5.5 Extranet Trading Partner Enclaves

The commercial revolution in the twelfth and thirteenth centuries was fuelled by a steady rise in the demand for more diverse products and the growth of the population. Until the rise of the middle class, the demand side was represented by a simple balance between two classes, namely the very rich (who had the means to acquire goods but seldom needed to purchase them) and the lower peasant class, who needed products but did not have the financial means to make purchases. Commercial growth was centred in towns where craftsmen were able to create a variety of goods and depended on trade to acquire everything else that they did not produce. The towns also provided a mechanism for early merchandizing by displaying wares so that other townspeople, visitors and rural dwellers could see what others were purchasing and desire those goods as well. As optimistic as this picture seems, there was still starvation, poverty and hunger – which despite great strides in technological advancement are still prevalent in twenty-first-century society.

Commerce and trade has always been constructed around a relationship of trust. Intermediaries act as a buffer between buyer and seller to broker the equitable transfer of goods and payments to each party with implied and expressed trust. The reputation, brand, and network of relationships represent an implied trust in which a new customer can measure the value of the relationship and compare it with the experience of others. The more pragmatic element of trust is that of an expressed trust such as a guarantee, warranty or insurance that the exchange will occur without detrimental effects to either party. This expressed social contract of trust in an exchange of value has typically been represented by a physical contract or deal. However, technology is now able to emulate and enable an expressed trust between parties that was previously squarely in the domain of the intermediary. However, trust is a mutual relationship between customer and intermediary, which in the new connected marketplace must also extend to manufacturers and suppliers, as indicated by Davidow and Malone:

For its part, the manufacturer must reward this supplier support with trust. Until now, firms have protected their interests by lining up multiple suppliers that could fill in for one another in case of failure. Second sources were identified in case a primary supplier failed to perform. By the same token, suppliers were proud of pointing out in annual reports how widely distributed their business was. Being dependent on a narrow customer base was considered to be a great risk.^[149]

The closer compression of the traditional supply and distribution chains means that there must be an integrated set of relationships not merely to facilitate the transfer of goods, but to build a link to long-term commerce. The value of trust is proportional to the length of time in which business is conducted. The initial transaction requires a combination of an expressed trust and faith, subsequent transactions build on this and it becomes an implied trust. It is equally important to note that when organizations interoperate or become co-opetition partners, all members of the value chain must develop the same or at least a similar operating philosophy in order to reach an operational synergy, as described by Davidow and Malone:

In the business model of the future, customers will have far fewer suppliers. The just-in-case supply philosophy will be increasingly obsolete. On the other hand, suppliers will be dependent on fewer customers. A customer’s failure will be extremely damaging to the supplier’s business.^[150]

The key to creating this interoperability is to develop a robust and predictable technological infrastructure. The robustness of the infrastructure should be in its ability to provide a network that readily accepts a wide range of compatible technologies that interface using a standard protocol. A predictable infrastructure offers seamless integration of successive new technologies to everyone who is part of the network. Thereby, a technology infrastructure works at its optimum when it is invisible to the participants in the process. As I have argued elsewhere, one can extrapolate the broad use of these technologies to an end which infers that a technologically expressed trust may eventually circumvent the need for an implied trust.^[151]

When the Internet was first viewed as a viable medium for trade, pundits heralded a new age of disintermediation, where consumers and manufacturers could be linked together thereby eliminating several layers of the distribution chain. Theoretically, the wholesale and retail levels of product distribution would disintegrate and consumers would simply order direct from merchants. In the spirit of unbridled capitalism, the grateful manufacturer would pass the cost savings onto the consumer. The manufacturers were ill-prepared to embrace this medium as a primary vehicle for doing business for fear of alienating their well-established distribution channels. Moreover, manufacturers were ill-suited to provide the level of customer service that consumers were accustomed to via retail channels.

Consequently, consumers were now faced with having to search through the millions of pages on the Internet looking for products and were frequently dismayed at their inability to make direct purchases. The wholesale and retail distribution channels were slow to embrace this technology and a new class of intermediaries emerged. Several early plays began as start-up companies raced to acquire capital to build their corporate infrastructures. Dismissed by many as unprofitable ventures, they were steadily developing not a shopfront for selling products such as books but creating distribution channels and defining an entire new market.

As the Internet moved from an embryonic collection of computer nodes to a network of interconnected companies with access by the public, the attitude of retail and wholesale trade chains began to change. Next the Internet established platforms to launch businesses and provide a home base for consumers. Trading platforms began to emerge as new virtual real estate in which corporations could show up in the market associated with other organizations. Consumers could access the Internet or these trading platforms via newly established ISPs which quickly metamorphosed into business portals.

Trading networks include partnerships, alliances, affiliations and exchanges (Figure 5.1). A partnership is a relationship between two or more firms, characterized by cooperation to achieve a specific goal, provide a specific type of product or service a niche market. For example, computer hardware and software firms may bundle products to provide a solution to a niche market. An alliance is typically a formalized joining of firms to associate a product to a brand identity. For example, companies often link products together such as Intel Inside, which is used by various personal computer makers, or Powered by Hewlett-Packard, which is used by Apollo Consumer Products.^[152]

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Figure 5.1: Elements of a trading network

Exchanges represent associations structured around giving and receiving items reciprocally. Members of an exchange often trade orders, customer data, monies, inventory and sales leads. Companies which mistake eCommerce for electronic data interchange (EDI) or subscribe to the notion that eCommerce is dead will be in for a rude awakening from the next wave of digitally enhanced commerce competitors. Countries such as China are in a unique position to provide a technological capability to business that surpasses most western nations, as noted by Peter Noland:

The IT sector offers China an opportunity to ‘leapfrog the Second Technological Revolution’, which dominated the twentieth century, and rapidly become a leader in the new technologies of the Third Technological Revolution’ in the early twenty first century.^[153]

This ‘leapfrogging phenomenon’ is due to three key factors which many western businesses ignore or discount: firstly, many countries have less pre-existing infrastructure to undo in order to take advantage of newer technology. For example, smart cards offer superior capabilities over credit cards, but the replacement of infrastructure and POS devices has slowed its implementation. Secondly, the firms in these nations have eagerly read about and learned from the dot-com failures, so they will be prepared not to make the same mistakes. Thirdly, the rapid growth in highly skilled, often western university educated labour in the emerging nations enables them to provide technological services which are competitive in the global market. In the Chinese market, the primary issue which may limit the competitive threat that China could bring to the market is the depth of political bureaucracy, also noted by Noland:

Despite great advances in its technical capabilities and important successes in aspects of industrial policy, it [China] was unable to truly separate itself from the operations of leading enterprises. Even after twenty years of reform, the Party remained deeply imbued with corruption, which seriously inhibited its efforts to implement a consistent, effective industrial policy.^[154]

As discussed above, throughout history and across geographies organizations have gravitated towards any technology that reduces the cost and speed of operations in the exchange of value. The true value of these technologies is that they permit organizations to exploit unique business opportunities by enhancing their current business practices or creating new ones and entering new markets.

From a structural context, the firms’ business processes are a complete system: processing orders, tracking inventory, making payments and a host of other discrete activities. Regardless of its type, make, model or version, technology adds value when it extends these functions externally to customers, trading partners, suppliers, distributors or employees. Extending the business processes adds value when the total output, cost of operation or some other meaningful measure is greater than the sum of the firm’s internal processes. For example, when an organization uses the Internet to take customers’ orders online, it is extending the order processing system to customers. In this scenario, a firm creates a value proposition in the following ways: allowing customers to perform the data entry previously performed by internal resources, thus reducing personnel cost, but increasing technology cost; extending the time in which a customer can order (24 hours a day, 7 days a week) without increasing internal staff resources. However, in some firms, an increase in weekend ordering makes for much higher volume on Mondays.

The above example did not include other factors – such as product quality, customer service levels, customer attitude and new channels to market – which are influenced in this scenario. However, the greatest implication of technology is not the measures we can associate with its implementation; it is technology’s ability to change radically how business functions. The first generation of these technologies interpreted the radical change as a revolution in which one could jettison the fundamentals of businesses in the search for continuous growth. The second generation of the technological business transformation will be to redefine the business of business.

^[149]W. H. Davidow and M. S. Malone, The Virtual Corporation. Structuring and Revitalizing the Corporation for the 21st Century (London: Harper Business, 1993) p. 153.

^[150]Ibid.

^[151]J. DiVanna, Redefining Financial Services: The New Renaissance in Value Propositions (Basingstoke: Palgrave Macmillan, 2002) p. 2.

^[152]Apollo Consumer Products Ltd, available at: http://www.myapollo.com/.

^[153]P. Noland, China and the Global Economy: National Champions, Industrial Policy and the Big Business Revolution (Basingstoke: Palgrave Macmillan, 2001) p. 172.

^[154]Ibid., p. 93.