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Mastering the digital marketplace.

The digital economy is a weird, wild place. Much of what you have learned and practiced successfully will no longer be relevant. In an excerpt from his new book, Douglas F. Aldrich of A.T. Kearney makes the case for a new way of thinking.

It's said that a seasoned farmer can sniff the air and predict approaching rain. That she can predict crop yield by tasting the soil. That there are people who have a special intuitive talent for figuring out exactly where you should drill your well. You may have even personally had a "gut feel" about something and taken action - even though you had no logical basis to do so.

We see this happening. We see experienced CEOs becoming wary. Savvy business executives in a broad range of industries tell us they can feel - that they know - big changes are coming. This is not based on data, fact or logical forecasts. Change of the type we're talking about defies forecasts, because forecasts are based on traditional experiences and expectations. Visionary CEOs sense this, and are looking for help making the leap to paradigms that haven't yet been imagined, much less created.

For those of you who do recognize what lies ahead, you may have to make radical adjustments in the current way you do business. For others, you will need to stop what you are doing - immediately - and begin anew.

A successful strategy is not about trying to maintain the status quo, even if that were possible. ("If we want everything to remain as it is, it will be necessary for everything to change," wrote Italian author Giuseppe Tomasi Di Lampedusa.) A successful strategy is not about creating barriers to entry for would-be competitors. It's not about cutting costs to maintain a marginal price advantage. A successful strategy is about coming up with new ideas, about thinking creatively, about innovative actions that take nothing for granted.

As we enter the digital economy, we need to leave behind our 20th century logic and management tools and begin developing ones that will work in the 21st century. Where nothing is sacred, nothing is given, and technology will continue to evolve beyond anything we can imagine today.

A new business model: The digital value network

Don't be scared by the jargon. A digital value network (DVN) is really just a community of business partners and customers that is connected using information technology. But simply integrating your traditional supply chain by using information technology doesn't a DVN make. The players in a digital value network work together to maximize their combined value propositions for the benefit of the end consumers.

And - perhaps most importantly - a digital value network is a much more dynamic entity than a traditional supply chain. The relationships within a DVN are fluid - forming, disintegrating and reforming based on market dynamics and the whims of the consumer. Yesterday's supplier might be today's customer and tomorrow's competitor. Adam Brandenburger coined the term co-opetition to describe the win/win nature of these new business relationships in which elements of both cooperation and competition drive all players to produce ever increased value for their customers, consumers and shareholders. The one-for-all-and-all-for-one philosophy of the DVN is that the network will support the diverse business goals and decisions of all members (and, of course, all interested investors).

Digital value networks are enabled by the tight electronic linkages found in digital value chains - highly efficient business relationships that allow for synchronous executing of business processes across the extended enterprise. These electronic links are often made possible through the use of a standards-based technology platform that allows partners to executive a traditional business function in a digitally enhanced way. We call this a digital function platform (DFP).

There's also a new form of business intermediary that supports digital value networks - an infomediary. These new intermediaries provide a number of information-based functions that support the operation of the digital value network.

The appeal of the DVN model is that it will produce superior market valuations for companies that embrace it. Investors are understandably excited - but hard work is still ahead before the theoretical promise can be turned into a sustainable operational reality.

Components of a DVN

Since the advent of mass market retailing, manufacturers and vendors have made the most of their customers' buying decisions. Companies choose what consumer needs they will meet, what markets they will serve, what product and service configurations they will offer, and what prices to charge.

Being a consumer in the industrial era has thus generally meant accepting limited choices and accepting compromise, often settling for the best available option even if it isn't a perfect match.

One of the primary drivers of the digital economy is the rise of the empowered consumer. Consumer intelligence grows exponentially as more individuals interact as members of a community made possible through digital communications. We call it the "law of increasing knowledge," similar to the "law of increasing returns." As more consumers interact within a growing community, they attain more knowledge about the value-added aspect of products and services in the marketplace. Empowered by this knowledge, digital consumers have started making much more intelligent decisions about the products and services they buy.

We believe that consumers will increasingly demand additional simplicity, quality, customization, improved content and, especially, time savings from market offerings. The DVN relies on this consumer-centric approach to business.

Producers of products initially form a digital value chain to create a far more efficient, rapid and flexible version of the traditional supply chain (remember pipeline velocity?). The digital value chain by necessity involves participants from a spectrum of separate businesses. One or more of these participants may take on the role of an "anchor," much as a major retail establishment usually serves as the anchor in a shopping mall. The anchor in a digital value chain is the power player around which the digital value chain is organized and often optimized. For example, whereas a Nordstrom might be the anchor in a local shopping mall, Dell Computer is the anchor in a digital value chain for producing personal computers, workstations and servers.

A particular business might assume the role of an "anchor" based on a number of factors. It may be providing the major share of the value delivered to the consumer (as most people go to the mall for the major department stores, not the ancillary businesses), it may be the dominant supplier (Procter & Gamble controls the vast majority of the value chains through which its products flow), or it may be the owner of a product or a service that cannot be duplicated by any other participant in the value chain (Wal-Mart owns the physical retail outlet and the brand recognition that draws the consumer to its stores). In some cases, the benevolent anchor works to maximize value to all the participants within the digital value chain, but more often the anchor is focused on maximizing its own profits.

Dell is a classic example of an anchor; its particular digital value chain also includes component suppliers such as hard drive manufacturers, monitor manufacturers and the like, as well as R&D technology suppliers and after-sales support suppliers. As the anchor, Dell calls the shots, establishes the rules, decides on technologies, and, in this instance, owns the consumer relationship.

Value chains and supply chains are relatively familiar concepts. It's the digital aspect of digital value chains that is providing exciting new ways to create value and minimize costs. Just look at the transformation of the traditional supply chain of the automotive industry into a digital value chain. Traditional auto dealers incur big infrastructure costs to operate their businesses - leasing prime locations; maintaining large, expensive inventories; paying employee salaries and commissions, etc. - costs that were automatically assumed to be a permanently fixed overhead for doing business. Digital pioneers (like autobytel.com, CarPoint, etc.) use the Internet to create a digital value chain that not only reduces the costs associated with the traditional supply chain - no physical lots, no physical inventories, for starters - but have also made buying a new car a more pleasant experience for the consumer.

Digital function platform

Cross two digital value chains, and what do you get? A digital function platform (DFP). A digital function platform is simply a business service or technology platform that supports business processes across multiple value chains. Through a digital function platform, previously disconnected and autonomous value chains (e.g., the tire value chain and the headlight value chain) are able to collaborate and combine their offerings (e.g., create a car) more efficiently.

Digital function platforms can include a software package such as SAP or a turnkey business service such as Federal Express Powership. The common denominator in any DFP is that it is primarily digital in nature (and we don't mean using a fax machine); it can be applied across multiple value chains; and that it provides a new way for those value chains to efficiently cooperate and create value for the consumer.

The concept of a digital function platform is something of an artificial construct - a made-up thing. We've chosen to name it in order to highlight the dramatic way these new digitized platforms are greasing the wheels of the digital economy, and subsequently enabling the creation of digital value networks.

Things as basic as Microsoft Word, or the set of ANSI EDI standards, can be considered digital function platforms. When you need to exchange documents with another company efficiently - even a company in another value chain that you've never dealt with before - Microsoft Word provides a platform. In the not-so-distant past, such an exchange was infinitely complicated by myriad possible file formats, disk formats, applications and transmission alternatives.

Likewise, the standardization of communications protocols across the Internet enabled by ANSI EDI standards has resulted in immeasurable efficiency benefits for a broad number of people participating in innumerable value chains. At this level, the entire Internet can be considered the grand-unified digital function platform for the digital economy.

Although a digital function platform can be as simple as a shared file format, it can also be a much more sophisticated set of products and services. Increasingly we are seeing the creation of turnkey business services that are able to unite value chains in order to serve a variety of consumer industries.

The strength of a digital function platform lies in its cross-network integration, which allows it to take advantage of cross-country opportunities. By employing horizontal business networks, a digital function platform reduces cost and increases value for all stakeholders.

The new middleman - the infomediary

The word infomediary has been used to describe a wide range of companies and services in the digital economy. John Hagel and Marc Singer used the term in their book, "Net Worth," to describe companies that collect and manage access to consumer information. Many firms are now emerging to provide these intermediary services between consumers and the companies that want access to their information - primarily over the Internet.

Others used the term infomediary more broadly - to describe a whole host of services around the collection and dissemination of all sorts of information (not just consumer information). We use the term here in a broader sense: to describe a variety of information-based intermediary services.

An infomediary service can involve the collection, dissemination and control of a variety of types of information. It can also be any person or organization that facilitates the exchange of information between other parties - such as a company that matches buyers and sellers in an electronic market.

Much has been made of the recent trend toward disintermediation of traditional middlemen. As distribution channels have become flattened and companies have recognized the need to reach their customer directly rather than through third-party sales channels, many types of traditional middlemen have been struggling. But in the digital marketplace, there is a whole new set of services that must be provided to facilitate trade - services that previously were not possible or necessary.

What do we mean by this? Simply that buyers and sellers still need to find each other, exchange information and arrange for payment and delivery of goods and services. Some products and services still need to be aggregated or combined before they create a compelling offering for the consumer. The consumer still needs to become educated on products and services in ways that producers may not be able to provide. Someone still needs to establish a price that the consumer is willing to pay while maximizing profits. So if traditional middlemen are on the outs and the retail channel is being threatened by the Internet, who is going to provide these necessary functions? Why ... the new infomediaries of course.

Let's look at some of the specific types of roles that infomediaries perform to enable the operation of a digital value network.

* Integrating services and needs. The infomediary takes existing products and services and combines them to create a new offering that has a visibly higher value. For example, Add-a-Photo takes the electronic photo uploading capabilities provided by PhotoNet and integrates them with American Greetings' electronic cards to create a service that allows users to personalize on-line greeting cards with the photos of their choice.

* Aggregating services and needs. By gathering suppliers and buyers to a single virtual space, the infomediary leverages volume transactions. Freight forwarders are a good example of companies that take shipments of goods from many sources and bundle them to make the shipments more economical.

* Creating a "floating" pricing system based on supply and demand. Buyers and sellers can therefore shop for, trade, auction off or otherwise exchange products and payment in a dynamic online environment that reflects up-to-the-minute market conditions. Online auction houses like eBay are classic examples in this category, eBay facilitates an online auction so that individual buyers can bid on products from a broad range of sellers - products that span more than a thousand categories.

Some infomediaries may elect to organize the demand side (or buyers of a product or service) within a DVN; others may elect to organize the supply side, or sellers in the network. For example, Amazon.com and Computer ESP have chosen to focus on the needs of the buyers; while companies such as Fast-Parts, NetMarket and CUC International concentrate on helping the sellers in their market niches. Still another model brings together several specialized infomediaries under one umbrella. For example, the online service AOL is in a sense a super-infomediary, providing subscribers with a portal to a great many specialized infomediaries.

A digital value network, therefore, combines these elements - digital value chains, a digital function platform, related infomediaries and, of course, the consumer - into an integrated whole. Together, these participants in the network act in ways that benefit all members of the network in ways that previously would not have been possible.

It's important also to understand that any of the digital components used to create a given DVN might also be used to create other DVNs. For example, Amazon.com's digital function platform was built to help purchasers locate and select books; but it turned out that the online bookseller's chief value had nothing to do with books per se. If tomorrow there were no books to be sold, Amazon could take the same business model, apply it to some other kind of product and still be successful, because the service it provides is based on information. A whole new DVN could be created in, say, wine retailing, quite easily.

To date, only a few companies have moved from possessing a traditional supply chain to becoming part of a digital value chain, onto the ultimate step of forming a digital value network.

There is ample evidence to suggest that early forms of DVNs are emerging, most based upon early EDI private networks, but some rallying around Internet-based infomediaries such as AOL and eBay. We believe, from some of these early attempts, that DVN pioneers can expect superior investment returns virtually every step of the way. However, these early experiences also suggest that commercial success does not necessarily start with copycat maneuvers.

Moreover, premature attempts to launch a DVN could, in fact, be a recipe for disaster - especially if the basic infrastructure requirements for success are not yet in place. Companies must begin by thoroughly understanding the building blocks essential to success in basic electronic commerce. Each step taken should improve the firm's ability to deliver value to its customers; each step must also pass a hard-headed test to make sure it helps the overall business (there are many things that your customers would love, but which would send you to bankruptcy court).

A successful DVN therefore must be carefully crafted by adopting an evolutionary strategy. Gain experience in the market, assemble allies, build relationships and enhance your electronic business capabilities in stages. An evolutionary strategy, however, does not mean going slowly. It, in fact, requires a great deal of speed. A successful DVN requires bringing together many participating entities, each with its own mature set of capabilities, and doing so as quickly as possible.

Beginning the DVN journey

A digital value network (DVN) isn't created overnight, and you can't put the business on hold while you fill the whiteboards with your "master plan." Moving from business as usual to a digital value network can and must be done in a way that supports and enhances your current business model while moving you incrementally in the right direction.

The first step to move properly into electronic commerce is to design a customized entry strategy based on your particular industry. For example:

* Manufacturers should begin by setting up a digital value chain that in the short term will help reduce costs and improve efficiencies. In the long term, of course, you should continue adding capabilities that enhance the value you offer to your partner companies in the value chain. This is a starting point, from which the goal should be to grow into a true digital value network.

One major chemical company is in the process of doing this by implementing a system in which storage capacity levels are rapidly communicated via satellite to headquarters. This sets up a replenishment schedule, and then electronically sends the information to a trucking company, which ties the information into a routing schedule letting the trucks know where to go and when. The company's ultimate goal is to extend from this starting point into a DVN capable of interacting with customers, suppliers and technical experts around the globe.

* Traditional wholesalers, distributors and retailers need to begin by staving off the risk of disintermediation (being eliminated). Specifically, they can protect their positions in existing supply chains and value chains by setting up a digital function platform (DFP) that leverages the business' value-adding capabilities and anchors the business in multiple value chains. For example, automotive dealerships could leverage their position as parts distributors by offering more products and services to repair shops, end consumers and after-market automotive performance stores that complement their existing product and service portfolio.

After successfully building this initial DFP, an ambitious organization could grow into a true digital value network with links to manufacturers and designers, providing an enhanced ability to develop customized products.

By initially setting up the digital function platform that conforms most closely to today's business environment, companies increase the likelihood of success and position themselves for future growth.

* Current intermediaries must concentrate on initiating infomediary services associated with their current offerings, customers and brands. The goal is to exploit the value of existing activities by extending them to this new digital realm. Care must be taken, however, to ensure that the necessary digital function platforms are in place. For example, EDS and InterWorld are developing an infomediary service for the Hong Kong Harbor that will facilitate data sharing among all shippers, exporters and manufacturers who use the harbor - a potential market of 230,000 companies. As the system evolves, these companies will become electronically (and strategically) linked to other essential services, such as ground support.

Douglas F. Aldrich is vice president and managing director, global strategic information technology practice, A.T. Kearney, Dallas, Texas.

Excerpted from "Mastering the Digital Marketplace." Copyright[C] 1999 by A.T. Kearney, Inc. Excerpted with permission of the publisher John Wiley & Sons, Inc. This book is available at all bookstores, online booksellers and from the Wiley website at www.wiley.com, or call 1-800-225-5945.
COPYRIGHT 1999 MacFadden Communications Group LLC
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1999 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes related articles on digital value chains
Comment:Mastering the digital marketplace.(includes related articles on digital value chains)
Author:Aldrich, Douglas F.
Publication:Grocery Headquarters
Geographic Code:1USA
Date:Sep 1, 1999
Words:3397
Previous Article:Managing diversity.
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