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Ready Or Not, the On-Line Revo Hits Asia

Ready Or Not, the On-Line Revo Hits Asia

There are still many executives in Asia who feel that perhaps, just perhaps, the Internet won't affect their business.

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Ready Or Not, the On-Line Revo Hits Asia
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There are still many executives in Asia who feel that perhaps, just perhaps, the Internet won't affect their business. They are dumbfounded that Amazon.com could already have the market capitalization it took Walmart 27 years to achieve, that eBay trades at over 300 times its revenue per share. But they're pretty sure it's got nothing to do with them.

They're wrong. Asian businesses would be foolish to think that they don't have to respond.

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Even a small amount of Internet in your industry will have a large impact. Consider a parallel from retail. In the late 1980s, so-called "big box" retailers emerged in the U.S. in a number of product categories historically dominated by distributors and small retailers (e.g., office supplies, building products, video rentals). These new large format stores were small in terms of industry volume, but they immediately had a severe impact on the margin structure of the entire industry. While companies like Home Depot, Blockbuster and Staples gained share, the overall profitability of the category — the total pool of profits available to all competitors — resettled at a lower level.

The Internet is the new business model of the generation, and it's already having a similar effect. Dell is extending its low cost, direct-to-the-customer model to sell $6 billion of personal computers from its Webstore this year. FreePC.com, Buy.com and others like them have started to give away PCs for free, hoping to offset their costs with media revenue. Faced with these changes, how can market leader Compaq, with its higher cost multi-tier distribution system, respond? Any attempts to sell over the Web bring it into head-on conflict with its channel partners.

It's a similar story in retail brokerage. There are now over 7.5 million on-line brokerage accounts in the U.S., up from less than 1 million in 1995. The Internet brokers like Charles Schwab, Fidelity, Waterhouse and Etrade account for 13% of all brokerage trades. In anticipation of similar growth here, there are now an incredible 75 Internet brokerages open for business in Asia. Their entry and growth has already caused a major redrawing of the industry profit pool: although trade volume and revenue grew by around 20% in 1998 versus 1997, total profit dollars declined 17%.

Many Asian companies will feel the impact of the Internet first in the supply chains they are a part of. For the U.S. and European companies who source from Asia, the building of `Extranets' and virtual trading companies with their suppliers is becoming commonplace. If the Asian companies can't offer the on-line service their trading partners expect, they risk losing the business.

You can also assume that the forecasts for E-commerce in Asia are understated. IDC currently projects $15 billion of E-commerce in Asia (excluding Japan) in 2002. Recent estimates for Japan range from $58 billion to $115 billion in 2003. These forecasts probably fail to take into account market characteristics in Asia that are particularly well suited to the Internet and E-commerce. High real estate costs, a traditional cost burden in Asian retail markets, are often irrelevant in E-world. Asia also has some of the least efficient multi-step distribution systems in the world. The Internet will simply eliminate many of the time zone, distance, currency, language and tariff complexities that clog the wheels of business in Asia.

At the same time, the Internet is hitting Asia in the midst of a telecoms and a personal computing revolution. The telcos are reducing access costs precipitously. The PC companies have moved past "multi-media" to "Internet-ready" as their rallying cry for new users. Of the 80 million installed PCs and network computers in Asia in 2002, at least 50 million are expected to have Internet access, with over 35 million users actually surfing.

What should you do? Here are three suggestions:

— This is not your chief information officer's problem. The Internet opportunity is large enough and complex enough for most businesses that it should be on the CEO or general manager's list of top priorities. Your IT department may provide the technical skills to put up and manage a site (although many of these functions can also be outsourced) but it is content and navigability that differentiate a site, and these are issues of sales, marketing, customer management and supplier relationships.

— Before you act, develop a basic strategy. At the simplest level, the Internet can either allow you to extend your current business or to enter a new business.

Extending your current business might mean creating a new way for existing customers to buy your products: for example, for Gateway, "rather than phone, order directly from the Webstore"; or for Citibank "rather than come to a branch, manage your account from the Website." In both cases, the companies will derive advantage from the fact that it should be lower cost for them to serve a customer over the Internet.

Extending your business can also mean offering customers other kinds of benefits that tie them more closely to you. Service and technical support, product information, customized offers, special pricing — all these can be provided from your Web site.

The Internet can also help companies to enter new categories or businesses. Barnes & Noble is a bookshop, but its Webstore has allowed it to build a substantial gift business. Dell is a PC company, but the recently launched gigabuys.com webstore, with 30,000 products in hardware, software, computers and accessories, puts it squarely into the electronics business. Intuit's personal financial planning and tax preparation software product, Quicken, extended into the Internet and the company has become a major home mortgage originator.

Companies can make these transitions because, in the confusion of E-world, brands matter. Most businesses and consumers don't care to understand the SSL encryption technology that enables E-commerce: they do care to deal with a company whose name they know and trust. This puts the successful early movers at an advantage in the evolving global competition.

— Demand results. This may sound surprising in a world where so many leaders have negative earnings. Results mean achieving what you set out to achieve: revenues, operating income, visits to your website, lower costs per transaction, web site awareness or other metrics that make sense for your business. Whatever your goals, you needn't allow the activities of your E-people to go unmeasured.

The future of E-commerce in Asia is very bright. But many Asian businesses are behind in developing their approach to the Internet. This matters for defensive reasons: a competitor, even a small one from the other side of the world, who has a winning Internet strategy, can impact margins for all industry participants. And it matters for offensive reasons because E-commerce is coming to your industry and early movers have the chance to capture a disproportionate share of future profits. The turbulence in E-world means that three years from now some of the leaders will be companies we haven't yet heard of, or at least don't associate with the Internet today. The challenge is to make one of those companies yours.

Mr. Root is a vice president at Bain & Company Hong Kong

Copyright, 1999 Dow Jones & Company, Inc. All Rights Reserved.

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