - the price per book is the same for one or one hundred books. While the costs of printing a paperback in a large print run are e.g. 50 koruna, the costs printing it in a small print run tend to run to multiples of that figure, let's say 150 koruna. While this figure is much higher than for the large print run, it is still less than the end price of the book. If we take into account the fact that we can print the book directly where we need it, the moment we have a customer for it, our view of the economics of the operation changes: when printing one book at a time, there are no costs for handling the printed books, or storing them, or transporting them, nor is there the danger of an incorrect estimate for the print run. No books are produced which I cannot sell. Moreover, the customer can choose a title from any publishing company in the world and does not have to wait for delivery - such "books" are transported at the speed of light. The technology is now in place for books to be transmitted in this way - e.g. in PDF27 format - and presses to print one book at a time already exist.
If this system starts to be used on a large scale, small print runs will become even cheaper. The outcome will be that the traditional printing of books in large print runs, their physical storage and costly transport, will not be able to compete with the new way of "virtualising matter", and will disappear. Instead of traditional bookshops, our streets will feature a network of small-scale printing houses. The customer will be able to order a book from home and pick it up an hour later at the corner shop. Alternatively, he can choose a book at the shop, which will then print it while he waits.
A revolution in producing books
The end result is of course nothing less than the disappearance
of distribution distances for the entire publishing industry.
The customer can order any book in the world. Regardless of whether
the book comes from a publisher in Prague or New Zealand, it will
be available in a matter of minutes.
For the first time in the history of human civilisation, the elimination of borders has been extended from the world of bytes to the world of atoms. And this is no science fiction. Just as the internet infrastructure has simulated the elimination of borders in the intangible world, today that infrastructure has been extended to simulate the disappearance of borders for the first commodity in the tangible world, involving moreover the transport of fully specified and customised products.
It all starts then with books, but they won't be the only ones. In the not too distant future, other commodities in our tangible world will also be "virtualised".
An example with furniture
Let's take furniture as an example. I can easily imagine that
just as there are small printing presses, fully automated manufacturing
plants for wood and metal parts will begin to appear in various
parts of the world. Everyone has probably bought unit furniture
at one time or another. The supply then consisted of a number
of boxes with planks of various shapes and sizes, a set of screws
and printed instructions. We can assemble this kit ourselves,
or it is possible to order an assembly service which delivers
the furniture and puts it together in our home.
Let's now look at the supply of unit furniture in purely technical terms: it is clear that essentially all the concepts needed to produce furniture can today be easily transported, basically free of charge. I forward individual parts as CAD28 plans and send the instructions, e.g. in PDF format. Provided there is an automated manufacturing plant at the other end, where they print the instructions and have automatic machine tools which turn out the parts (from materials with the required parameters) on the basis of the documentation received, I have virtualised the entire process of transporting unit furniture. All that remains is to pack everything into boxes; I can, but do not have to, order a team to assemble it - just as is the case today.
Dematerialised commodities from the world of atoms
In other words, furniture has dematerialised in a way not unlike
that in which information did earlier. With new developments in
technology, the number of such dematerialised commodities from
our world of atoms will rise. Along with this, the significance
of transport and transport barriers will diminish for an increasing
number of sectors.
This trend has important commercial implications. Today's classic furniture manufacturer is a company which covers the entire manufacturing process, from design to production. However, the emergence of the new infrastructure will allow the world of bytes (furniture design) to be completely separated from the world of atoms (physical production). This will be reflected in the world of furniture companies, which will also be split up along those lines. The brand owner will only produce the design. For example, we will select a Korona brand kitchen (the name is fictitious) from the parts on offer in line with our needs29. We then specify where in the world we want the kitchen to be delivered. The brand owner will also be the owner of the virtual company Korona, and will therefore act as "orchestrator" - he must put together a virtual company for each supply, which will cover the entire customer service process. In our example, the brand owner will place an order at an automated manufacturing plant in our town and will send it all the information required electronically. The owner is of course responsible for the quality of the end result; if my Korona is poorly produced, I will slander the brand and never buy it again, which naturally harms the brand owner. As we said in the previous chapter, ownership of the brand is the greatest value which the owner of a virtual company has (the virtual company does not physically belong to him - he merely rents its individual parts on an order-by-order basis). In other words, the brand owner must oversee all the processes in his virtual company, i.e. oversee their efficiency (wherein lies the benefit of electronic commerce) and overall quality (which is essential in given the strong competition on the internet).
Global local manufacturers
Like the publishing industry, the furniture industry will therefore
split into a design part, which will also own brands, and a general
manufacturing infrastructure, with no ownership ties to the design
part30. Specialised manufacturing companies will be set up, capably
of automatically producing individual orders while adhering to
strictly defined quality requirements. It is highly likely that
those latter companies will also join together and create their
own brands, so there will be two or three competing global units,
which will be capable of manufacturing and delivering the goods
in question at the same quality anywhere in the world. These global
brands of "local manufacturers" will compete for orders
from the virtual furniture companies. Because static companies
will break up into virtual companies, which with their competing
sub-contractors will be much more dynamic, the new arrangements
will be substantially more competitive. This is why electronic
commerce is inherently more efficient than classic business.
This disintegration only applies to those sectors where matter can be virtualised. As we will now show, while the disintegration of companies is a consequence of this process, it is not limited to those sectors. Previously, it was recommended that companies integrate their value chains. They were told to join with the market as closely as possible, to take charge of supply to the market. Nowadays it is possible to disintegrate an entire value chain, i.e. design, sale, production, logistics and delivery, with no loss of control, to take it away from the company and put it in the hands of sub-contractors. This disintegration is facilitated by the greater transparency of the entire process. The fact that the new communications technologies allow the originally external process to be kept under control, regardless of whether or not that process is part of our company, means that those technologies give us the option of separating supply from the actual production process.
The new technology therefore facilitates the break-up of the value chain. Each part can be performed by whichever company can do so the most efficiently, without the brand owner losing control over the entire process. This puts the brand owner in the role of "orchestrator" - he brings his virtual company together and is responsible for the quality of its products and the optimal functioning of its individual parts. This can be done regardless of the commodity we operate in.
The decomposition of the value chain
As we said above, in certain commodities the technologies allow
much more - they allow matter to be "virtualised", ruling
out the need for physical transport. Supply is then directly tied
to production.
It will gradually be possible for more and more tangible goods to be translated into intangible services, i.e. into the area in which internet business can yield the highest value. In our model those sectors then move to its upper part. As there are more and more "virtualisable" commodities, an increasingly large part of the tangible world will switch to intangible transport. Competition in those areas will therefore increase. Greater competition will accelerate the break-up of the classic value chain on our other axis, and the disintegration of traditional companies. The world of bytes will therefore shape the world of atoms - it is the catalyst for the emergence of a world in which the value of electronic commerce is increasing significantly.
In the introduction, we promised that this book would result in more questions than answers. Given that, there is no better way to end this book than to try to look forward into the future, which raises a whole range of questions.
We can look at future commercial internet applications in two ways. Let's start with technology, looking at possible changes to their architecture. Any change to the technical paradigm for internet applications has concrete results for the robustness and functional properties of the solutions we build on such applications. This naturally takes us to the second approach, the question of what tasks those applications will be able to handle in the near future. That question will symbolically close this book.
From the start, the net's basic principle has been its distribution. In the fifties, when the world was facing the threat of nuclear war, the main motive of the spiritual fathers of the internet was an attempt to establish an entirely decentralised environment for secure military communications. The aim was to create a communications instrument which would not have any central nodes, i.e. weak points, whose failure would paralyse the entire network.
Vulnerable centralised networks
A classic telephone network is an example of a centralised and
highly vulnerable network: all stations in a given city (or part
of a city) are connected to a single telephone switchboard. If
that switchboard is put out of action, all its participants are
also put out of action and the city is completely cut off from
communication by telephone. Local switchboards are connected to
intercity switchboards, and those in turn to an international
switchboard. If the international switchboard is put out of action,
there can be no calls to or from the country in question (it is
of course possible to call within the country, provided the other
switchboards are unaffected. However, all international calls
have to go through a single switchboard, and if that stops working,
there are not international calls).
Packet transfer
As that example shows, the hierarchical structure of the classic
telephone network is very vulnerable. It was for that reason that
a project for a resilient network was needed, and that vision
was subsequently realised in the idea of packet data transfer.
Packet transfer features mechanisms to maintain the functioning
of the network, even in situations when part of the network disappears.
It can be compared to transporting a group of people on a network
of roads. I first of all split up the group into cars, and send
the cars to their destination. Each car can choose its own route.
At the destination, the people get out of the cars and the whole
group is reunited. If one of the cars has an accident en route
(i.e. if a particular part of the network stops working), I discover
at the destination that the car in question is missing and request
the dispatcher to send a new car, which brings me the missing
people (on the network, the "cars" of course transport
information, which can be resent). The network so described does
not have a vulnerable central element and this method of communication
works even in extreme conditions.
With the arrival of the WWW service in the nineties, the decentralisation of the network did not shift to the level of applications. Weak points began to appear in the originally decentralised environment, and if they are put out of action, they take out entire applications from the virtual world of the net. While it would be hard to take out the WWW service as a whole (there is a large number of web servers), internet applications can disappear, regardless of their popularity and importance. Every WWW application depends on one, or at best a few servers, and if they are put out of action, the application immediately disappears, regardless of whether it is a nine-year old child's personal pages or the most popular search engine in the world, Yahoo!
Recent attacks such as Denial of Service (DoS) are evidence of the problematic nature of today's centralised approach - they have discovered a way of paralysing basically any web application. The series of DoS attacks made use of the fact that in the WWW service, there are always more clients than servers. Potentially, all the internet's clients - 200 million today - can be standing against a single server. The hackers were able to sow fictitious clients on the net, who could easily overload their target server at a time planned in advance. Some attacks took place without any mass distribution of clients, using the net's amplification effect. The technical details of the attacks are not important at this moment. What is important is the very fact that they exist. That proves that the good old robust internet is - at the level of today's applications - a thing of the past.
Here we run into a very fundamental problem, which is the splitting internet participants into two categories: a small group of (web) servers and a large group of (web) clients. This division goes directly against the basic technical idea behind the internet. At the application level, the net has lost its original immunity. Dividing services on the net into servers and clients can be compared to a situation in which we would only have two kinds of neurons in our brains: active neurons and passive neurons. But nature doesn't work like that.
Today's applications suffer from yet another drawback. If the number of changes to services on the net exceed a certain limit, we run into the principle problems of navigation. Those limitations are inherent in all of today's search engines, as today's paradigm for search services does not allow changes to the net to be processed in real time. Probably all of us regularly encounter dysfunctional links to web pages we are looking for. The simple fact that any server can easily be taken out of the network (a change to the internal structure of its pages is sufficient) presents today's search engines, which basically work off-line, with an insoluble task. They have to try to map, as frequently as possible, something which is alive and continually changing. That can perhaps only be compared to trying to produce a paper map of the sea, including all of its waves.
Music on the internet
Precisely this problem has arisen for music recordings. Every
day, a whole range of new pages with pieces of music appear. For
the most part, those pages infringe copyright and are therefore
regularly deleted. In such a situation, looking for music using
classic search engines, where the inclusion of a page sometimes
takes days (and deletion sometimes months), is not practically
possible. The resulting list would be full of non-functional links.
That is why developers have begun looking for another paradigm
in this area.
The first system to eliminate those problems when looking for tracks was Napster. It left music tracks on users' computers, and recorded an application which basically turned users' computers into servers. Napster did nothing less than eliminate the categorisation of net users into servers and clients.
Napster
The actual searching is however still centralised. With Napster,
before connecting to the net it searches our disc. It creates
a current list of the music files on our computer which the user
offers to share, and when we are connected to a Napster server
(there are around 100 of them on the net), sends it to the indexing
system. At the moment the user disconnects, all the files he offers
disappear from the system. So at any moment, the system knows
exactly what music files are currently in it. I would like to
underline the word "currently". The servers carry information
on who is currently connected, whether that connection is of good
quality right now, and what are on offer. The Napster paradigm
makes it impossible for the search system to carry out-of-date
information.
The principle behind the working of Napster
The other new feature in this approach is that Napster servers
do not contain specific data for users (tracks), as is the case
on WWW servers, but only a brief structured description of their
content. The principle behind the working of the Napster system
is in separating the actual data (extensive music files) from
their brief description (author, album name, song title, maybe
also musical genre). A music fan looking for a certain track is
very accurately and efficiently directed to a place where that
track can be found at present. The system only needs to work with
a limited amount of data to do so. The transfer of information
only begins at the moment the track is found, when it starts working
with a large volume of data. That makes the system's functioning
highly efficient.
The advantages of the system
The actual transfer takes place directly between end users, and
does not burden the indexing servers - for the data exchange,
the vulnerable central element has been eliminated. The system
of direct communication between end users is just as robust as
the net itself. In terms of data, Napster has taken a fundamental
step. Data is distributed in the system and separated from its
description.
Napster also differs in this respect from today's search portals. In the indexing phase, the latter work with all the information indexed. A search portal's robot has to go through a an inundation of texts and try to find what is essential. In contrast, Napster gets information on the current content directly from the client at the moment of connection. That information is moreover structured and the system only receives precisely that description which users need to search. The difference in the efficiency of the functioning of both systems is massive. And the results naturally correspond to that. It is therefore only logical that today's search services are not capable of monitoring information on the internet on-line. No search server can give us an accurate picture of the internet's content at any one time - unlike Napster, whose accuracy we can rely on.
On the other hand, Napster is an example of a transitional stage in technology: the data has been decentralised, but not the repository, i.e. the search servers. It is therefore possible to shut down such an application (in consequence of a legal dispute, for example). In such event it suffices to take the approximately 100 search servers out of action and then users will have nowhere to connect to. In other words, Napster still has a vulnerable central point. Today however, applications are emerging which do not have any vulnerable points. Systems such as Gnutella and its clones cannot be shut down, just as we cannot shut down the internet itself.
The application and transmission layers come closer together
With the invention of Napster, the application layer began for
the first time to move to the same level of distribution (and
therefore robustness) as the transmission layer. In terms of data,
the division between one vulnerable server and thousands of clients
who depend on it disappeared for the first time. That has happened
for music. What will be the next step?
We should note an interesting feature of music applications. Music files (e.g. in MP3 format) contain a simple, concise and yet quite unambiguous description of their content.
Applications of the future
Applications of the future will clearly not be limited to situations
in which a brief description has already been prepared (as is
the case with MP3 files, whose heading includes the track title,
artist's name and album title). It is very likely that there will
also appear systems which will use active cooperation with the
"live" user to prepare information. That will help the
systems to select what is essential from the flood of information.
Smart commercial projects of the future will ensure that the user
is interested in working with the applications as best as he can,
and in investing his own work into the running of the system,
or rather the community. The commercial applications of the future
need not only involve original technical solutions; successful
projects will very probably blur the boundary between work by
machines and human work. It will be hard to separate the result
of coordinated work by members of a community into one or the
other category.
Let us go back now to technologies and try to summarise the main features of applications such as Napster and Gnutella:
Relevance, efficiency and robustness
1. Relevance. Both systems automatically rule out searches for
out-of-date information.
2. Efficiency. The entire search process only works with a minimal volume of data. Large files remain with the users, who offer them directly from their computers. For music applications, an effective description is contained in the heading of each MP3 file; the work of an automatic client is sufficient to process that description. For other projects it is possible to use a human participant (system user) to prepare information. Distributed applications allow the activities of a large number of people to be coordinated, bringing together a sufficiently large number of sources to create greater value.
3. Robustness. This property is a consequence of the distribution of the approach. Gnutella does not have a single vulnerable point and the system is as robust as the internet.
Let's admit it. Our readers are going to have to answer that question. Those who give good answers will become rich people. At the present level of knowledge, at least two of the main characteristics of the new paradigm are clear.
Distribution
All search systems and portals to date have suffered from all
the well-known drawbacks of centralised approaches. This particularly
concerns reliability, which is a consequence of the general problems
of the system's weaknesses. The weaknesses of today's server solutions
and "dotcom" companies are not only the technical solution
used in servers (which can fail, which can be overloaded, or which
can come under another form of attack); they also concern the
existence of a single company which takes care of the entire process.
What will remain of Amazon.com's twenty-two million customers
if investors declare the company bankrupt? Regardless of the fact
that building up that customer base has taken years, it can disappear
overnight.
A transitional system
The world does not of course know only black and white solutions.
I can imagine a project which would consist of several kinds of
applications, e.g. "server-orientated", "client-orientated",
and of course mere projectors, i.e. pure clients with no feedback.
After all, Napster itself is a transitional system. I can also
imagine that the role of applications and their individual components
could in time develop and one would turn into the other, in accordance
with developments in user's needs. That brings us to the second
characteristic.
Adaptability
Not even the best visionary can predict the way of describing
information on users' computers, nor all the areas which people
will want the method distributed to tackle. There will evidently
be a whole range of specialised solutions for narrowly-defined
application areas. There may be projects which will be generally
usable and which will be adapted to various needs. Not just for
their own work - it is possible to use the work of people in the
community of users of the system in question for that adaptation.
Making use of the human community may in time lead to the original
use of distributed applications being extended to application
areas which we cannot even guess at today.
Both of these factors mean that new internet applications can be realised by approaches very different to those we know today. Those new approaches will of course enter into business strategies. A company which wants to succeed globally will not be able to try to own a newly-created community, nor to control a newly-created structure - just as not even the internet has an owner. It will of course make up for it elsewhere - it gets access to a set of information created by members of its community which is potentially so unique that it enables it to excel for example in activities which are apparently completely different. That has to be counted with from the start. The winners will be companies whose strategies are not merely superficial.
What actually is e-business?
This raises a question: will this be e-business? If we understand
e-business to mean communications between companies and the people
who comprise the companies which are as straightforward and as
automated as possible, then the answer is definitely yes. Unlike
purely technological solutions, these new projects will have one
advantage: so far, every successful solution in history has been
concerned with the needs of the end users. If it is possible to
make the end users feel that they are part of the whole and that
cooperation within that whole is in their own interest, that is
the greatest value which any commercial company can create, whether
it is a classic or virtual company. We can hardly find a greater
challenge than the implementation of a project which prompts a
group of people around the world to start shaping our solution,
with the end result the emergence of a higher unit, bringing new
value. Perhaps that is just what the internet is for.
This book ends here. It is now up to us to try to answer at least some of the questions which have been raised.
In this book we have said that the success of any business depends upon whether we can enthuse other people for our project. If we attract as many good co-workers as possible, if we can conclude strong strategic alliances, and of course if we win a sufficient number of customers for our products or goods, we can succeed. In the best-case scenario, we can raise a tornado, which is nothing other than an avalanche of adoption by potential customers.
Our idea therefore has to be strong enough to attract as many people as possible, who can then breathe life into it. By ourselves, we never have enough power or resources for realisation. But we do have the option of motivating other people to cooperate. There can be a whole range of motivations in classic business: the employment relation, in which I give people salaries and benefits, the option of a stake in a new company (not just for employees - this option can also be used when negotiating strategic partnerships between companies), and motivating customers to buy my goods, for example by means of customer competitions.
New kinds of motivation
In the new era, these traditional and fundamental truths of business
are being transformed into the creation of communities. The role
of ownership has fundamentally changed in the New Economy. It
is no longer necessary to own an entire company to ensure the
quality of the entire customer service process.
A theme throughout this book has been the various aspects of this new take on ownership. This change is not only apparent on the outside, in the way of owning companies which work together, but also in companies' internal workings. The traditional "permanent" employment relation, in which a person is employed for eight hours a day, during which he sits in an office, and receives an agreed monthly salary, is becoming superseded, just as the need to own sub-suppliers has been superseded. New Economy projects will therefore use not only virtual companies, but also virtual employees. Work on short-term projects, where people are hired for projects and can then have more or fewer additional contracts in accordance with the quality of the results, is becoming increasing important.
Another significant phenomenon is working from home. People working on contracts, but also more and more ordinary employees, can spend more time at home and just surrender the results to the employer. The employer saves operating costs, those working for him need not travel so much, and can choose a time when they feel like working and therefore when their work will be more efficient.
The emergence of virtual communities
The present has however another feature, an entirely new one.
Until now, the motivation for people to work has primarily been
financial. That is now changing - some jobs can be turned into
hobbies which people enjoy doing, quite voluntarily, in their
free time. Thanks to the new information infrastructure, there
can emerge large, perhaps even world-wide communities of people
working on a given problem. This was how the entire category of
Open Source Software was created, including the Linux operating
system and the majority of its applications. The people who work
on those projects are not motivated by money - instead, the need
was for self-realisation and for recognition within the specialist
community.
In the new era, virtual communities will be even more important. Very sophisticated communication systems will emerge, which will simplify bringing people into interesting tasks which cannot be solved using classic approaches. Those systems which can best motivate participants in the community to cooperate will succeed.
An example of work by a community
Although the technical support for communications will have to
be markedly improved, there are already communities around internet
projects. One example is people associated around internet servers.
The communities of specialised servers tend to be of very good
quality, with great creative potential. In September I hosted
a virtual workshop on the Lupa.cz server on the theme of the possible
forms of future distributed applications on the internet. To my
surprise the three-day discussion brought quite concrete proposals,
which it would be possible to present professionally and for which
finding an investor would not be any problem.
The coalescence of the work of people and machines
The very powerful ideas which came out of the discussion led me
to the following reflections. We are entering a period in which
it will not be possible to distinguish between work by people
and work by machines. Basically, we are already there. Who for
example was the author of the results of the workshop? The people
who got involved in it. But it was a technical system which made
that cooperation and discussion in a virtual environment possible.
The phenomena we have described in this book are the next step in the development of the infrastructure of human civilisation. Development leading towards the emergence of a hybrid system, which will bring together work by computers and work by a human community. I am convinced that this is the direction which future applications of the universal network will take. There will be systems in which it will not be possible to distinguish between work by computers and work by people.
It was once the dream of science fiction writers to supplement the human brain with a computer. It seems today that it will take place externally. The human community will be supplemented as appropriate by an artificial infrastructure. The results of the work of such hybrid systems will be available to people, which will lead to even greater value.
Human society as a whole can be compared to the neural network in our brain. A neuron which does not communicate loses the purpose of its existence. The human individual also has a need to communicate and participate in society. It is only natural that as our civilisation develops, it will have an ever better infrastructure for communication between people.
According to estimates, the human brain has ten to a hundred billion neurons. Today's internet is much simpler, with approximately three hundred million users. However, new access facilities in domestic appliances are appearing, which set themselves the goal of connecting the majority of people on the planet. According to important analytical companies, in 2003 the internet should have over a billion users. In subsequent years the number of users of the world communications network will be close to the number of neurons in the brain of a mammal.
One day this infrastructure may create something which is at least remotely comparable to human consciousness. When that happens, we will not be able to say whether that consciousness is the result of the activities of neurons, or the increasing connections between them. Whether the higher value is the outcome of work by people, or computers.
It is beautifully symbolic: after all, the process of human learning is explained by new connections being made between the neurons in our brains. The development of civilisation has led to new communications being made between people.
1 As we will explain in the next chapter, the "world of bytes" refers to all the intangible parts of our civilisation, i.e. information in all its forms
2 The expression New Economy usually refers to the present business environment, which has been markedly changed by the arrival of new information and communications technologies.
3 In the not too distant future, there will be ten billion people on the planet. That number cannot be greatly increased, but the development of civilisation is not limited by that fact. Human society can still carry out a great deal of work to improve the information structure, which can significantly improve the level of management and the quality of communications between people. This will giver rise to a higher unit, to which we shall return at the end of this book.
4 One proof of the intangible world's supremacy over the tangible world is the emergence of computers. The world of thought has created an infrastructure in the tangible world (computers connected to one another), which greatly simplifies putting ideas into practice. The growth of this infrastructure is one of the specific features (perhaps the main one) of the present day.
5 This progress can be compared to the difference between a secondary school graduate and a university graduate. They also look the same at first sight.
6 The origins of printing date back to the second secondary BC in China.
7 No milestone can be set with complete accuracy. Instead of von Neumann's concept, we could also list Turing's machine. Of course, both Turing and von Neumann draw on the work of many other people, including the ancient philosophers who laid down the basis of modern logic.
8 As a mark of respect to the inventor's genius and proof that his ideas were correct, the machine was built in the end. This took place recently, in the British Technical Museum, one hundred and fifty years after the inventor's own unsuccessful attempts - with, of course, the implicit help of present-day computers.
9 This is known as the network effect. It derives from the fact that each new participant increases the value of the network for all other participants.
10 Virtual companies are entities which truly exist and generate real revenues. They are only virtual, i.e. non-existent, in terms of ownership. They do not have a sole owner, but are in fact groups of companies owned by various entities, brought into a single functional unit when the customer requires something. That has brought a new dynamism into business. A similar concept is the virtual employee, an employee carrying out real work and generating real value, who is however only employed for a specific contract and works from home.
11 Incidentally, the first commercial e-mail systems did not have anything in common with the internet. That is quite logical; the internet was firstly a military and then a scientific network, and so only those two communities used electronic mail on the basis of the internet. Commercial e-mail was swallowed up by the internet when the WWW service brought the internet into the business community.
12 Mail is another example of a service which was developed long before the internet. Today however it is being squeezed out of its original role by electronic mail. Classic mail is therefore a typical example of a company which, although not operating in the field of technology, has had to respond to the altered external environment and try to turn the new threats into opportunities. We shall discuss possible ways out of such a situation at the end of this book. Here however let's mention as an example the possibility of focusing on the personalised delivery of a unique product to personal recipients, making use of the popular trend for personal commercial (one-to-one) applications on the internet today. We can already illustrate this trend on the Czech market, were logistics services are being linked to electronic shops.
13 And if we ignore the paradigm for its use today, where it has merged with the WWW service, the internet also offers great possibilities for decentralisation and developing self-service communities.
14 This objective has not changed to the present day. Those very words can be used to describe the greatest challenge facing today's electronic commerce applications.
15 These features of companies - whether electronic or classic - are collectively known as One-to-One, or Customer Relationship Management (CRM). It concerns making the best use of the information which the customer provides us with in the course of his commercial relationship with us (especially concerning what goods and services he likes) in order to improve our services for that customer. Thanks to that knowledge, we can give the customer better service than the competition, which does not know the customer at that moment. That creates a barrier to competition and promotes customer loyalty.
16 See e.g. www.calresco.org.
17 We cover the relation between the tangible and intangible worlds in our model for electronic commerce in chapter 8.
18 Mobile means of connecting to the internet moreover allow information on the user's current position to be used. This can be used e.g. to announce a sale at a local market only to those people who are in sufficiently proximity to the market (and who we know to be interested in such an offer), or bets on the result of a football match in progress can be offered to all spectators at the football stadium in question.
19 The mixed model is known as CAM (Click And Mortar - a parallel to Brick and Mortar, the name used for classic shops).
20 We have put the word internal in quotation marks because the system does of course serve for communications with external partners. It is only internal in the sense of a virtual company.
21 That is how Amazon worked when it was starting. Subsequently, in order to guarantee the quality of the entire customer service (including delivery), Amazon began to cover logistics itself. However, as the infrastructure of our tangible world is put in place (extending logistics services, expanding small-scale printing), these reasons lose their force, just as retail chains are now separate from manufacturers. When that happens, virtual companies will be able to benefit in full from their greater dynamism and will not be tied to their own delivery services.
22 And other companies with classic products, such as the sportswear company Nike.
23 A classic example of just that situation is the shameful ten-year implementation of the Iridium satellite telephone communications project. During the time spent on developing the project, a globally implemented and interconnected system of dozens of terrestrial mobile telecommunications networks was brought into service. This created a globally functioning whole which solved the needs of world-wide communications for travelling businessmen, which had been the impetus behind Iridium. During the implementation of the Iridium project, the original gap in the market disappeared and the company went bankrupt. For electronic commerce, there is yet another parallel: not all globally successful projects need to be centrally managed. The internet environment offers entrepreneurs a tool to realise projects as large as the global mobile telecommunications project in our example, without trying to own the entire project.
24 This level is different for business customers buying flight tickets, different for people buying vegetables in Prague, and different again for the global community of internet applications developers.
25 This development is comparable with the effect of the invention of the printing press on a sector which apparently had nothing to do with the book industry.
26 To tell the truth, that idea is not particularly attractive for me. If we travel by plane, it isn't much slower and the probability of our physical destruction is less than 100%.
27 Portable Document Format by Adobe Systems Incorporated
28 Computer Aided Design - a general expression for software used for computer design, usually of technical parts.
29 Note that in our example this is a product which is made to measure for the customer. That is the outcome of the general development of technology towards the automatic provision of personalised services, which further support the competitive advantages of One-to-One companies.
30 The book industry splits into the publishing part and a part replacing the function of present-day printing houses and bookshops. The publisher's brand naturally features on the printed book.