| HUB AND SPOKES | | | | 4. The consumer's need to judge legitimacy. Is |
| AS A NEW BUSINESS STRUCTURENatural | | | | this person and company reliable or am I being |
| market forces that lead to consolidation and the | | | | sold snake oil?For the most part, the Internet has |
| law of twos happen even faster on the Internet. | | | | quickly done away with each one of these |
| The "best" products are anointed, information is | | | | obstacles and offers added benefits as well: |
| rapidly distributed, and customers (who face no | | | | When a medium can fully explain or show how a |
| geographic limits) seek out these "hot" places. | | | | product works, then a large portion of the |
| Moreover, as brands become familiar, consumers | | | | product's sales typically shifts from agents to |
| increasingly seek them out because they have | | | | direct sales by manufacturers or suppliers.The |
| credibility.Unique to the Web is something which | | | | Internet has a unique capability (interactivity |
| may be called a "hub-and-spoke strategy" . This | | | | combined with a low-cost avenue for |
| also facilitates the law of twos: A hub-and-spoke | | | | communications) to make complex items such as |
| strategy is the increasingly common arrangement | | | | financial products comprehensible. Because of the |
| where a major retailer establishes relationships | | | | Internet's ability to filter, the consumer is |
| with other Web sites, promising them a | | | | presented with information directly relevant to his |
| percentage of any sales (generally 5 to 15 | | | | or her situation and therefore avoids wading |
| percent) that result from any traffic sent to the | | | | through a stack of folders and brochures. A |
| retailer by these "affiliates." It's not uncommon for | | | | well-designed site can explain all of the product |
| a major affiliate program to have over 10,000 | | | | features and benefits of whole life insurance |
| participating members, all of whom refer traffic to | | | | policies and annuities. As a result, these products |
| the central site. What's even more interesting is | | | | can now be sold directly by their providers over |
| the extent to which this type of business model is | | | | the Web, since agents are no longer needed to |
| proliferating: Refer-it is a site that lists credible | | | | explain the products.Time and Self-Generated |
| affiliate programs for prospective members. As | | | | Recommendations In addition to making the |
| we go to press, it is approaching 500 distinct | | | | complex clear and comprehensible, the Web |
| plans.The Internet is already taking its place as a | | | | saves customers time. In essence, this represents |
| central tool in everyday business life. Each aspect | | | | a system that employs interactive tools to both |
| of commerce is changing in light of the new | | | | explain the product and recommend what |
| capabilities available. The coming changes are so | | | | consumers should purchase. |
| powerful that it is both terrifying and exciting. The | | | | Convenience The convenience offered by the |
| first phase of Internet business has principally | | | | Internet is also a factor that will further the shift |
| focused on the creation of new types of | | | | to direct sales. Everyone with Internet access can |
| businesses: The next phase will involve the impact | | | | now shop for products and services at any time |
| of these developments on brick-and-mortar | | | | that's convenient without prior research or |
| businesses and on the economy as a whole.The | | | | preparation. As a result, the "preparation |
| new capabilities that the Internet makes available | | | | impediment" to direct shopping is removed. |
| for business-to-business commerce and for | | | | Large chains with inefficient operations or those |
| business-to-consumer sales will transform many | | | | saddled with the high overhead costs related to |
| industries from top to bottom. Winning companies | | | | maintaining a brick-and-mortar business will face |
| will understand that in the emerging era success | | | | price pressure that could well endanger their |
| now requires new rules for action and the | | | | ongoing operations.CHANGING THE SALES CHAIN: |
| mastery by the organization of different types of | | | | CHANNEL CONFLICTHistorically, consumer product |
| skills.Questions may arise on what the future will | | | | businesses have operated with a well-defined |
| look like: "Will my business be helped or hurt?" | | | | chain of sales:Making the transition from selling |
| "What should I do to survive?" Until recently, the | | | | through a middleman to selling direct (channel |
| pace of change has been so great that attempts | | | | conflict) is a troubling issue many businesses are |
| at answering these questions were often | | | | wrestling with right now. On the one hand, |
| unsatisfying.Elements that will play a central role in | | | | retailers naturally become "unhappy" with |
| how the Internet economy evolves. These | | | | manufacturers who, in their view, go around them |
| elements have the potential to greatly harm our | | | | and directly to the consumer with a lower price. |
| economy or to power us into prosperity for the | | | | On the other hand, the manufacturer may |
| twenty-first century. The best way to discuss | | | | observe cost-advantaged direct sellers who, |
| these ideas is to provide two contrasting visions | | | | because of lower prices as a result of lower |
| of the future: | | | | distribution costs, are winning business and market |
| The Potential Downside of Internet Growth More | | | | share. In addition, a company may have its entire |
| than any other aspect of the Internet, shopping | | | | sales force dedicated to selling through the retail |
| "bots," software that searches the entire | | | | channel.Right now channel conflict is probably the |
| Internet for products and services based on | | | | most difficult, vexing problem faced by companies |
| predefined criteria (price being the most popular), | | | | in this hypercompetitive environment |
| have the capacity to offer great benefit to | | | | The problem of channel conflict is a central |
| consumers while potentially bringing great harm to | | | | reason the PC business is an industry on a high |
| businesses. | | | | wire. If everyone in an industry moves through |
| Today the major Internet portals, include Google | | | | retailers, there is a fairly defined set of |
| , Yahoo and MSN , all have shopping initiatives with | | | | competitive rules. However, it is absolutely |
| participating retailers that are, at least in part, | | | | predictable that if direct selling makes sense, then |
| powered by bots (also called "intelligent software | | | | someone will enter the market. It may even be a |
| shopping agents"). A visit to will reveal that there | | | | brash upstart with no roots in the retail distribution |
| are already over many easy-to-use bots that are | | | | business. For the PC industry, that upstart was |
| available for businesses and consumers. Each bot | | | | Dell.At some point PC owners compared notes |
| typically has a specialized function, ranging from | | | | about where they had purchased their computers |
| financial bots that perform stock-related functions | | | | and what they had paid, "I ordered it direct from |
| to news-gathering bots to auction-related | | | | Dell" became a frequently heard report, and |
| bots.The more businesses and consumers rely on | | | | before long Compaq and IBM realized they had a |
| price as the sole criterion for purchase, the more | | | | problem.. What was Dell doing right, that these |
| price pressure every manufacturer and retailer will | | | | other manufacturers had missed?The increasing |
| feel. Bots that search for the best price have the | | | | popularity of the Internet meshed perfectly with |
| potential to trigger ruinous price wars. At some | | | | Dell's sales model of selling computers direct to |
| point, price wars can ruin industries or set back | | | | customers. On the Web, customers could visit |
| their development by several years through lack | | | | Dell's site, decide what they wanted, see images |
| of funds for investment in new and better | | | | (something that wasn't possible over the phone), |
| services. To me, this is the frightening downside | | | | and place a direct order. Since Dell had no |
| of a world where customers can buy from | | | | inventory tied up in a retail sales channel, the |
| anywhere and essentially name their price.The | | | | company had an estimated cost advantage of 10 |
| Internet is already demonstrating some of this | | | | to 15 percent over its competitors who sold |
| behavior. At this time, we are witnessing deep | | | | through retail stores. |
| discounting on the part of large Internet retailers | | | | Moreover, Dell could react instantly to changes in |
| to attract customers. For ongoing businesses, this | | | | consumer-buying patterns.Dell's lower-cost |
| type of discounting is unlikely to be sustainable.The | | | | Internet-oriented methods created chaos |
| pace of change in the past year has been so | | | | throughout the PC industry-chaos that continues |
| incredible that a growing population-from | | | | to this day. Using their own brands, retailers now |
| executives to retirees-feel they have more than | | | | actively compete with everyone, including their |
| passing familiarity with the Internet. However, this | | | | suppliers. While Compaq and IBM both developed |
| newly claimed "knowledge" of Web sites and | | | | innovative techniques that permitted them to |
| portals and e-mail techniques belies the fact that | | | | lower costs and deliver custom PCs through |
| the Internet is still so new that there are no rules | | | | retailers, Dell continued to gain market share and |
| for "play."Internet services, including comparison | | | | grow in profitability. |
| services, software agents such as bots, and new | | | | The importance of this issue cannot be |
| digital middlemen, enable easier access to | | | | overstated. |
| information and, as a result, fundamentally change | | | | Keep in mind that if existing companies don't |
| the competitive battleground.Stores that pitted | | | | grasp opportunities, others will.."It may take years |
| themselves against each other generally rose to | | | | for an industry to be turned on its head by direct |
| the occasion and even employed "comparison | | | | sales, but product manufacturers need to plan for |
| shoppers," who cruised the aisles of competitors, | | | | that eventuality. For example, one could argue |
| reporting on pricing so that the store owner could | | | | that record labels would Never sell directly online-a |
| price competitively. And signs touting "We'll Beat | | | | move that would effectively go around online |
| Anyone's Prices" covered any store that wanted | | | | music stores, not to mention brick-and-mortar |
| to preserve business no matter what.The | | | | music stores. Never assume that lower-cost |
| Internet radically changes this dynamic. Not only | | | | direct distribution won't happen because of channel |
| can consumers move easily from one Web site | | | | conflict.TWO GUARANTEED BENEFITS THAT |
| to another, checking out the products and | | | | ARE CHANGING COMPANIES INTERNALLY: |
| services at each, but many Internet services are | | | | INSTANT COMMUNICATIONS AND LOWER |
| specifically designed to promote comparisons | | | | COMPANY COSTSBy seamlessly linking people |
| among products or services within a category, | | | | and entities around the world, the Internet can |
| and another growing class of businesses-digital age | | | | accelerate the speed of new product |
| middlemen-are actively working to create bidding | | | | development and introduction while lowering the |
| situations among several suppliers that lead to | | | | cost of operations throughout the enterprise. |
| lower prices for consumers and businesses. These | | | | The Web offers a whole new way of setting up |
| new classes of Web sites raise the stakes | | | | a business. If a company were never to sell a |
| throughout an industry. Competition takes two | | | | single "widget" online, it would still be worth |
| forms: between manufacturers or service | | | | mounting a Web strategy.The Internet permits |
| providers -for the product or service to be | | | | companies to cut costs through seamless, |
| purchased-and between "stores" as the place to | | | | automated communications both within the |
| purchase.Companies now operate in a world | | | | company (intranets) and with the company's |
| where comparison shop- | | | | suppliers (extranets). Moreover, these |
| ping is almost effortless, geographic boundaries | | | | communication systems can dramatically lessen |
| are eliminated, and the pace of activity is far | | | | the time involved to produce specific products |
| faster.WHAT HAPPENS IN THE MARKETPLACEIn | | | | because various departments and outside |
| the online environment, anyone offering a | | | | suppliers can communicate automatically. |
| particular product competes with everyone else | | | | Strategies 2, "Speed Is Everything," and 3, "Cut |
| offering that product or something similar. On any | | | | Costs and Increase Efficiency Using the Web," |
| given day, a customer may be able to locate | | | | detail many of the ways companies are benefiting |
| several - or several hundred-online stores selling | | | | by using the Web. As companies are striving to |
| what he or she wants, and the customer can | | | | compete in the emerging environment, they must |
| then determine from which vendor to purchase | | | | also grapple with competitors who have put these |
| the item. A recent search using a comparison | | | | new technologies to work: for faster and lower |
| service such as Froogle identified that a specific | | | | cost operations, for increasing the speed of their |
| HP All-In-One Multifunction printer was available | | | | product development and deployment, and to |
| from 57 different stores from $ 57 to $ 170 | | | | more effectively manage a worldwide sales force |
| .Bots, the comparison services, and the new digital | | | | at lower costs.FOUR MORE REASONS WHY THE |
| age middlemen can all work in a variety of ways. | | | | INTERNET UPSETS THE APPLECARTThe Internet |
| Some comparison services are operated by | | | | is creating fundamental widespread changes in the |
| retailers; the site generally posts information on | | | | world of business. Comparison shopping, the |
| how specific products sold by the store compare | | | | breakdown of geographic boundaries, the increase |
| in price and quality with the competition. Other | | | | in direct sales, the reduction in costs, and the |
| services are stand-alone Web-based businesses | | | | incessant need for speed-all as a result of the |
| offering comparisons among a variety of | | | | Internet-have led to vast changes. But there are |
| manufacturers.Bots (Intelligent Software Shopping | | | | still more ways in which the Internet is affecting |
| Agents)Today Product Finder, along with hundreds | | | | businesses of all types. At this point, your industry |
| of other "bot" services that are now on the Web, | | | | may be affected by one or all of the changes |
| is still in its infancy. However, it has already | | | | discussed; very few businesses aren't affected at |
| stimulated the creation of sites that feature | | | | all, and if you're in this minute minority, prepare |
| comparison shopping facts, and I guarantee that | | | | anyway. The tsunami is coming. |
| these bots will play a role in changing the future | | | | /. The Internet facilitates the sale of personalized |
| of commerce.Sites Offering Price ComparisonOn | | | | products.Consumers' desire for customized |
| the Web, competition for customers is fierce. | | | | products has been well documented over the |
| Because bots can shop the Web for a customer, | | | | past several years. Who wouldn't want something |
| companies have been forced to design their Web | | | | made exactly for them? Similarly, businesses |
| sites with comparison shopping in mind. The Net | | | | have always needed custom configurations-which |
| has facilitated explosive growth of comparison | | | | were presented in paper-based orders. In recent |
| services that stretch across the full spectrum of | | | | years, the ability to manufacture |
| products and services. It's impossible to even | | | | mass-customized products, at acceptable costs, |
| estimate how many exist today and new | | | | has been developed. The Internet provides the |
| services-for unserved categories or with better | | | | missing piece: the perfect sales channel.The very |
| features in categories that already have such | | | | nature of the Web makes it an ideal mechanism |
| services-are constantly popping up: | | | | for custom-based orders. Buyers-whether |
| New digital age middlemen only intensify the | | | | consumers or businesses - can see pictures or |
| competition . | | | | illustrations of the components via the Internet, |
| Digital Age MiddlemenAn additional factor in the | | | | and the order specifications can often be tied |
| spread of Hyper Wars is the emergence of a | | | | directly to an automated system that checks |
| new kind of business, "digital age middlemen This | | | | accuracy, with the site saying, in effect, "Yes, |
| broad range of entities may share one or more | | | | feature A can be added to feature B," so the |
| of the following characteristics: | | | | possibility of paper-based errors is reduced. |
| First, they create a "more perfect market" for | | | | 4. Products that can be sold through searchable |
| buyers and sellers by improving the information | | | | databases (any type of offering where the buyer |
| available to both sides regarding the demand and | | | | provides specifications and the seller tries to |
| supply of products.Second, they generally serve | | | | match those requirements) are going to become |
| as electronic gathering places where buyers meet | | | | highly competitive online products.Consider planning |
| potential sellers for specific industries or types of | | | | for your summer vacation. If you're scanning the |
| products. In this sense, successful digital age | | | | newspaper for a summer rental in the general |
| middlemen are typically vertically focused and aim | | | | vicinity of your city, you might have to read the |
| to serve a very specific market, such as buyers | | | | listings for several different geographic areas and |
| of specific financial products, or specific kinds of | | | | then scan through the ads as grouped by a |
| engineers or electronics firms. Occasionally this | | | | Realtor. Contrast that to searching for a summer |
| leads to selling the same products at different | | | | home online: Log on, go to one of the classified ad |
| prices . | | | | sites (many, but not all, of which have been put |
| Third, the digital age middlemen defy traditional | | | | up by newspapers), and then enter the qualities |
| boundaries. Location, company size, the time | | | | you're looking for: preferred township, timing, |
| required to get competing bids from many | | | | cost, number of bedrooms, and "walking distance |
| potential suppliers, and the time involved in | | | | of beach," for example. Within seconds a range of |
| searching for potential new suppliers are all factors | | | | selections will be presented.These offerings are |
| that have traditionally created "competitive | | | | unquestionably faster and better than working |
| advantages" for specific companies in specific | | | | through traditional newspaper ads. They may |
| situations; these services work to eliminate these | | | | even eventually cause some offerings to be |
| constraints.And fourth, they all provide a buying | | | | cheaper, since you'll have all the listings in front of |
| mechanism of some type. Often, digital age | | | | you and you can compare carefully. As |
| middlemen pit potential sellers against each other, | | | | newspapers fight to retain their revenues against |
| and generally the one with the lowest price earns | | | | Web-based competitors of all kinds-for everything |
| the business. | | | | from home purchases and apartment rentals to |
| For buyers, the effect of digital age middlemen is | | | | cars and job listings -new types of competitive |
| to make goods | | | | behavior will inevitably result.SPEED AND THE |
| and services available at lower prices.DIRECT | | | | LAW OF TWOSOften categories of businesses |
| SALES ARE EXPANDING, TRANSFORMING THE | | | | start as "a ladder of many rungs," but that all |
| MARKETPLACE | | | | categories gradually become "a two-rung affair," |
| Experience to date strongly suggests that the | | | | where competition resides primarily among the |
| Internet will accelerate the shift to direct sales by | | | | top two contenders, such as Pepsi and Coke, |
| manufacturers, thereby creating a major change | | | | Hertz and Avis, McDonald's and Wendy's . It's not |
| in the way both businesses and consumers shop. | | | | that there are no other competitors, but that the |
| and services available at lower prices.For buyers, | | | | lion's share of the market ends up split among the |
| of course, the downward pressure on prices is a | | | | top two competitors.The Internet, however, |
| welcome benefit of the Web. For sellers, | | | | accelerates the playing out of the law of twos. |
| however, digital age middlemen are a central | | | | There is nothing gradual about what happens here. |
| factor in the emergence of Hyper Wars. By | | | | Because of its focus on comparative shopping, |
| creating a "more perfect market" with full | | | | instant communications, and easy distribution of |
| information, fewer geographic boundaries, and | | | | information, the Internet accelerates the speed of |
| more potential suppliers, the level of price | | | | competition. As might be expected, the law of |
| competition reaches a new degree of intensity, | | | | twos occurs even faster.At the "dawn" of the |
| making it harder to generate profitable revenues. | | | | Internet age, there were over ten browser |
| As these online middlemen proliferate, each | | | | companies. Now there are primarily two entities |
| transaction will feel to the seller even more like a | | | | Microsoft .and Foxfire .Similarly, all of the other |
| battle in a war that is waged in hyperspace. | | | | major Internet business categories (thus far, |
| DIRECT SALES ARE EXPANDING, | | | | music, books, auto buying, online stock trading, |
| TRANSFORMING THE MARKETPLACE | | | | and travel) have consolidated rapidly, leaving just |
| Experience to date strongly suggests that the | | | | a few major players.At first blush, it may seem |
| Internet will accelerate the shift to direct sales by | | | | as though the idea of rapid industry consolidation |
| manufacturers, thereby creating a major change | | | | and the law of twos is in conflict with a central |
| in the way both businesses and consumers | | | | theme of this book-that market success can be |
| shop.Over time, the percentage of all products | | | | fleeting. In fact, they are complementary. The law |
| sold directly from manufacturers or service | | | | of twos suggests that there will be consolidation in |
| providers to end users has been increasing, and | | | | an industry as we currently define it. However, |
| the cost of having a middleman is being eliminated. | | | | what the Internet makes it possible for new |
| This phenomenon has accelerated whenever the | | | | entrants to redefine an When this redefinition |
| development of new technologies or new media | | | | takes place, the entire cycle starts once again: |
| has provided ways to overcome what are | | | | Typically there are multiple entrants pursuing this |
| generally perceived as the four barriers to direct | | | | new idea of the industry and rapid consolidation |
| sales: | | | | then occurs.Although there has already been |
| 1. The consumer's need to see the item being | | | | consolidation among many online businesses, the |
| purchased | | | | potential for radical change remains: Entirely new |
| 2. Product complexity | | | | business concepts are likely to evolve and start |
| 3. Access to product information | | | | the process of intense competition all over again. |