Internet is taking the world by storm. It is changing the way business is being done. The Internet economy has produced many offsprings. E-commerce is the most illustrious of them. Thanks to e-commerce, globalisation is taking place at a faster pace and the rules of doing business are changing.

The change has been smooth and swift. Internet is fast replacing traditional communication channels such as letters, fax and telephone. And it is still spreading like wild forest fire. During 1999, e-commerce revenues were a little over $150 billion. In fact, the impact of doing business on the Net has been so dramatic that any big firm that fails to grapple with the consequences is risking its future. Consider the benefits that Internet offers first.

Benefits galore
Economist describes the economic impact of the Internet as oil shock in reverse. The jump in oil prices during the Seventies increased inflation and pushed the world into recession. However, the Internet reduces cost of information. This has positive economic effects. As far as business is concerned, advantages from Internet are immense.

Put simply, Internet makes it easier for buyers and suppliers to compare prices. It helps to cut out the middlemen between firms and customers. That means lower transaction costs and reduction in entry barriers. Economists have an interesting argument: the main reason why firms exist is to minimise transaction costs. Since the Internet reduces transaction costs, it also reduces the optimal size of firms. Smaller firms can buy services cheaply from outside. Thus, in overall terms entry barriers should fall.

The Internet can link up supply chains, make it easy to place and track orders and display specifications right down to the look and feel of products. Hence few companies are willing to miss out on the benefits e-commerce offers.

So, it is certain that the Internet cuts costs, increases competition and improves functioning of the pricing mechanism. Internet moves the economy closer to the textbook model of perfect competition, which assumes abundant information, zero transaction costs and no entry barriers. Analysts feel markets should become more efficient as Internet increases the flow of information between buyers and sellers. This, in turn, should ensure efficient allocation of scarce resources.

Not just that. E-commerce increases competitive intensity by allowing business customers to consider every available alternative to every offering. Suppliers no longer compete with two or three familiar competitors, but with every company in the world that have a web site and a comparable product or service.

E-commerce also undermines traditional sources of advantage based on asymmetries of information. In the past, sellers derived some advantage by knowing more than their buyers. Such an advantage came from knowing more about the product, the cost availability of raw materials and components and the efficiency of their own manufacturing processes. Each step in the supply chain had a lock on its own information, which made each link more defensible but the chain as a whole less efficient.

Two-way information
The Internet does away with much of this privileged access to information, shifting the competitive emphasis away from secrecy and toward transparency and the absolute comparative value of the offering. Individual consumers may shop carelessly, but in the business-to-business (B2B) e-commerce arena, suppliers can no longer count on tradition, brands, advertising, habit, or customer ignorance to do some of their marketing and sales work for them. But even as e-commerce intensifies competition and undermines traditional sources of advantage, it also makes new ways of competing possible. In particular, the Internet's two-way flow of information -- from as well as to the customer -- provides companies with a powerful means to expand the richness of their offerings.

Distribution and sales channels have always conveyed a certain amount of information back to suppliers. But bandwidth, precision, ease, speed and manageability of the information flowing in both directions are orders of magnitude greater on the Internet. The interactive exchange of information, design requirements, component specifications, cost tracking, logistics oversight, service requests and troubleshooting advice permits an unprecedented level of customisation. Competition on this level will necessarily become the rule.

Though Internet retailers tend to hog the limelight, the biggest impact of the Internet is likely to come from B2B e-commerce. Gartner group forecasts that global B2B turnover could reach $ 4 trillion in America by 2003 against an online sale of less than $ 400 billion to consumers.

B2B e-commerce
E-commerce refers to trade that actually takes place over the Internet, through a buyer visiting a seller's Website and making a transaction there. It is broadly classified into two categories, business-to-business (B2B) and business-to-consumer (B2C).

Naturally, a different skill set is required for being successful in both the businesses. "While the B2B segment would require businessmen to have an extensive domain knowledge of the business, the B2C business would call for understanding the customer at large," says Ranu Vohra, CEO and co-founder of Coolstartups.com, a Web-based venture catalyst. The B2C segment focuses on the individual customer, but the B2B segment is more focussed and concentrates on a particular business.How large is B2B e-commerce? The B2B segment accounts for as much as 80 per cent of all transactions on the Net. While the B2C e-commerce involves heavy advertising costs, it is the B2B segment which is more focussed since it concentrates on a particular industry or business.

Which industries are likely to see shift of business to the Web? Says B K Sethi, CEO of the Mumbai-based Electricmela.com: "Industries which are fragmented and have a low profitability per transaction are likely to shift to the Internet". That means the entire gamut of traditional industries including textiles, chemicals, electrical goods and engineering.

In USA, which is a mature Internet market, the influence of the Web as a source of information stretches far and wider. Here is an estimate: though last year only 2.7 per cent of the new car sales in America took place over the Internet, as many as 40 per cent involved the Net at some point with consumers using it to compare prices or to look at the latest models.

Currently, B2B e-commerce commands the biggest volume of trade, thanks to supplies to large companies such as General Electric. Several technology companies including Cisco and Oracle have transferred almost all their purchasing onto the Web. Long-established businesses such as car-makers Ford and General Motors are expected to transfer all their purchases to the Web within the next few years.

B2B savings
Clearly, B2B e-commerce cuts company costs in three ways. One, procurement costs are reduced drastically which makes it easier to find the cheapest supplier from all over the globe and to cut the cost of processing transactions. Two, it allows better supply chain management. And three, it makes possible tighter inventory control so that firms can reduce their costs or even control them. Through these three channels, B2B e-commerce reduces production costs by increasing efficiency or by squeezing suppliers' profit margins.

However, biggest savings in B2B e-commerce are likely to come from procurement. Companies such as British Telecom say that procuring goods and services online will reduce the average cost of processing a transaction by 90 per cent and reduce the direct costs of goods and services they purchase by 11 per cent.

B2B exchanges also offer big savings. Ford, GM, Daimler and Chrysler are setting up a joint exchange to buy components from suppliers over the Internet. Another firm Messers Brookes and Wahhaj reckon that doing business online could reduce the cost of making a car by as much as 14 per cent. Their report looks at industries that account for about one-quarter of America's gross domestic product and uses input-output accounts to include second-round effects of cost savings. Second-round effects of cost savings are lower costs in one industry leading to lower prices of inputs for other industries. They conclude that in the five big rich economies, B2B e-commerce could reduce average prices across the economy by almost four per cent. And this probably understates likely cost savings because it is based on lower procurement costs alone.

Enriched offerings
There are various ways in which companies can exploit Internet's capacity for increasing richness. According to consultants at the Boston Consulting Group, you can make more out of B2B e-commerce by letting customers design the offering and by letting customers use the Internet to explore the whats and ifs of performance, features, costs and scheduling.

Few people think of machine tools as a dot-com business, but in fact several suppliers in the industry are embracing a business model that uses the Internet to give customers input and control. Using CAD and CAM technology and new algorithms, the customer specifies the precise tool he requires or the job he needs to get done. Suppliers and customers use the Internet to explore options, costs, and schedules. Then the supplier takes over as a clearing-house, auctioning the job among specialty toolmakers and brokering and tracking delivery, logistics, invoicing, service, and eventual replacement. This kind of managed and individualised offering provides customers with an integrated solution, not just a tool. And the cost-in-use it delivers is dramatically lower than that of off-the-shelf tools.

Serve the customer's customer. Companies can go even further. By extending close Internet relationships up and down the supply chain to include all critical layers in a single information-sharing network, they can add richness by reaching beyond their immediate customer to serve their customer's customers as well. Consider the case of paper companies. They can enrich their offerings to consumer goods companies by extending the design process to include the packaging requirements of the big-box retailers who are those companies' largest and most demanding customers.

In manufacturing, there are huge benefits to be had from linking an entire supply chain into a single virtual enterprise. Second, third and fourth-tier suppliers can use the Internet to monitor consumer feedback to the OEM. They can observe the remote assembly lines where their components are being installed in order to spot and correct problems even before the OEM is aware of them. Every player in the supply chain can use such links to anticipate demand, reduce inventory, coordinate deliveries, and troubleshoot problems.

Transparency
Make a business out of transparency. In some situations, the creation of this degree of transparency can become a business in itself. Improving supply-chain architecture requires new systems and software that can be lucrative products. The trick is in knowing when to sell the product and when to give it away. In some cases, supply-chain transparency adds so much value to an industry's core business that companies will benefit more from sharing a system broadly with everyone than from selling it. In other situations, the new software may be more valuable to individual members of the supply chain than to the chain as a whole. These systems can become a rich source of revenue to the company that develops them. They can even be spun off, with all the capital benefits that accrue to successful new e-businesses.

Change the mindset
True, the Internet offers a new information system, a new marketplace, a new form of communication and a new means of distribution. The power of digital distribution may even lead to wholly new products and services that nobody has hitherto imagined, offering the hope of further increase in economic growth. Despite the obvious benefits, how does the traditional businessman view the Internet?

In the Indian scenario, many companies still take e-commerce as a defensive strategy than an offensive strategy. Most of them feel that the e-venture will never turn out a profit. The only reason they are doing business on-line, they feel, is to protect market share. They envy the explosive growth and extraordinary stock multiples of the pure Internet players, but they are afraid of cannibalising their existing businesses and rendering legacy assets obsolete. Most of them assume that succeeding at e-commerce is simply a matter of designing a catchy Web site or creating a new channel, which are moves that fall well within their current skill set. This contradictory mix of skepticism and envy, fear and complacency, slows them down in an arena where the early-mover advantage is substantial and where half-hearted efforts commonly fail.

Analysts have a different opinion. They say that established companies are often well-positioned to succeed at e-commerce. Due to the fact that they have been in the business for a long time, they possess critical assets that can give them an edge over start-up competitors. But to take advantage of those assets, incumbents need to take the offensive quickly. They must carefully assess their strengths and weaknesses, build on the former and rapidly make up for the latter. They need to be highly customer-oriented. And most important of all they need to understand e-commerce not as an end in itself but as the cornerstone of an integrated business system.

Businessmen have to realise that e-commerce is more than merely creating an on-line presence. Rather, it is a component in the delivery of a complete customer experience. Established companies can use existing assets not only to extend their distinctive customer experience to the Web but also to fortify and enrich that experience across multiple channels. Those able to do this will be at the forefront of e-commerce, leaving other companies to play the defensive catch-up.

Looking ahead
In India too, B2B e-commerce has begun catching up. But more than concentrating on the business, people are more carried away by the valuations offered to Net companies. That more or less explains the massive advertising displays by B2B companies in various media. Already there are portals in different industries and the number is increasing with every passing day. However, actual business transacted on B2B sites is very small.

Internet's immense reach and powerful marketing potential will surely lead to a virtual explosion of B2B e-commerce soon. Until now, only a few business suppliers have exploited this tool for maximum competitive advantage. Most tend to see e-commerce primarily as a new channel. They need to broaden their perspective and aim higher. Instead of merely taking an existing business to the Internet, companies should use e-commerce to rethink their offerings. In particular, they should strive to create value not only from the Internet's great reach but also from its potential to expand the richness of products and services by increasing information content and the degree of customisation.

Looking ahead, the future of B2B e-commerce is definitely bright. A Goldman Sachs study estimates that B2B e-commerce will cause a permanent increase in the level of output by an average of five per cent in rich economies, with over half of this increase coming through within ten years. That implies an increase in the GDP growth of 0.25 per cent a year.

If the benefits of Internet use were to spread to other industries not included in the study, the eventual gains would be larger. In historical terms, an extra 0.25 to 0.5 per cent of annual growth would be significant.

But if the Internet itself seems unlikely to boost economic efficiency by as much as this, the productivity gains from IT and the Internet together could easily come close. Computers, software and telecom now account for about 12 per cent of USA’s total capital stock, not far from the share accounted for by the railways at the peak of America's railway age in the late 19th century.