"Dynamic Trade" is Forrester Research's term for the new rules of doing business on the Net.  It means "leveraging technology to satisfy current demand with customized response," but it has implications far wider than that simple phrase. John McCarthy, Forrester's Group Director of New Media Research, discussed the future of dynamic trade at this Morino Institute Netpreneur Program Coffee & DoughNets meeting held March 25, 1999.

Copyright 1999, Morino Institute. All rights reserved. Edited for length and clarity.  This presentation is based on research contained in the report Dynamic Trade copyright 1999 Forrester Research, Inc. All rights reserved.

Statements made at Netpreneur events and recorded here reflect solely the views of the speakers and have not been reviewed or researched for accuracy or truthfulness. These statements in no way reflect the opinions or beliefs of the Morino Institute, Netpreneur.org or any of their affiliates, agents, officers or directors. The transcript is provided "as is" and your use is at your own risk.

mary macpherson: introductions

We are pleased to have with us John McCarthy from Forrester Research, Inc. (http://www.forrester.com), the independent research firm based in Boston that has built a reputation for analyzing technology change and its impacts on business, consumers and society in general. As Group Director of New Media Research, John is responsible for much of the work that Forrester is doing in connection with E-commerce and the Internet.

We at the Netpreneur Program are working with Forrester on a project that you will hear more about over the next several months. From that work we have seen that they have a great handle on many of the things you need to know to be successful in today's marketplace. This morning, John will take you through Forrester's work on a concept called dynamic trade, their phrase for a new business model that Forrester says will affect all sectors and all aspects of doing business.

john mccarthy: dynamic trade

Thanks very much. It's great to be here, especially with such a full house this early in the morning. Hopefully, I'll get through my comments before the sugar buzz from the doughnuts comes down.

For the next 45-50 minutes I'd like to share with you Forrester's vision for the Internet and how we see it evolving. There's a fundamental business change taking place which is going to impact all of you. It will provide a new tool, new ways to get your message and your products to market, and it's also going to impact the customers you sell your products to.

Before I get started, however, a funny story. For the last couple of nights I have been practicing this speech. Now, I have a son who is a little less than one year old and I have been getting a little worried because, as I walked around practicing the speech with him, he has never made it past the fourth slide before falling asleep. Then I realized that even though he's extremely advanced for his age, the topic is probably a little over his head.

As Mary said, the title of my presentation is "Dynamic Trade." It presents our vision for how the Internet is evolving beyond simply "brochure-ware" and order taking to create fundamentally new business models and new ways in which companies will need to compete. I'll share with you where we see the Internet economy today, and how we see dynamic trade changing the ways in which companies differentiate themselves in the marketplace—both for you as netpreneurs and for the customers you are trying to sell to. As I develop this theme that dynamic trade will redefine the rules of the Internet economy, I'm going to look at what is driving the Internet economy today and share some of our research numbers. I'll then drill down into the main part of the presentation and define what I mean by dynamic trade, its rules and a self-test you can apply to see how dynamic trade may affect you and your customers.

What's driving the Internet economy is not about technology. We talk about the Internet as the fourth channel. The first channel is traditional, face-to-face interaction for customer service, support, sales and marketing. The second channel is written communication or direct mail, and the third channel is the telephone. When all is said and done, the Internet is just another channel. It's not an IP connection; it's a channel for interacting with customers, suppliers and business partners in both business-to-business (b-to-b) and business-to-consumer (b-to-c) settings.

The real challenge is finding the appropriate mix between these four channels. We see a lot of companies falling down today in channel synchronization. When Fidelity launched its Web site three years ago, they didn't equip their call centers with browsers. People phoned their 800 numbers saying, "I'm looking at your Web site and I'm not sure what you mean in this prospectus," or, "Which of these funds is most appropriate for me?" It's things as simple as that. Or take the large cataloguer, whose name I won't mention. A woman who works for me ordered a pair of jeans from their Web site, then realized she forgot to put in her apartment number. She tried to work backwards through the process. It wouldn't let her do that, so she called the company's 800 number. She spent five minutes going around and around with the person at the other end telling her that she didn't have a catalogue number because she didn't have a catalogue because she had placed the order on the Web site. The company hadn't done the appropriate level of channel synchronization and, in some cases, channel reform.

So, that's how we view the Internet at a very basic level, as a channel for delivering customer service, for ordering, marketing, promotion and sharing information with business partners and suppliers.

Figure 5: Click image to enlarge

What are our latest projections for the size of the Internet commerce market? Worldwide, conservatively speaking, both b-to-b and b-to-c, we think it will be about $3.2 trillion by 2003. That's commerce where the actual order for the goods or services is placed over the Internet. For example, if you go to Amazon.com or W. W. Grainger and place your order with a corporate credit card, or if there is an Electronic Data Interchange (EDI) transaction over the Internet behind it. However, if you research the car you are going to buy at AutoByTel, and, even though there is a pre-negotiated price you sign the contract in an automobile dealership, that would not show up in these numbers (see figure 5).

What's driving this? On the b-to-b side, there's an E-commerce spiral. Early suppliers launch their efforts—the Ciscos, the Dells and other cyber-celebrities. When their customers reap the benefits and the savings, those customers push more suppliers to get online, saying, "If you want to do business with us, this is how we are going to do it." As more suppliers come online, more customers start to realize that the Internet is a way to interact with them, and that keeps driving the rate of change. Our b-to-b projections are five times our b-to-c projections, despite the visibility and the high IPO prices of the b-to-c Internet commerce players.

Figure 7: Click image to enlarge

Still, a similar thing is happening in the retail environment. Our research with 120,000 consumers shows that there are about 33 million households online this year, and that by 2003 that number is going to be almost 61 million households. As more people come online, more retailers come online. As more retailers come online, they tend to add more categories. For example, Gap (http://www.gap.com) came on with a very simple catalogue. Now they have Baby Gap and a full range of products. This encourages more people to come online (see figure 7).

Two other things that have taken place in the first quarter of this year have affected this fundamental shift in Internet activity. First was the visibility of the retail sales at Christmas, then, and probably more importantly, almost every CEO at every company (certainly the public ones) took notice of the share prices and market valuations of some of these Internet-related stocks. That's what really gets their attention. In our research this quarter, all of a sudden the CEO was asking, "What is this Internet thing and how are we taking advantage of it?" It's only going to further accelerate the growth in these curves.

Figure 9: Click image to enlarge

At our conference last November, we asked an audience like this one for their projections about how much their companies would sell and buy online (see figure 9). As you can see, a lot of these companies were pretty conservative about how much they would sell online in 1999. Some 30% said flat out, "We are not going to sell anything online. We are going to wait and see." Only about 9% said they were going to sell more than $100 million worth of goods online this year. When you look at what they say they are going to do in 2001, the number of participants on the sidelines drops from 30% to 7%, and the number of people who are selling over $100 million rises to over 30%.

Figure 11: Click image to enlarge

What's really interesting, however, is that when you compare "how much are you going to sell?" with, "how much are you going to purchase online?" Right out of the chute, the number of companies which say they are purchasing nothing drops from 30% to 19%, and those purchasing over $100 million goes to 28%. When you look at what they are going to do in 2001, the numbers go up significantly (see figure 11). I will submit to you that online purchasing of simple things like office supplies, business travel, the non-vertically complex products—not the stamping machines that General Motors would make metal parts with, but basic office supplies which is a $350 billion industry worldwide—is going to be the killer app that draws companies to the Internet.

Of course, there is a funny kind of disconnect here. You have to ask yourself the question, "Who are they going to buy from if nobody wants to sell and everybody wants to buy?"

To buy online is pretty simple. I give people browsers. I have some pre-negotiated deals. Maybe I have a supplier create a custom Web page for me. However, to sell online requires, in many cases, a fundamental reengineering of my business processes. I have to buy and develop this very sophisticated commerce software. The barrier to entry is a lot higher; however, it will be like what we saw in a case like EDI. When big companies like General Motors and General Electric said, "It's going to be EDI for moving the transaction data back and forth," all of their suppliers suddenly started to toe the line. The same thing is going to happen with the Internet. We already see large companies being dragged on to the Internet by their large customers demanding that it's the way they want to do business.

There's one more thing I'd like to share with you about what's driving the Internet economy—our projected emergence for the Internet economy on a country-by-country basis.

We see the Internet economy going through two distinct phases, the first being the commerce threshold. This is where private businesses and governments lay the groundwork in investments, regulation, legal issues, etc. This is the early incubation and alignment stage needed so that countries can participate in the hypergrowth phase that follows.

Figure 12: Click image to enlarge

The United States is already moving out of the commerce threshold period and into the hypergrowth period. Certainly, as long as the economy stays strong, the numbers will continue to increase. Among the G7 countries, roughly 18 months behind the United States there is a second wave of Canada, the United Kingdom and Germany, then there will be another wave that includes Japan, France and Italy (see figure 12).

When does a country go through the commerce threshold? The investments and the pioneering you get from private industry and government in the early phase, making the right decisions about taxation, legislation and things of that nature, that's the threshold that drives the hypergrowth.

To summarize, then, what do we see driving the Internet economy?

Changing customer demands. They want more information. They want more timely delivery of goods and services. They want a more responsive set of suppliers and business partners.

Globalization is a factor that feeds off of the Internet. One thing we found from our research is that 10-20% of orders from Web sites come from overseas, right out of the chute. Most of them go unfulfilled because the company is worried about credit card fraud, or because regulatory issues or existing distribution relationships prevent them from actually shipping the goods to countries outside the US.

The Internet is becoming increasingly ubiquitous. Hundreds of thousands of companies today are being connected to the Internet—it will be well over a million by 2003. Consumers are projected to go from 30 million households to over 60 million households in 2003. Another interesting fact that we uncovered in our consumer research is that over 50% of the households in the US now have a PC.

A new set of technologies and intermediaries are driving the Internet economy; in many cases it's from small startups and companies that didn't exist three to four years ago. On the commerce side, you have companies like BroadVision (http://www.broadvision.com) and Inner Shop. There are a whole new set of applications that can be deployed within an organization to help get purchasing online from people like Ariba (http://ariba.com) and Commerce One (http://www.commerceone.com). There are personalization packages and customer service packages from people like Silknet (http://www.silknet.com) and Brightware (http://www.brightware.com). We also see whole new business models around these intermediaries. MetalSite (http://metalsite.com) is selling surplus steel on the Internet. So much for the saying that you can't sell big ticket items on the Internet. National Transportation Exchange is an intermediary that coordinates and improves the productivity of both the companies that are shipping goods via trucks and the truckers. In Pittsburgh, Free Markets Online (http://www.freemarkets.com) has a software Internet application and service bureau for hosting online bidding that I'll talk about in just a minute. Ultraenergy, another intermediary that's emerging, auctions natural gas. These are just some of the examples.

Now, I'd like to shift focus to develop the theme that dynamic trade will define the rules of the Internet economy. What do we mean by dynamic trade? We define it very simply as "leveraging technology to satisfy current demand with customized response."

Highlight two key parts of this definition. The first is current demand. Not what customers told us they wanted six months ago, or what the order logs show us they ordered six months ago, but what they want today and with a customized response. We are treating each company or each customer at a personalized level (or at least appearing to) in terms of how we deliver content, the terms and conditions, the configurations that we show them, etc.

Basically, dynamic trade is a leveraging of the Internet and an evolution of the Internet.

The Internet started with "brochure-ware" which gave us access to information more easily than having to run around to get it. What we have seen in our research is that once people start getting the information, they are not happy with the "commerce interruptus" site that says, "If you want to order this product, call the 800 number or stop by our local shop." So, the next level of evolution is that the company starts taking orders. You would be surprised how many cases we found in our research where, when a customer places an order online, the company actually prints that order, faxes it to another part of the organization and re-keys it. I was really surprised.

We are finding that the Internet is like a set of dominoes. Once you start putting up information, the next thing the customers ask for is order taking, then they want customer self-service. When they place the order, they want to know exactly when it's going to ship. Is it in inventory? All of a sudden the IT guy is pulling his hair out because this little stand-alone Internet effort now needs to be integrated with the systems that he is scrambling to make Y2K compliant. It's a real mess for organizations, but that's part of the evolution.

We see dynamic trade as being an even higher level of service in terms of its ability to provide value and to re-craft industries, supply chains and the relationship that companies have with their products. Dynamic trade is going to change the relationships you have with your customers and your suppliers, how much information you share with them and how you treat them in terms of a personalized or customized experience. It's going to change your business processes. The stovepipe systems and stovepipe processes that are great for political advancement don't necessarily meet the needs of current demand with a customized response. They may even get in the way. The way companies are scrambling with simple things, such as giving browsers to their legal staff so they can review Web site content is just one small example. The warehouse relationships with a channel are a big change that companies are struggling with. We can't necessarily disintermediate everybody because we are used to shipping things up by the tractor/trailer-load, not by the Federal Express box-load. One of the biggest challenges we see companies grappling with is how to organize for the Internet. Is it part of IT? Is it part of marketing? Is it a separate commerce group? When it comes to the technologies they deploy, the good news is that most companies are looking to new and innovative vendors for Internet dynamic trade, not the traditional ones they have been dealing with in the past.

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