REINVENTING THE @nterprise.

The Internet is revolutionizing our work methods and becoming a useful and profitable technology for businesses that have been able to strategically deploy it

Many companies have taken advantage of the Internet by strategically deploying new resources. Some of the advantages and benefits that have frequently been attributed to the Internet include enhanced ease of doing business, reduced transaction time, more extensive customer relationships, and access to a larger market of buyers and sellers.

For customers, the value proposition is enhanced because they can now do business with a simple keystroke, any time of the day, to and from any place in the world. They can procure made-to-measure products at the best prices and within a shorter time. In addition, they can obtain personalized comprehensive information about products and services. This value proposition is unprecedented. Strategic deployment of the Internet encompasses and impacts the three dimensions of the value proposition of every company: product attributes, cost and production times.

The product of the cottage business of the pre-industrial era was relatively simple: it was what one person, with only hand-made tools, could produce by hand. The only cost element was mobilization of the craftsman during the project, and the only time element was the time that the craftsman took to make the product. The industrial era ushered in more complex products along with a reduction in the total cost and delivery time of products. If a car would have to be manufactured and assembled by craftsmen, it would cost much more and production time would be much longer. The industrial era made it possible for businesses to do more at a better price and faster, provided that a minimum amount is produced. Over the years, companies in this era progressed; products became more complex, their attributes multiplied and the transformation costs and delivery time were reduced considerably.

It is nearly unthinkable to produce an industrial-era product under the cottage system; it is likewise impossible to offer a bona fide Internet-era product if an organization adheres to the business practices of the industrial era. Consider well-known products of the Internet era. Could you order a customized computer, receive it in ten days and have access in real time to 24/7 after-sales service without the supplier having integrated new information and communication technologies (NICT)?

Nonetheless, experience shows that it is not so easy to engage in profitable business over the Internet. Transaction costs have certainly been reduced but other costs have appeared. In fact, very few companies realize profits via the Internet. Several have even encountered serious financial difficulties. Production times, although reduced, are less foreseeable and their consequences are more critical. Customer relations and after-sales service is certainly not the same. The usual business markets seem to have drowned in a much vaster market.

Strategic deployment

Although reality generally seems to contradict expectations, some companies have been successful at integrating the Internet into their business strategies. These companies can be called "@nterprises." Strategically deploying the Internet means that the Internet and the information it offers becomes the cornerstone of the business model of the company and that the company has overhauled its operations in line with these new resources.

Having a business model that is centred on the Internet is indispensable for a company operating in the new economy, whose very mission is to harness NICT; but how can industrial-era companies strategically deploy these new resources? They must totally abandon their traditional business processes and literally reinvent their company, as Bell Canada is currently doing, along with most Canadian banks. They must completely overhaul their operations. In this respect, the Internet can be characterized as revolutionary, similar to the machine at the end of the 18th century. The machine revolutionized cottage industries and created the industrial era. Today, the Internet is spawning @nterprises that are revolutionizing organizational operations.

Sources of value creation

The craftsman's work was the main source of creation of value in pre-industrial times. In the case of businesses that rely on the soil, such as agriculture, the earth is an element of capital, and is thus another source of value. When the machine gave rise to the industrial company, fixed assets and equipment became the main sources of these companies' value creation. The technology inherent in this equipment can also be considered a specific source of value. However, economists unanimously define the production function according to the variables of capital and labour. They undoubtedly consider that the technology of machinery is an integral part of the equipment. By contrast, owing to its distinctiveness and crucial role in the ongoing Internet revolution, NICT and the information it generates necessitate consideration of these technologies as the main sources of value of the @nterprise. The value proposition of an @nterprise is therefore linked to four variables (in descending order): NICT, information, ca pital and labour.

NICT includes the Internet, as well as electronic platforms, software and specialized languages. The information newly acquired through NICT includes identification of potential customers, usage or consumption profiles and logistics follow-up. It is all the information that enables companies to develop, market and sell products, and to add the information required to plan production and purchasing more quickly and at a better cost. Information is the knowledge base of the company. It is the unification of the resources of NICT and information that engenders the new value proposition.

These two new sources of value contribute new elements to the calculation of transformation costs. In effect, classic management accounting states that transformation costs are composed of direct and indirect costs, associated with the use of fixed assets and logistics. However, costs linked to new information and communication technologies (NICT) and information management should make up a distinct category.

How the reinvented organization functions

The business processes of organizations that have strategically deployed new information and communication technologies (NICT) cannot clearly be identified if they are measured against those of industrial-era businesses. To help identify these processes, let's examine the changes likely to be generated by the Internet revolution using a framework originally developed by the CMA International Centre (see chart below) to analyze strategic deployment of the Internet in front office activities.

Six business processes seem to be particularly affected by the Internet-driven upheavals: formulating a business strategy, product development, marketing, sales, customer order management and after-sales service. Production and purchasing planning, also known as back office activities, are also affected.

Formulating a business strategy.

The artisan's strategy was simple: respond directly to customers' needs by delivering a product that complies with their expectations. Artisans developed their products themselves. They did not have to formulate a marketing strategy; instead, their customers visited their boutique and sales were direct. They did not have to manage orders, and after-sales service was equally direct. Because of the need to sell large volumes to benefit from economies of scale, these activities became formalized. Product development, marketing, sales, order management and after-sales service were consequently assigned to specialists.

The business strategy of the Internet era no longer resembles the classic model. It is shaped by several trends such as new sharing of responsibilities, market globalization, changes in outsourcing activities, changes in product franchising, use of shared service centres, strategic alliances, mergers and acquisitions.

Product development. In industrial-era businesses, product development was conferred on engineers, who were informed of the perceived needs of customers by intermediaries. Their goal was to translate the customers' wants and needs into product specifications, in line with their knowledge of the technology. Engineer designers working at an @nterprise are in direct contact with customers who transmit their needs via the Internet. They now work on virtual models of personalized products. The Internet reconstitutes the link between the customer and the designer, a link that had been cut during the Industrial revolution. In best practices, the customers themselves design the products. Industrial-era practices related to conception and design of a product, namely development, construction and evaluation of a prototype, improvement of an existing product, testing the efficiency of new or current products and planning of production, are literally reinvented.

Marketing. Marketing activities - which include identification of market segments, customer definition, market and competition analysis, choice of distribution channels, price strategy, promotion and advertising, sales projections and emerging market penetration -- must be totally overhauled. The conventional channels tend to be tailored to a local or national market, however, the market has now become global. Organizations now possess previously inaccessible information on potential customers, the competition, habits and behaviours. Nonetheless, this data can easily be submerged within a sea of information. Pertinent data must be identified and processed using specialized software. Promotion and advertising must be rethought according to new specialized global markets. In many cases, emerging markets are created by the new value proposition offered by @nterprises. Product attributes are multiplied, products are personalized, and demand prices are set according to the attributes, and are thus also personaliz ed.

Sales. The sales force becomes a public relations team or a team of trainers at the customers' service. In addition, given that markets are global, it is essential that the team be multicultural. Management of these new communication professionals must have a dual foundation: the acquisition and management of technological skills and training in multinational communication.

Order management. Similar to the case of delivery time of products ordered by customers, response time to customers' requests for information now has a predominant impact on the degree of customer satisfaction. The level of efficiency of the order management process now determines the success or failure of the Internet-era company. In addition, @nterprises must now strive for better integration of activities ranging from customer order reception to delivery of products ordered. This allows reduction in production times and the cost of order processing in addition to increasing the reliability of the process.

After-sales service. The personalized link between the customer and the artisan is reconstituted in the @nterprise. The clientele spans the globe. Businesses must reinstate this service, which had been relegated to distributors and the chain of retailers in the preceding era.

The table below summarizes the distinctive characteristics of the @nterprise in relation to those of an industrial-era business or cottage business.

The Internet will not only be useful and profitable, but will permanently alter our work methods. However, certain conditions must be met and stages must be completed. The Internet can reduce transaction costs on the condition that organizations invest significantly in NICT and in the acquisition and management of the newly accessible information. The Internet can reduce overall production time, but can only do so reliably if information systems become more reliable.

The Internet can bolster relations with customers and enhance after-sales service provided that the customer is given priority by system designers. In terms of cost behaviour, a major investment in a new infrastructure (i.e. NICT) can be profitable only if there is a significant increase in the gross margin or sales. Moreover, the Internet can increase an organization's market of buyers and suppliers, but only on the condition that a global business model is developed.

The Internet is revolutionizing our work methods and becoming a useful and profitable technology for businesses that have been able to strategically deploy it. However, success in this era necessitates a major investment in NICT, improvement in security and reliability of information systems, development of customercentred systems, a global business model and a multinational communication plan.

Hugues Boisvert, Ph.d., CMA, FCMA, is full professor at Ecole des HEC in Montreal. He is also a university associate with the Montreal office of Arthur Andersen and is the director of the CMA International Centre. The CMA International Centre (www.hec.ca/cima) is an applied research centre dedicated to benchmarking at Ecole des HEC, which is affiliated with the Universite de Montreal.

Cottage era                Industrial era
Artisan                    Business
Value created by labour    Value created by capital,
                           including equipment
Unique product,            Mass product, complex
simple design              product, multiple attributes
Labour is the main element Infrastructure and logistics
of transformation cost     are the main elements
                           of transformation cost
Production time is the     Conception, distribution
only time factor           and purchasing times
                           add to production time
Individual market          Network market
Individual operations      Bureaucratic operations
Cottage era                Internet era
Artisan                    @nterprise
Value created by labour    Value created by NICT
                           and information
Unique product,            Personalized mass
simple design              product, very complex,
                           multiple attributes,
                           personalized perices
Labour is the main element NICT and information
of transformation cost     are main elements
                           of transformation cost
Production time is the     Conception, distribution
only time factor           and purchasing times
                           are reduced
Individual market          Global market
Individual operations      Internet operations