The Net Economy Roland BergerHaniel Management ConferenceDuisburg, September 2, 1999Roland Berger & Partner GmbH – International Management ConsultantsBarcelona – Beijing – Berlin – Brussels – Bucharest – Budapest – Buenos Aires – Delhi – Detroit – Düsseldorf – Frankfurt – Hamburg – Kiev – Kuala Lumpur – LisbonLondon – Madrid – Milan – Moscow – Munich – New York – Paris – Prague – Riga – Rome – São Paulo – Shanghai – Stuttgart – Tokyo – Vienna – Zurich- 1 -
and development of the net economy© Roland Berger & Partners 1999- 2 -
transformation from industrial to information/knowledge/service features➨Industrial employment declines from >30% to <20%➨Information/knowledge/service-driven employment and valuecreation➨Corporations and “employees” work in increasingly virtual, networkedforms of organization➨Information technology and e-technologies determine value addedprocesses/productivity in industry and service companies➨Both on an internal basis and toward customers/suppliers, (global)industries and service providers are setting up networked structures- 3 -
2. Europe: On the path to the knowledge/information/service society ...Volume of workWest Germany [million hours]56,083VolumeEmploy-51,770of workment4,259State47,00846,092Priv. services5,5686,865- %+ %43,6106,5967,0706,754+ %+ %6,27010,293Trade/8,520transport9,34210,150+ %+ %12,7608,7628,49326,099Secondary- %+ %8,500sector24,62920,12218,155- %- %14,680Primary8,5695,1593,010sector2,067- %- %1,40019601970198019901998USA ahead in structural change: Now only <20% in manufacturing!Source: IAB, Roland Berger & Partners calculations- 4 -
3. … and to virtual employment structuresStandard / non-standard employment relationshipsWest Germany 1970-1996 [%]%%exclusively in %%low-paid %%%Short-time workers and %%on job-creation schemesPart-time workers subject %social insuranceWorkers on %%%%dependent employment197019751980198519901996➨Institutions/companies virtually networked internally/mutually➨People “entrepreneurs of their skills”Source: IWG- 5 -
business far ahead of “old” industries interms of productivityProductivity (sales per employee)US 1998 [US$]309,000244,000218,000160,000AutomotiveE-commerceSoftware Hardware industryproducersproducers(retailers)➨ Decline in the traditional automotive industry: 27-48%Source: CREC/University of Texas- 6 -
“cost of distance” via e-technologiesCost of call minutes for OECD/Kilometer costs on a flight/Avg. cost of Pentium processor/international callspassenger kilometersper capita computer spread in EU[1991 = 100][1991 = 100][1992 = 100]265197178Passenger km179168PC spread217158International calls162146147181139137132127115145110100117100109100100TC costs9492100Cost of kmPrice of processor1007995859275817178766979777274587365549192939495969798919293949596979892939495969798Source: ITU, EITO , Roland Berger & Partners analyses- 7 -
sustainable, constant and irreversible trendstoward the net economy demand a newstrategic and operative focus- 8 -
1. New e-basic technologies as drivers of change The Internet The e-network technologies e-commerce technologiesare proliferating globally at breakneck speed➨Number of web transactions doubles every 100 days (!!!),200 m subscribers today➨Number of networked computers up from 150 m in 1999 to1 bn in 2004 (x 7 !!!)➨Global sales via e-commerce: US$ to trillion in 2003(x 20 !!!)Source: Intel, AC, Forrester, Dataquest, Roland Berger & Partners analysis- 9 -
2. The scope and growth of the net economyValue added by industryUS 1998 [US$ bn]>450>350>300270223EnergyTelecomsInternetAutomotiveInterneteconomy industryeconomy19981999➨ Avg. growth . 1995/98 +%➨ Europe is rapidly catching upSource: CREC / University of Texas- 10 -
3. Seven new economic rules determine the net economy➨Growing instead of falling scale returnsThe “value” of networks increases exponentially with the number ofparticipants➨Virtual value-added structures rather than company size and verticalintegration➨Mass (segment) marketing replaced by "segment-of-one marketing"➨“Imperfect” markets are turning into “perfect”, transparent markets➨Many industries organized along stock market principles- 11 -
➨Assets which may not be capitalized, such as and know-how, generatevalue as drivers of economies of scale and scope➨Share-financed mergers accelerate growth in market share (shareholdervalue!)➨The global market is becoming the “relevant market”Only the world market is large enough to allow network and e-technologyinnovations and capacities to be recouped- 12 -
4. Two factors for operative success for companies inthe net economy1) Knowledge / intellectual capital➨ The scarce commodity2) Client base➨ The market entry barrierTraditional assets – real estate, machines, raw materials – arebecoming increasingly insignificant for growth, returns and corporatevalueThe stock exchange revalued corporations long ago:➨ Microsoft x General Electric- 13 -
5. The four value drivers for companies in the net economy1)Speed➨The competitive tool2)Capital market access (shareholder value)➨The growth currency3)Content (utility, solutions, ideas)➨The creator of value added via the fixed cost commodity network4)Global market and value-added presence➨The relevant geographic dimension of(virtually networked) economic activity- 14 -
the new net economy, all players in the value-addedprocess need to be able to change at a speed faster thanever before ➨ danger of substitution!➨Companies in all branches of the economy➨Large, well-established companies➨The “Mittelstand”➨Start-ups➨Public administration➨Individual employeesThe yardstick: “Faster, better, cheaper!!!”The alternative: “Be among the innovators/drivers or retire”- 15 -
-commerce – a key area in the net economy- 16 -
-commerce – the new reality of the net economy- 17 -
-commerce accounts for almost half of US InternetbusinessInternet business in the USCenters and segmentationBostonSeattleNew %(retail)%Silicon %Source: CREC/University of Texas- 18 -
-commerce: The net economy’s growth driverE-commerce volumesUS [US$ bn]+62% ,65914819982003Source: Forrester- 19 -
Significantly declining costs are driving Internet usageCost of Internet usage in GermanyCheaper terminalsInternet accessPlummeting TC costs[DM] [DM/month][Pfennig/minute]-70%-100%-60%,-358FullyequippedInternet300.-1-3PCInternet0console199920021999200219992002Dramatic reduction ofNo separateRapidly decliningsystem costscost of accessTC costsSource: Roland Berger & Partners- 20 -
-commerce: New rules of the gameFuturePresentNewbusinessmodelNewPastefficiencydriverNewsalesNewchannelmarketingtoolEvolutionRevolution- 21 -
E-commerce changes/is a substitute for numerousbusiness modelsTechnologyMarketing/sales applications innovative sales channel Internet/intranet/extranet Data warehouse One-to-one marketing Data-mining Cross-sellingDramatic Supply chain softwarechange of Computer telephony integration Procurement market platformtraditional Kiosk systemsbusiness models Build-to-order Virtual reality Value-added services Mobile Internet . . . Communities of interestSource: Roland Berger & Partners- 22 -
economy: Focus on customers rather thanproducts via e-commerceTraditional economyNet economyCompetitionCompetitionfor productsfor customersParadigm shift➨ The customer defines products/services- 23 -
the main e-commerce marketof the years to come- 24 -
in 5 years >93% of the e-commerce market inthe USE-commerce by segmentUS 2003 (forecast) [%]US$ 1,659 bnB2C6,5%B2B (services)13,3%80,2%B2B (goods)➨ And the highest growth (>80% .)Source: Forrester- 25 -
the field of B2B, there are four basic businessmodels used in practice12RetailerBrokermodelmodelBusiness-to-businesse-commercebusiness models34Marketplace traderCommunity-buildermodelmodel➨ Differentiation by source of income and type of income- 26 -
e-commerce retailer sells goods and servicesdirect to customers – income via marginThe retailer business modelDiagramFeatures Sale of goods and services direct tocustomers/ consumersEUR Profit generated via margin: Dependent onSupplierPurchaseAnbietersales input and sales achievedSales of goods/services Simple relationship between provider andcustomer, no third parties involvedMain business relationshipRevenue stream Examples: , ,Owner of the business , - 27 -
: Limits himself to arranging deals betweencustomers and providers of goods and servicesThe broker business modelDiagramFeatures Arrangement of deals between customersand providers of goods and services,sometimes in his own nameBrokerEUREUR Profit generated via commission (sales-Sales ofrelated) and fees (transaction-related), bothgoods/serviceslirrASnubpieptleierrPurchasefrom customers and providers (dependingon the business model) Generally no third parties involvedMain business relationship Examples: , pricescan, ebay, streamOwner of the business model- 28 -
marketplace provider establishes a virtualshopping mall and offers additional servicesThe marketplace provider business modelDiagramFeatures Provision of a virtual shopping mall, inwhich providers sell their goods and servicesSupplierPurchase Profit generated via rental charges, feesEUREURMarketplace(transaction-related) and commissionAnbieterprovider(sales-related)EUREUR Offer of additional services and guarantees,. payment handling, logistics, detailedmaterials commissioning, business relationship Examples: , streamOwner of the business model- 29 -
builder: Builds up a demand-orientednet societyThe community-builder business modelDiagramFeatures Build-up of a society with mutual interests, inwhich the customer is offered information,Sale of goods/goods and services on a certain topicrrMemberMemberservices(slir)(cs➨tr)The aim is to encourage the customer to(supplier)(customer)establish a relationship with the societyEURCommunityEURwhich amounts to more than just buyingbuildergoods or servicesrMember Profit generated via commission, fees,rental charges and one-off payments byintegrated providers and third partiesMain business relationshipRevenue stream Examples: , ,Owner of the business (partially)- 30 -
key success factors fore-commerce in the net economy(Roland Berger study)- 31 -
Six key success factors in e-commerceStrategy levelStrategicorientationInte-Integration levelgrationPartner-of businessshipsprocessesWebsiteFunction-levelContentMarketingality(customer side)- 32 -
: Being "first mover" is today of moreadvantage than a well-positioned brandTurnover Barnes & Noble/-99 [US$ m] Went into internet Not a name, but first is theno. 1 "brand" for116online orders87663832282616161179302Q1Q2Q3Q4Q1Q2Q3Q4Q1199719981999➨➨ SpeedSource: Morgan Stanley Dean Witter- 33 -
: German Top 15 do not use it asintensively as international best-practice companiesUsage of database marketing tRB study[%] iTop 15Best practice()(Iil)(Germany)(International)No10%Yes45%55%No90%YesSource: Roland Berger & Partners- 34 -
: Cisco's “front end” is consistently basedupon Internet functionalitiesCisco: e-based front endExampleCustomer61OnlineTechnical supportconfigurationonlineiBusinessOrder52lstatusmodelDeliveryOnline order43ProductionBuild-to-planningorder 75% of all orders come via the Internet 60% cost advantages because of technical support viaInternetlResults 90% cost advantages because of software downloadsvia the InternetSource: Roland Berger & Partners- 35 -
: Dell has shortened throughput timesthanks to e-based process integrationInformationsystems- 36 -
: is on its way to becomingan "omni-store" strategy 199935% stake in Home 18. 5. (food supplier)Acquisition of 26. 4.(book and music memorabilia)Acquisition of 12. 4.(live auctions)50% stake in 29. 3.(pet products)Stake in 24. 2.(health products)➨ /➨ Growing sales/client- 37 -
: Reuters has a strategic approach towardthe InternetExampleReuters: Steps of the Internet strategy-/ 1996-19981998/1999Next stepStakes in InternetEstablishing own services in theEntering thestart-ups:internete-commerce business Yahoo! E-delivery of news services Services and soft- Infoseek New web-based products forware for e-brokers US Web Sportslinespecific target groupsand companytreasurers➨Strategic goal➨Strategic goalGain understanding of Opening-up new clientInternet processessegments (. back offices ofand technologybanks) Making services cheaper➨1998 sale of shares➨Reuters today biggest newsagency on the InternetSource: Morgan Stanley Dean Witter- 38 -
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1The net economy is replacing the industrial economy➨In terms of size, growth, value creation and employment➨Via new economic rules➨And new success factors➨And new value drivers2Europe is 2 to 3 years behind the US net economy➨ Are we catching up?- 40 -
3E-commerce is one of the key areas of the net economy withhigh growth rates and substitution potential➨B2B is a top segment4Six key success factors in e-commerce➨Content➨Marketing (one-to-one)➨Functionality (customer interface)➨Process integration➨Partnerships/alliances➨Strategy/top-management attention- 41 -
The net economy: A fourth growth wave for HanielPer capita GDPt1999- 42 -
