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The business of doing business underwent a radical transformation this week. First, Sun Microsystems announced that it would offer some of its critical business software free over the Internet. Responding to the challenge, Microsoft Corp. two days later revealed that it would offer its own top-selling business software over the Net as well. Both moves are part of a larger shift in the business landscape. The Internet is now making the inroads into traditional business practices that have long been promised.

While attention has focused on e-commerce — selling goods to individual consumers over the Internet — the real bonanza lies in business-to-business dealings, sometimes referred to as e-business. By one estimate, e-business revenues will soar to $1.3 trillion in 2003 from a mere $43 billion in 1998. Most analysts consider those figures conservative.

The attraction of e-business is diminished costs. Of course, the Internet can be used to cut traditional communications and costs and to speed up transactions. If each paper-based transaction for operating resources costs about $150, then the potential for savings is great.

Executives also see the Net as a great leveler, a device to shave operating costs by expanding the universe of parts-and-services providers. Product specifications are posted on the Net and the lowest bidder, no matter where it is located, can now compete. Aggressive use of the Net has allowed some businesses to cut operating expenses by 30-50 percent. Giga Information Group, an information consultancy, estimates that U.S. companies saved some $17.6 billion in 1998 by conducting business on the Internet; it is estimated that by 2002, U.S. businesses will save $600 billion annually, boosting profits by $360 billion to $480 billion.

Those are big numbers, but they are nothing compared to what is in store. The basic problem is that the prevailing view of e-business is static: The Net is pretty much just grafted onto existing business practices. That is easy to achieve, but it misses the point. E-business will not merely streamline business procedures — it will utterly transform them. That is the significance of the Sun and Microsoft policies announced this week.

In essence, these policies transform products into services. Instead of buying software, companies will outsource their functions. The network allows businesses to let technology specialists handle their in-house needs from distant locations. Database management can be farmed out, saving on the costs associated with information technology. Companies will increasingly focus on where they can provide value; as a result they will be forced to hone their competitive advantage.

This is a critical element of the new global marketplace, and one that has been overshadowed by the hype surrounding the need for economies of scale and by the megamergers that have followed in its wake. Finance, in particular, is especially reliant on information technologies. The new superbank that will be formed by the merger of the Industrial Bank of Japan, Dai-Ichi Kangyo Bank and Fuji Bank is a response to the requirements of this new market; one of the reasons for the merger was that only large companies can afford the IT investments that will be needed to compete.

But size is not a panacea. Unless management seizes the opportunities inherent in new technology, the economies of scale promised by the merger will vanish. Traditional business practices, philosophies and relationships will have to be adapted and sometimes dropped. Nothing less than a revolution in the boardroom will be required.

The challenge for Japan is especially acute. A stagnant economy has kept businesses from making the investments in much-needed new technology. Old ways of doing business have discouraged innovative thinking. Fortunately, the economy seems to be turning around and the companies that have embraced the digital revolution — Sony and Fujitsu, to name two of the most prominent — are reaping the benefits and setting an example.

More has to be done. One critical element is the need to lower telecommunications charges. This week, the Ministry of Posts and Telecommunications released a study that found that connection fees in Japan were 10 times higher than those in New York City. If infrastructure costs come down, surf time will go up. The increased use of the Net will encourage individuals and businesses to experiment. New needs will arise, new opportunities will be created. E-business beckons.

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