Find this article at: http://www.business2.com/content/magazine/indepth/2000/03/01/20682

Clock Wise

Customer Convenience Is the Key to Ecommerce
From the March 01, 2000 issue

Daniel F. Spulber

Imagine discovering a deposit of the scarcest, most
valuable resource on the planet, a deposit so vast it could someday
benefit every man, woman, and child on earth. Such a discovery would set
off a frenzy eclipsing even the great California gold rush.

That deposit has already been found, but it does not contain
crude oil, gold, or platinum. The scarcest resource on earth is something
we all value more than anything-our time. We all have the same 24 hours in
a day. By delivering convenience-that is, by saving us time-the New
Economy offers a massive discovery of our most valuable resource.

By linking people electronically, high tech industries have
found the mother lode. Novel ways to reduce time spent on common
transactions is worth many a fortune, which helps to explain the high
valuations of Internet stocks. These companies do not make anything,
except that they make time. With the click of a mouse, people can travel
around the world, communicate with friends and family, find information on
practically anything, and shop almost instantly. Time to spend with those
near and dear, contemplate nature, relax and recreate, perchance to dream,
that is a discovery indeed.

Creating convenience

Economic transactions take time. No matter what is being
purchased-clothing, food, entertainment, or gifts-the shopper usually
needs to search for the best store. Visiting merchants takes even more
time, to find out prices, product features, and what is in stock.

For instance, I recently went shopping to buy a television
set at an electronics store noted for its low prices, but I spent almost
an hour trying to locate an available salesperson to obtain the product,
followed by a long wait in the checkout line. Almost anyone who has bought
an automobile knows the excruciating feeling of waiting for hours at an
auto dealer to haggle over the price of a car. Think of how much time you
spend shopping for food, clothing, insurance, housing, and other
necessities in the average week, month, or year.

"Time is
money" goes the old saying. The social contrivance of money saves time for
everyone because it solves the problem of the double coincidence of wants.
If we were to rely on barter, a person who desired apples and had only
bananas to trade for them would have to find another person who desired
bananas and had apples available to trade. Such a search would be
time-consuming. By using money, people can buy and sell apples, bananas,
and other goods and services without looking for the perfect trading
partner. But money and its modern equivalents, such as checks, credit
cards, debit cards, and even electronic cash, do not solve high time costs
of shopping for goods and services. Going
online dramatically cuts the costs of searching for merchants and service
providers in ways that were never possible before. Consider the time costs
of contacting several dozen insurance companies to find the policy that
best suits your needs and budget. Finding and meeting a slew of insurance
agents would be so time-consuming that you would be tempted to cut your
search short and settle quickly for second best. Shopping online with the
Insurance Answer Center, InsureMarket, InsWeb, QuickQuote, or
Quotesmith.com, on the other hand, allows you to successfully complete
such a search in a matter of minutes. When buying a car, the endless
driving around to different dealers and interminable visits to the
much-dreaded auto showroom can be discouraging. All that can be cut short
by shopping through online car-buying services such as autobytel.com,
Autoweb.com, CarPoint, CarSmart, or Consumers Car Club.

Buying a house is likely to be even more time-consuming.
Traveling around with a real estate agent can be exhausting, and the brain
begins to reel after viewing only a few houses. On top of that, real
estate agents sometimes steer prospects toward certain neighborhoods and
control the order in which houses are viewed. With electronic real estate
listings such as Realtor.com, HomeAdvisor, or homefair.com, home buyers
regain control over the search process. Using these types of services, a
home buyer can set search parameters such as price range, location, and
house types and instantly generate a list of available houses. The search
can be done at the buyer's convenience rather than the agent's and can be
repeated as frequently as desired to see if any new houses have come on
the market. This allows buyers to narrow their search to the most likely
prospects, cutting down the time spent viewing houses.

CyberShop's egift helps you pick out the perfect present and
then gift-wraps it and ships it. The Website offers suggestions in
categories based on relationships, types of gifts, special occasions, or
prices. Experts are available 24 hours a day to help you choose the right
gift. The site even offers to remind you by email 10 days before special
events along with some more gift suggestions.

Companies that
deliver products with the greatest convenience are those that will prosper
in the New Economy. Whereas traditional merchants are open during
so-called business hours, limited hours of operation will soon be an
anachronism for many types of businesses. The online store stands ready to
provide sales and service 24 hours a day, seven days a week. The Gap
advertises that its online store is "always open." Banks once ran on what
was called the 3-6-3 system: Borrow at 3 percent, lend at 6 percent, and
make it to the golf course by 3 o'clock, giving rise to the expression
"banker's hours." Electronic banking has changed that forever. Now
Citibank tells us "the Citi never sleeps." This does not mean that people
will stop sleeping, only that advanced computer and communications systems
on the Internet can provide services to fit the many and varied needs of
customers around the clock. The vast set of online directories and search
engines significantly reduces the time costs of collecting information.
Portals offer quick access to news, weather, business, and sports
information, as well as directories.

Where do you want to go today?

The hero of Jules Verne's early science fiction classic Around the
World in Eighty Days, Phileas Fogg, defies conventional wisdom and wins a
wager by traveling around the world in record time. Even in the Jet Age,
people complain about travel times. While there will always be the need
for human contact, many kinds of travel can be left to the virtual world
that can be traversed in nanoseconds. Online stores can be visited
instantly, no matter how distant in geographic space. Travel to museum
Websites abroad or gather tourist information about other countries in
just a couple of clicks. As the Internet becomes more international, the
electronic traveler can go around the world at speeds defying science
fiction.

Closer to home, cutting commuting time to and from
work would greatly enhance productivity and improve the quality of life.
Although the full promise of telecommuting has yet to be realized, the
time savings appear to be substantial. According to a 1997 study by
business consulting company Find/SVP, there were more than 11 million
telecommuters in 1997, about three-quarters of them regular employees and
the remainder contract employees. "Growth of email, voicemail, and the
Internet, combined with a renewed emphasis on work results rather than
workplace appearances, have encouraged managers to recognize that
employees working part-time down the road are no more distant than
employees working down the hall," according to Thomas E. Miller, Find/SVP
vice president. The International Telework Association and Council has
announced Telework America Day for Oct. 27, when millions of Americans
will work from home or a remote work center to illustrate the time savings
and productivity gains. Telecommuting is a rapidly growing feature of work
in the New Economy.

Whether at work, at home, or on the
road, electronic communications promise substantial time savings. Email
avoids the endless games of telephone tag that result when communications
are out of sync. Email also saves the considerable time needed to prepare
traditional paper-based correspondence. More advanced Internet and
intranet communication using shared documents and other methods allow
workers to contribute to a common document without time-consuming
meetings. Just like videocassette recorders let people adjust television
viewing to fit their schedules, shared documents give employees much
greater flexibility in workplace scheduling, saving time at work.
Companies such as Xerox advertise the time-saving benefits of document
management.

These examples illustrate the tremendous returns
to time saving in the New Economy. The rush is on to capitalize on the
time frontier. Those businesses that offer the greatest convenience will
reap huge rewards. The potential returns equal the value of the time
saved.

Building electronic bridges

The successful companies in the New Economy are not simply providers of
traditional goods and services. Outsourcing and electronically linked
networks of manufacturers and distributors are rendering the vertically
integrated manufacturer obsolete. As e-retailers and e-wholesalers replace
some of the services provided by traditional alternatives, management
strategies must change as well. Winning companies are those that create
innovative transactions, connecting their suppliers and their customers in
new ways. How can companies seize the day? For customers, buying products and services has two
costs: the price paid directly and the indirect time costs of finding the
product, making the purchase, using the product, and obtaining related
services. It's the total cost to the customer that counts, the purchase
price plus the transaction cost. Companies that deliver the best total
package of price and convenience will prosper.

Companies
succeed by creating and operating their own markets. This means creating
innovative institutions of exchange. Electronic commerce provides the
technological means to create new institutions, but is not a substitute
for creativity. Markets that employ new technologies will be organized
differently, even though they inevitably share common features with more
traditional markets.

Take eBay, for example, which bills
itself as "the world's personal trading community." Sharing many features
of the traditional swap meet, eBay is far more than an electronic flea
market. In its three years of operation, more than 35 million items have
been put up for sale, and more than 130 million bids have been received.
With nearly 1 million items for sale at any one time, the site receives
more than 600 million hits per month. There are 1 million registered
users, each of whom can create a personal Web page for free.

What distinguishes eBay from the flea market is not its
sheer scale, although that is certainly impressive. It is the fact that
eBay is an online community. It brings buyers and sellers together not
only to transact, but to interact with each other and share common
interests. Visitors to chat rooms are urged to converse with other
collectors about their favorite area, but "No business please!"
Category-specific chat rooms are devoted to such areas as antiques, Beanie
Babies, coins, computers, dolls, glass, jewelry, photo equipment, pottery,
stamps, toys, and trading cards.

eBay focuses on
convenience. The system is designed to allow buyers and sellers to search
easily across categories and to participate in auctions with as little
friction as possible. Within any category, such as computer hardware,
auctions in any subcategory can easily be identified along with featured
auctions. Online tutorials lead newbies through a simple four-step
process: register, find stuff, bid, and sell. Users can customize the
service, keeping track of bids made, offers received, and their account
status. Buyers and sellers can connect to TradeSafe or i-Escrow to obtain
escrow services. Because eBay does not certify the sellers or the quality
of their products, it operates on the principle of caveat emptor-let the
buyer beware-but offers online tutorials and extensive tips on safe
transactions. After an auction is completed, the seller and the high
bidder exchange email addresses and deal directly with each other.

Because eBay brings buyers and sellers together in new ways,
it has created a huge number of markets for resold goods of all types,
dramatically cutting the time needed for millions of buyers and sellers to
find each other and transact. Little wonder then that eBay's market value
has soared, going public at $18 per share and rising to more than $150
within two months. Bringing buyers and
sellers together is transparent in the case of eBay. But that is what most
successful Internet companies are doing. Amazon.com, barnesandnoble.com,
and Borders.com bring readers and publishers together. Ameritrade and
E*Trade connect investors to markets for financial assets. By adding
convenience, companies engaged in electronic commerce stand to earn
returns from speeding up transactions.

As a result, the
market value of a wide range of Internet stocks is tending toward the
stratosphere. This has led to endless speculation about irrational
exuberance. Internet stocks such as Yahoo! and Amazon.com trade at
seemingly wild price-earnings ratios because current earnings are small
but investors evidently expect future earnings to snowball.

While financial bubbles can arise, there are reasons to
believe that Internet stock growth is more than tulip mania. The growth of
interest in the Internet has been extremely swift, and further growth is
imminent given the arrival of sub-$1,000 personal computers. Surveys of
new computer buyers suggest that their main motivation is to get connected
to the Internet. The convenience of Internet commerce lends credibility to
projections of sustained growth in Internet commerce. As a result, the
returns to establishing focal points and creating recognizable brand names
are significant.

Accelerating competition

Speeding up transactions to save time for customers and suppliers has
an inevitable byproduct: the process of competition speeds up as well.
Ease of searching the Internet means that competitors are only a mouse
click away. Quick comparison shopping implies that companies cannot hope
to attract and retain customers on the assumption that information about
competing alternatives is limited.

Old strategic advice
urging companies to erect entry barriers no longer applies-the moat around
the castle is easily crossed. Companies have to continually move faster
than competitors to attract customers. Services must be more readily
accessible than those of competitors. Companies must provide immediacy;
goods and services must be available when customers need them.

At the same time, ecommerce dramatically reduces costs of
adjustment for companies. Menus of products and services and prices are
easily altered online. This slashes "menu costs," which are the costs
restaurants face every time they want to offer new dishes or change their
prices. Price changes are more frequent and product cycles can be
shortened. Markets for all sorts of goods and services begin to resemble
markets for financial assets. Companies can respond quickly to changing
traffic patterns on their Websites. Traditional retailers and catalog
merchants have slower response times because of the costs of changing
inventories and posting new prices. Because online merchants can easily
change offerings and prices, the speed of competitive interaction changes
accordingly. As online competition speeds
up, overall competitive strategies go through more rapid transformations
as well. While companies undergo strategy makeovers from time to time, the
cycle of change is much faster in electronic commerce.

Within the space of a few years, for example, Microsoft has
shifted strategy a number of times: from a proprietary content service,
Microsoft Network (MSN); to development of separate Internet services such
as its CarPoint car-buying service and Expedia travel services; to
creating a multimedia Website or portal known as MSN.com that doubles as
the homepage for Microsoft's Internet Explorer. Moreover, Microsoft
purchased Hotmail, adding free email services to its ecommerce offerings.

Competitors are not standing still. America Online bought
Netscape Communications and made a deal with Sun Microsystems in November
to co-develop start-to-finish ecommerce solutions and explore access
technologies allowing users to "access America Online brands from
anywhere, anytime."

Friction leads to innovation

Despite the progress made by ecommerce, transaction costs are not
easily reduced. The New Economy is far from being friction-free. The
proliferation of Websites re-creates the problem of time-consuming search
in the virtual world. Search engines are imperfect and frequently generate
a blizzard of scattered or irrelevant information. Specialized
infomediaries are beginning to sort through the confusion and provide
tailored information and business connections. Electronic commerce does
not imply "disintermediation," only the demise of some types of
intermediaries and their replacement by others acting as agents, brokers,
monitors, and communicators.

Jokes about the "World Wide
Wait" show just how much every second counts and how much more there is to
do. There is the task of providing broadband access to households and
businesses. Cable companies are pursuing hybrid fiber-coaxial cable while
telephone companies are developing digital transmission over fiber
backbones with copper to the home, known as digital subscriber line
service. Other firms are developing hardware and software solutions to
help customers send and receive information more quickly. Companies such
as Cisco Systems are developing data-network technology at increasing
speeds and purchasing startup companies to tap into the widening stream of
network innovations.

There are only so many hours in a day.
Each moment counts, so how much of each day should be spent on mundane
transactions, finding the right store, buying gifts, checking on
investments, or paying bills? Market makers are simplifying electronic
commerce by focusing on convenience. Hopefully, the promise of vast time
saving will be realized. What you do with all that extra time is up to
you. Maybe I'll surf the Web a bit...

Daniel F. Spulber ([email-masked]) is a professor at the Kellogg Graduate School of
Management, Northwestern University. He advises many major companies on
change and is the author of The Market Makers: How Leading Companies
Create and Win Markets (McGraw-Hill, 1998).

Content copyright © 2000 Imagine Media Inc.

Find this article at: http://www.business2.com/content/magazine/indepth/2000/03/01/20682