Entovation International
MARKET CREATION IN THE NEW ECONOMY
Introduction of a paper - review of ideas and markets whose time has come
by Piero Formica

Professor Piero Formica is Dean of the International University of Entrepreneurship Amsterdam, and Senior Research Fellow, Enterprise Research and Development Centre, Business School, University of Central England, Birmingham, U.K. You can request a copy of the entire document directly. His e-mail address is formica@bo.nettuno.it

The Internet age

Old economies look like hi-end dinosaurs that mainly compete for existing, often conservative and mature markets. In contrast, permeated by the spirit of the “new economy, the new economies are focused on markets not already in existence that could be missed. Increasingly modest gains arise at the horizon of conventional markets. The impending scenario of the Internet democracy for information and products (figure 1), which appears nowadays focused on the E-commerce, shows pictures of a deep change to the traditional approaches and thinking in the modern interdependent world. It is going to bring fresh competition in the free market economy and to narrow down the international borders.

Figure 1- Democratisation of information and goods

A continuous, rich, rapid, free and reciprocal flow of information.

Reduced transaction costs.

A new marketplace, a new form of communication and a new means of distribution.

Lower barriers to entry.

Increasing price transparency and competition.

Easier price comparisons for buyers and sellers.

Cheaper prices of goods and services bought online.

Power shifted from producers to consumers.

A permanent increase in productivity and the level of output.

The spread of the Internet and the development of E-commerce - OECD analysts argue- might deliver significant cost reductions and organisational improvement to firms. Yet, the new weightless ways of creating wealth do not mean that novel markets lead to economic heaven. Indeed, for today’s dot.commerce ventures the road to the Promised Land of prosperity is a navigation in troubled waters.

At the dawn of the Internet time early birds-dotcom companies have merged from the US to threaten values of the old economy’s conventional wisdom. In the late 1990s, Andy Grove, the Chairman of Intel, stated, "In five years time, all companies will be Internet companies or they won't be companies at all." This assertion has been deciphered as an imperative need and a challenge for all types of companies to use the Net “ to lower costs, enter new markets, create new revenue streams and, importantly, redefine relationships with customers and suppliers”.

After have been plunging into the explosion phase till March 2000, a severe upheaval has struck the dotcom industry. A wider shake-out echoes a trend towards the consolidation phase. The aftermath of the wreckage left in the wake of the crash in Internet stocks is that most of dotcom entrepreneurs who were not able or did not have time to raise enough money will go away. Dotcom pioneers who might succeed to survive will have to fight against old economy companies whose stronger balance sheets permit to buy what left off by dotcommers went out of business.

Hence, after the deluge, online markets will be reshuffled by the penetration of dinosaurs (how pure dotcommers dubbed old-fashioned bricks-and-mortar companies) who have been buying early-birds dotcoms, as well as by the merging of dotcoms survived to the wreck. However, the entire business population, incoming titans and tyrants included, should not be comparable in size to the industrial giants of the recent past. Just the simple fact that the Internet dramatically reduces transaction costs makes uneconomic the size and the vertical integrated organisation of the modern industrial corporation.

E-commerce: a revolution hundred years old

Companies no longer need to sell to the consumers through stores made of bricks and mortar. Customers are reached all over the world through virtual stores. Isn’t this the wonderland named Internet and seized by the frenzy for an E-commerce’s boom? The response is a plain ‘yes’ for those that hail the Internet as the device that is going to revolutionise the way of buying and selling. But looking at the Internet as one of the radical changes that have been occurring throughout the commerce’s entire life-history is a blow that leaves the plain ‘yes’ believers spinning. Thus, trucking down the innovations that took place in the US distribution of goods from the turn to the fall of the 20th century, Malcolm Gladwell (1999) bluntly states that “the real E-Commerce revolution happened off-line.”

Even tough concrete savings can be realised cutting transaction costs and transaction time, customer-service costs are still there. Indeed, the click of a mouse cannot erase the need for human interaction. As argued by the head of E-commerce for Lands' End, the world’s largest online apparel retail, "One of the big fallacies when the Internet came along was that you could get these huge savings by eliminating customer-service costs. People thought the Internet was self-service, like a gas station. But there are some things that you cannot program a computer to provide. People will still have questions, and what you get are much higher-level questions. Like, 'Can you help me come up with a gift?' And they take longer."

The technology has turned the human search engines represented by the order-takers “missionaires” into dotcom search engines, but automation has not eliminated the human touch. The Internet age has devised a new job profile, that of the sales adviser who is going to replace the order-taker of the old days.

If history is any indication, behind the emergence of the today’s E-Commerce there is the formation of a long-lasting process to exploring alternative paths for market creation and trading. Major changes in the way that companies do business have been driving by two, consecutive waves of innovation occurred throughout the 1900s. The Internet is not the E-commerce revolution, but one of its key components.

“Collaborative economy” has been defined the Internet-based world of strategic and collaborative alliances, and business collaboration should appear as the impending Internet frontier beyond e-commerce, which is only a step toward this direction. But, what does it really mean business collaboration?

Business collaboration is in an enduring process of learning how to manage inter-firm relationships. Trust and social capital are the ‘genes’ that dictate the evolution of so a complex, adaptive web as it is business collaboration.

Traditional sociability is the outcome of kinship and family ties for which “you can only trust close relatives”. High-trust communities are those in which non-kinship relationships prevail and don’t rot in interest groups that support restrictive practises. They accomplished a ‘chain reaction’ of social capital between (i) the individuals’ spontaneous ability to associate with each other, (ii) the degree to which the communities share norms and values placing common interests before individual ones, and (iii) trust that comes out of such shared values and, in turn, feeds spontaneous sociability.

The accumulation of social capital gives force to the simple proposition that the path to prosperity could be run through by almost everybody. In fact, a shared prosperity is the striking feature of a collaborative economy, while a widening inequality poses a growing threat to the society.

Along the learning process of collaboration, there are firms that come to the role of decision-makers at local level. Then, an evolutionary form of co-ordination emerges, whose configuration resembled a wedge. The leading company at the tip of the wedge embraces problem solvers or co-makers, involved in the early phases of the leader’s development process, and a platform of secondary and tertiary subcontractors underpinning the new business configuration. At this stage the architecture of collaboration shows a large gray area between propensity to binding commitments and propensity to opportunistic actions.

Co-ordination fits in the case of a stable set of products to which routine and incremental innovations are suitable. Supply chains are the entrepreneurial version of vertically integrated companies without the inconveniences of bureaucracy the common ownership gives rise to. But things thoroughly change once new product development rather than upgrading the existing product lines becomes the key factor for success.

Online markets

Different species of dotcoms populate the cyberspace. The most popular are dotcoms that sell a product or service to a retail customer (business- to-consumer or B2C dotcoms) and, then, those selling a product or service to another business (business-to-business or B2B dotcoms). The Economist’s E-commerce matrix displays four market segments: business-to-business, business-to-consumer, consumer-to-business, and consumer-to-consumer. There are dotcoms that offer solutions to end-users whereas others provide the foundations (the electronic bricks and clicks of Internet) on which the e-merchants can built their niches in the cyberspace. There are online businesses that rely on advertising (e.g. a portal site). By contrast, others become successful only to the extent that visitors make purchases (e.g. a web retailer, Lastminute.com, “had about 600,000 registered users by the end of 1999 but only 29,000 paying customers” - reports the Financial Times).

Online markets can be built around buyers or around independent exchanges. The former markets are one-way networks in which big buyers hold the market power. The latter tend to be two-way networks that occupy a central position between buyers and sellers, mediating between both sides.

There are also portals not involved in sales, acting only as providers of various kinds of industry/processes-specific information in the form of online bulletin boards, online journals, chat forums, et cetera, through which good and bad news travel quickly world-wide.

Neutral markets should dominate the B2B scenario under two main circumstances:

  • the need for a net market of a critical mass of buyers and suppliers to succeed -which implies a large proprietary platform, and

  • the outcome of a better collaboration between buyers and their suppliers ranked higher than the result in terms of speeding up transactions -which entails sharing benefits fairly between the two parties.

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